The Case for Defi - with Richard Galvin, Su Zhu, and Hasu

Transcript

welcome to uncommon core where we explore the big ideas in crypto from first principles this show is hosted by suzu the ceo and chief investment officer of three hours capital and me hasu a crypto researcher and writer welcome sue hey guys together we brought on richard galvin the co-founder and ceo of sydney-based digital assets capital management or dacm this fund has been a top performing crypto venture fund in recent years and was also among the first to better on the emergence of decentralized finance or defy on ethereum and other blockchains thanks so much for coming on the show richard

thanks for having me guys i love the podcast it's an honor to be here yo you're actually one of the uh sorry to say that you're actually one of the older people i've met but that makes it even more fascinating um to talk to you can you tell us a bit about your history and how you came to invest in crypto and um start the acm sure i um yeah i'm a little older i started in uh i started my career in the mid 90s in investment banking and and spent 20 years at goldman sachs and jp morgan i spent that time focused around uh the telco media and technology sectors mainly so i saw you know the disruption of the internet and as that came and

started to disintermediate communications and media and and the impact that had on on the clients that i used to work with so i had two key roles through that career i ended up running the um or the code lead the co-head of the the tmt advisory group at goldman and then i switched back to financing and worked at chopin morgan for uh uh for six years and ended up running their uh equity capital and dirties markets team again focused on sort of high growth tmt space uh left bank in 2016 like a lot of people found their way to crypto through a mutual contact um fell in love with the technology but also fell in love with the markets and you know what the people that created around the trading ecosystem for this globally fungible highly liquid

token and it kind of brought the two things that i'd worked on all my life together which were really technology high growth technology you know disruption um and markets you touched on some of the things that you like about crypto you know like in more general terms what what is your thesis for investing in crypto why did you come to um invest here and where do you place it on basically the the map for yeah macro investors or investors in general i think if um if you're going to invest in any uh any asset or any thematic um if you can get sort of tailwinds behind you across the whole asset class that makes your job a lot easier because you're kind of like you're sort of sailing with the wind

you can make your mistakes less brutal and it can make your wins much bigger and i think when you know when i first came to crypto and we'll get to valuation in a minute because i thought it was outlandishly cheap when i first found it but i think at a thematic level it seemed to capture a lot of the disruption that i thought was going to come across the world over the next you know 10 to 20 years i think the three key categories i'd put that in is digitization and and you know the unstoppable trend i think we'll see for you know the next 20 to 30 years and we've been living through for the last 20 years it's a digitization of society and the digitization of assets and it's hard to think of any thematic that's more perfectly positioned for that than crypto

decentralization i think is a key theme at a more macro level not specifically on a technology level across society i mean people live their lives in a much more decentralized manner than they did 20 to 30 years ago with their social groups with their work and that's partly driven by digitization and probably has been accelerated to a degree with covert as well pushing more people to think about how that can work in a decentralized manner and communicate with groups in that on a decentralized basis and i think the third thing that kind of struck me and was well aware of that coming from i guess my previous career in investment banking there was definitely a falling level of trust i think across society with the traditional institutions

particularly within the financial services sector um and i think you know some of that is some of that is frustrating particularly for someone that used to work in that sector but it's understandable to level it as well and i think it's undeniable it's undeniably there and it's got even more so in the five years or so since i've left that i've left that sector so if you wrap that together you can think about sort of three very key trends that sort of play right into writing to crypto's hands you know you've got the birth of a very new digital asset class it plays upon a theme which is pushing through society which is decentralization and its key disruption is amongst those traditional institutions that people have lost faith in particularly since the financial crisis in the late 2000s

um and it you know it provides a solution for that lack of trust in you know a trustless form of technology that disintermediates those institutions so when you find an asset an asset class where you've got those tailwinds to invest in that's a pretty pretty unique opportunity i think the other thing i i've also learned being a bit of a you know a a a student of financial markets history is new asset classes don't come along very often um and when they do come along they're an exciting place to be there's a lot of innovation there's a lot of opportunity there's a lot of opportunity across to build you know new brands new services and to really sort of build an edge as an investor and to build a brand in financial services

which is not an easy thing to do when you're building like an investment business and i think those things together made it look just a made it an easy choice for me for the next sort of career move uh post-investment banking we know obviously a lot about the occupy wall street movement and basically we we know all about the people who lose their trust in the financial institutions and institutions in general but how did you or did you at all notice this erosion of trust while you were inside the traditional finance sector yeah i think you actually see it from both angles so there's a dif there's a definite change within the attitude towards clients

uh that we used to work with over my career from sort of the mid 90s through to the sort of you know the mid 2010s there's a lot more skeptical view of the investment banking career and and investment banks in general and i'd say a lot more combative relationship between the banks and their clients that developed over those 20 to 30 years now it's not to say it's you know there's a complete breakdown of trust or anything it was just a very different relationship i guess than the one that i walked into in the in the mid 90s i think uh adding to that i think the the level of trust within those organizations has also decreased over that period i was in the

banks with you know the increased regulation they faced um you know with the ongoing fines and lawsuits and all those sorts of things they do second-guess themselves a lot more than they did when i started their the controls and compliance become you know quite stifling um as you work through those institutions and i think you know that's probably been you know a societal push to make that happen and that's understandable after what happened with the financial crisis but it particularly changed the environment within within those banks and i think they lost a lot of the innovation a lot of the entrepreneurial spirit that they had when i joined those organizations in the mid 90s and worked through them particularly before the financial crisis and that's

probably you know that's probably the goal of um some of the regulation but there was someone working there it definitely changed the attitudes or changed the environment in which you were working did people ask themselves at all if they are the bad guys like as stupid as that so answer was it more like like increasing content against government regulation and populism no i think there's a realization in those banks that some things needed to change and the excesses before the financial crisis um some of them needed to be wound back i think those institutions also faced a lot of competition which they hadn't faced for the last 20 to 30 years as well i mean we saw the rise

um of you know the you know fast super growth um tech companies which became um quite competitive at particularly the hiring level amongst what would be traditionally seen as the sort of graduate market that those banks played in so i think they also started to see competitive threats they hadn't seen for in a long time for top graduates um you know the top graduates out of most universities that generally you know the banks had a pretty good share of getting those top graduates into their um into their um graduate programs and that makes sense because they are a very good training ground and i found that myself and i'm very pleased with the training or very thankful for the training that i

got working through those institutions but they started to find a lot more competitive i think particularly as you saw the the rise of the googles and the facebooks and those sorts of places it became a pretty desirable place for some of the key graduates to go and that starts to sort of impact i guess some of the ways they react in some of the culture how do you think people who still work in traditional finance view crypto right now from the outside i think there's been a substantial change in the last probably 12 to six months um uh i always found it and to be honest when i first got into got into this space i was amazed that and that was one of the things that excited me about it to be honest that the lack of engagement or the lack

of knowledge that uh my former colleagues had around this what i had high conviction was a new asset class um you know the people i used to work with uh you know some of the most financially sophisticated people in the world and you know at a personal level some of their investments and you know across extremely exotic type investments around derivatives and assets and structured products and those sorts of things so these aren't people that have you know very standard you know share index type portfolios these are people that are you know highly sophisticated investors um yet i didn't know one of them they had any exposure whatsoever to crypto and i think part of their you know a small part of my excitement at the time

of finding the space was that none of them were there and it just seemed inevitable to me that investors of with those sorts of diversified portfolios would find their way to this asset class over time and they haven't i think we've seen that in particular the last six months and also just gave me more comfort i guess of the valuation upside as those sort of people started to approach the sector at some point in the future and apply some of the methodologies i guess i was looking at the sector within the early days um to what i thought was probably some of the most undervalued tech i've ever found i guess a question i would have as a follow-up is how do you see it interacting as more wall street people come into crypto do you do you think that

wall street firms will let's say for instance put customer funds into defy do you think they'll start voting in governance or do you see it more as the people at these firms will will look to build on dfi and it kind of will just like how do you see wall street and and defy interacting i think it's a difficult one to answer just because the the the pace at which wall street and i guess financial services in general moves now is so encumbered um you know it traditionally hasn't been the fastest moving sector but i think even nowadays it's even slower than it has traditionally um it seems like a hard thing for them to keep up with to be frank and i mean we

have seen it um you know even even in you know my part of the world the asx has been trying to build a blockchain solution now i think for three or four years and there's still no closer to launching that and if you think of the innovation that's happened in this space over the three or four years since they've been looking to build this solution i think it just shows the mismatch between what i'd say is the traditional financial market the traditional financial services sector and what the blockchain speed what blockchain economy is moving and i think that's one of the things that um i think we found we find so exciting about this tech i mean we saw a great page just to put it in context and you know there's a great chart we use that shows you know how hard it is to

open a bank account in europe you know how long it takes in terms of clicks and days and i think on average it's something i'll probably misquote it but you'll get the you you'll get the um the quantum's kind of the idea that on average it takes something like 30 or 40 clicks to open a bank account in the uk and takes i think up to eight 8 days on average and can be up to 60 days i actually tried to open a bank account couple days ago for a company and i was turned down by the biggest german bank they just won't do it for compliance reasons because i have in the past uh made some of my money by playing online poker which is completely illegal in germany but that the banks won't touch it it's they they won't even they won't even

give a bank account to a company where i'm a shareholder because i had to deal with pokers i mean the this val just validates defy and um well just permission this blockchain technology on so many levels in my opinion yeah well i mean the the equivalent bank account although you know there's obviously some still some way to go to make it as i guess user friendly in the traditional world as as a normal bank account but i mean you're talking about seconds in terms of interacting and you know what two or three clicks for that to happen so i think that i think the problem they face is just the the sheer disruption and um i think you know i'd see a similar thing play out soon that we that i saw play out through the media sector while

i was working and and working in an advisory capacity there through the mid-90s to the early 2000s their ability to move even at the internet's disruptive um speed you know big traditional corporates and telcos was just encumbered by the i guess the bureaucracy around those businesses and and some of the entrenched power structures um and you know we saw so much destruction of value from traditional media as they failed to grasp i guess the disintermediation power of the internet and then by the time they realized um the power of that their ability to actually then adapt um and get on the defensive in the right sort of

right sort of way now there has been some exceptions around the media space those that have done it but you know by and large it was a destructive a destructive outcome for media companies and communication companies and i suspect we'll see a similar thing in financial services as they struggle to keep up with the speed of change and innovation here you mentioned the three big tailwinds that led you to invest in crypto and see it as as a very profitable asset class digitization decentralization and the erosion of trust in in society um how how do you go about like when you have big thesis like these which i by the way i strongly agree with and i would i would add a fourth one which is maybe

just the level of demographic change and just the valve distribution between different generations um then how how do you go about thinking about replicating that thesis with a fund like the investable universe is so big how do you decide what to buy on what time frames and so on well well that thesis is basically predicated on a huge disruptive wave um that's going to move through based on this technology right and so the way we think about it is where will that disruption hit first and hit the hardest and where will it be monetizable um and i think we would take a lesson

from again cape harping back to what we saw with the internet if you look today at you know what the you know the initial digital revolution drove you know the internet's basically disintermediated all through supply chains you know communications entertainment basically there's hardly anything that's been untouched by that wasn't the case in the early days like the the applications and the uses of internet technology that actually accrued value were relatively confined in that sort of initial wave of the technology um sort of through that sort of mid-90s and early 2000s period and it really was you know the value accrued largely around that sort of

media communications telecommunications space first and that's where the i guess the most most disruption happened when we looked at this technology we try to find you know what would be the most disrupted traditional markets or traditional service traditional economies from this technology and time and time again we just kept coming back to you know finance centralized finance financial services however you want to portray it to us every time we thought about you know what is what this technology causes in terms of disruption where it focuses where its best use cases or its most value occurring use cases are time and time again we

came to finance and that's largely why i guess you know we're focused largely on finance orientated investments both at a layer one type level and in in the d5 space as well do you include store of value type assets in that category yeah we've always been a a big proponent um of the digital gold thesis for bitcoin and that's been um i guess how we've always viewed our investment into bitcoin as a firm that it would take that position as digital gold i actually think that is a an alpha use case for any asset i think if you could if an asset was a

person and you could ask them what role they would want in an economy to be the store of value would probably be the first one you would choose it's an extremely valuable place to hold when you think of the stack of value in any economy so i think yeah that is absolutely a financially disruptive position to be in i also think it's a hugely valuable position to hold and from my perspective looking across all the different thesis people always had around what bitcoin could be um from our perspective the store of value was always going to be there was our view was always going to be the alpha use case that was going to be the most disruptive uh

and the most value accruing uh end case for bitcoin and it's played out that way in our view but we also think that would crowd out other use cases for bitcoin um so we always had a view that um you know some of the attributes that you want of your store of value robustness just you know absolute security and certainty means that you also don't want to change it right you don't want it to innovate you don't want to add new attack vectors to it and therefore other potential use cases kind of get crowded out from the mix as the store value kind of takes hold and becomes the key value driver and i guess that's why we've always been a i guess a portfolio investor as we always had a view that other use

cases would would go down would trickle down to other other chains and other other technology solutions that weren't encumbered by that highly valuable use case and they'd find a place where they could offer you know other use cases that you know would be just as disruptive and as value creative over time as well and how do you view um i guess more broadly application layer versus layer one versus ether um in terms of i mean it's obviously a very complicated question but um like in general do you think that applications will be worth a lot more than the layers that they're on uh or vice versa i think it's becoming even more blue

blurred now sue because you're actually seeing applications that have their own chains right yes yeah particularly you know things like carver and and tara where you've effectively got like an application type offering that's also running its own chain so we are seeing a a much more blurred um landscape than we probably you know than we had or we were theorizing about back when we sort of launched our phone back in 2017 we've always had a view that um um there would be a number of layer one solutions that would come out of this space that would be multi-trillion dollar assets and i think we've still got that view i think the thing that's probably changed over the last

few years is we can also see multi-trillion dollar type applications that could be somewhat layer agnostic built on top of those economies as well um but it is a rapidly moving and you know i'd have to say some of the views we had back in 2017 that's some other things that's changed just as the space is kind of growing um i think for you you've also known about how investors sometimes value assets and where i guess investment capital accrues makes me think that layer 1 solutions will still be at least at least over the medium term a favorite investment choice for a lot of traditional capital just because it's an easier investment decision to make

it's a this might be an aussie saying but i think it's more broadly used it's a more of a selling shovels to the miners type scenario right where you can take a view on a thematic growth without without having to take a specific view on a management team to execute or a project team to execute an application to keep innovating you can take a i guess an economy-wide view as opposed to having to take a an application specific view which i think a number of investors particularly in a new asset class will prefer so i don't think we'll see the dilution of value or some of the premiums we see in layer ones removed anytime soon based on the fact that that'll still be the preferred

investment place for a lot of new investors or what i'd say is more traditional probably less native crypto investors into the space we did a sound check yesterday where we had a half hour conversation that i wish we had recorded because it was very interesting and we talked about the role of valuation models on how investors on how viable basically investors see a particular asset class isn't it also the case that layer 1 blockchains are much harder to value than some of the application layer that we now see yeah i think they are but i think that's a relatively new innovation and i i think well a

relatively new change given the reworking of tokenomics and those sorts of things particularly we've seen driven out of the d5 space um and i think that's no surprise that's why we're seeing some of those d5 applications become you know i think you know uni swaps like the eighth the biggest depends how you measure but it's one you know eighth biggest crypto asset by market cap at the moment and it's no surprise that to me that that's the case given that you can build a you know a traditional or kind of build a traditional evaluation methodology around uni swap to get some comfort around um what it could be worth you know based on a number of scenarios um i think i think you're right in terms of the um

the the layer one value mechanisms or the way to value them is harder than it would be for a d5 right because d5 tokens have basically converted themselves into something that looks a lot more like an equity typical investment um just a lot of changes than um than they used to some time ago and you know so that's no surprise to me you've seen d5 be a you know significant re-rating as it's been that um you know as it's because it's a sector people can more comfortably invest in if they've got that traditional evaluation driven approach i still think though the thematic of the layer ones with a whole raft of applications on top of them is still a pretty compelling investment story and i still think over time people

will treat this technology like they treat most other technology which is not get too worried about the valuation accrual in the short term knowing that once the technology takes hold once it starts to add value the owners of the technology or the investors or the original capital providers will get rewarded in some way and i think we've seen that play out in d5 to a degree as well where you've effectively started to see the tokenomics getting reworked only once they started to actually have a real value proposition and a real user base and i think we're never in a hurry to see our project start returning capital to us we're not even in too fast if the

economic model is still somewhat hazy if we think the use case holds because i guess we just have faith that if you can build a user base where you're adding value it'll get worked out at some point that the providers of the capital that got that use case up and going will get some form of return you said you said something very interesting which is that anything is investable you think if the use case holds and um i would like to connect that to something like paul graham tweeted the other day and and he i think the tweet was something like he his kid asked him uh why we need the financial sector in general and and he couldn't come up with any explanation and to try to then present that as some

kind of gotcha so um when we look at defy today it seems to be very self-referential there's not a lot of real world use cases and i think most people see that as well when they look at the regular financial system so i have a very general question for both of you why does the world need a financial system a financial sector i think um the first debit that i think um what people underplay or underrate is the um the importance of the cost of capital in an economy and um if you look across the world and the world's leading economies you'll generally find a pretty strong

correlation between the efficiency of capital that's available to entrepreneurs and businesses and the growth and the wealth that occurs in those economies um and i would say that having a sophisticated financial system you could argue gets over sophisticated and goes down the wrong paths that many times but ultimately its purpose is to find the most efficient way to raise and use capital across the economy and you know if you looked at the us economy it's clearly the biggest pool of capital in the world um on most measures it's the most efficient and cheapest pool of capital hence why so many companies like to list there and get access to that liquidity and so it's no surprise that they've you

know spawned some of the greatest companies the world's ever seen based off the fact of their extremely efficient capital market so my response to that tweet would be that i see the key purpose uh the financial services sector apart from the you know the services it provides to you know retail mortgage holders and those sorts of things is really to provide a added efficiency at that capital efficiency at that capital that capital formulation layer um allowing companies to lower their cost of capital and be the most efficient users of capital and uh and most efficient financiers of the growth that they're trying to reduce yeah those are all good points and i think more

more broadly too there's never been a society without finance then it's just a matter of how how it's organized or how it's constructed right because even when in the old days when we use shells or we use things or you know when we use the promise of another person vouching for you when you're on the silk road the old silk road um people need a way to to represent value and to exchange it in as efficient a way as they can think of right and and so if you if you try to imagine a world without finance like for for me having been in violence so long like i actually don't know how you

would i don't know how you would have a supply chain i don't know how you would be able to get a product from city a to city b i i don't get how anyone would invent anything so i think or anything will get produced so i kind of see finance as as um really the glue that that that makes all that happen uh via systems of incentives but i do think that paul graham has a point which is that the financial sector is different from finance itself right the financial sector as it were is the collection of people that are in suits and you know are behave a certain way and and yes this can obviously wear different faces over generations and i think we and i think it will

uh through crypto uh but i don't think that the underlying ideas of borrowing lending of trading of of these kind of of capital formation i don't think these ideas are the things that uh can be overtaken i don't think there's that much new under the sun uh in terms of those ideas i think it's interesting the um and one of the things i see it a lot in crypto is the um i don't think people fully grasp the value that secondary liquid markets provide across the whole sort of value chain in an economy people think of trading as this one sort of spot incident of people moving assets around

and i forget that the trading is the i wouldn't it's probably the wrong way to portray but it's the necessary evil of having a liquid and low-cost primary market now the fact that i can buy a share in a company that i've then got liquidity in means that i'm willing to pay a higher price for that share than if it wasn't liquid right so you can't really divorce that whole value chain of primary you know even from a vc level through to a you know a pre-ipo level to then a secondary market um placement or rights issue type financing that whole value chain and people sort of forget that it's all intertwined to basically producing the lowest cost of capital in my view to those users of capital which is

generally corporations or entrepreneurs and if you take one piece out of it so if you take the trading piece out of it and you reduce liquidity the flow on impacts through that through you know that primary capital part like if i'm a vc investor and i can't get liquidity in the future then clearly i'm going to ask for a bigger return when i make that investment right if my path to liquidity is longer less certain or takes you know is more unknown then clearly i'm going to have a higher hurdle rate when i invest but if my path the liquidity is to you know a very liquid share market or a very liquid crypto market or whatever it may be clearly i'll lower my return threshold i'll lower my cost of capital and in a way

um that allows entrepreneurs to also make more returns for their investments because you know they have to dilute please um to investors like ourselves fantastic yeah i never heard it expressed that way but yeah thinking about secondary markets i mean yeah on the one hand that's a necessary evil where you then get sort of trading and arbitrage and whatnot but on the other hand it as as it lowering the cost of capital to invest in the primary markets that makes so much sense and the way that i the reason that i asked this is if we look at d5 today and we like as investors we need to build some confidence about bets that we can make use cases that will hold for

a decade or longer right um so how do you think that defy actually improves on what we just talked about i think accessibility um i think and um you guys did a great um you guys did a great podcast after the gamestop incident about some of the barriers or some of the the layers of value within the traditional markets um and how you know it's harder to break down some of those barriers for smaller investors or they start at a disadvantage based on the market structure i think that's one of the key advantages that d5 has in terms of opening up a system that's become more and more closed as

time has gone by um i think the concept and and to be honest you know i see this a lot in crypto people underestimate the revolutionary nature of what's happening in d5 and i think i've probably got a fortunate position of having lived both sides of the of the markets and and lived for you know in the detail of the traditional markets and investment banks and how they work and how they make money and then see how disruptive what dfi is creating to that value chain that the investment banks have had you know all investment banks and hedge funds and large institutional players in those markets have had for had for decades now i mean the concept of anyone being able to

provide liquidity into a market and in a good return for providing that liquidity be it and putting current ethereum fees to one side but be you know from 100 up to 10 million dollars is such a revolutionary concept compared to what happens in traditional markets now where you've got a small club of key liquidity providers and everyone else is just trading at a disadvantage to them with imperfect information and the value accrues to that small club of liquidity providers whereas in d5 if i provide ten dollars to uni swap or a billion dollars to uni swap my percent my percentage return of the pool is exactly the same and the return i get on my capital is exactly the same

that's incredibly revolutionary concept and extremely disruptive that just opens the playing field as to who can play um and who can get a return on their capital um that has really been uh sort of i guess ring fence to a very elite group of corporates and and investors today and more so lately also i've heard a lot that when you're one of the super rich then you have way more possibilities to to basically rehypothecate your own collateral if you if you will right so you can invest in a hedge fund and then you can take your shares in hedge fund and use it to collateralize something else um what do you think about democratizing

this particular use case yeah i think that's probably why we get so excited about um when we step back from when we step below that sort of those macro thesis i spoke about about you know the the tailwinds around you know decentralization digitization and the like some of the other things we get really excited about is just step into a more specific um crypto element to it is you know composable yield and what composability brings to the table um again um you know the concept of composability is so foreign to anything you'd see for a typical investor into traditional markets and i think to your point what it does it gets gives the power of capital efficiency um to a smaller

investor that's just not there today and to be honest you're basically replicating you know i guess probably the closest model to it i'd be interested in sue's view but the closest model to it today is that of a prime broker who basically provides you know um whole of portfolio services um you know to you know elite super large hedge funds um and allows them to have a material capital advantage against um a smaller investor into a market who doesn't get the chance to basically re-hypothecate their capital or lever against you know existing positions so the concept in d5 of being able to provide liquidity into into one platform and then take that liquidity and

effectively use it as collateral for another use case where i'm also earning a return and start to get those kind of you know elite capital efficiency type metrics that you know the world's leading hedge funds have enjoyed for some time but to do it on a small investor retail level is a pretty disruptive he's a pretty disruptive outcome and i guess something we got the most excited about when we started to find d5 and when you look across our portfolio um we think the people that provide those composite those composable yield opportunities we think they'll be some of the leading platforms that come out of this d5 revolution as capital starts to accrue to those sorts of use cases and they start to be the ones that acquire scale i think probably the fastest maybe just

to think about like the like the recent run in nifties i think is interesting as well uh just to tie in with the idea that financialization does seem to be uh make something more useful and make it more like it gives it liveness right so if you think about baseball cards or basketball cards they they originally weren't really meant to be collected uh as a store value or as a bet on collectibility it was really you saw the player's stats right like you wanted to know how many points he scored and people bought these things and it was like informational and then over time as the sport became more popular people thought these are cool because you know not that many people managed to keep theirs in good condition or whatever

but then it's still really just sitting in your house somewhere like you know and you and you have to send it in to get it rated and you can't borrow against it right like no one is gonna do that for you so you kind of see that like with the financialization like now people can put out content and then they can you know do a lot of this like peer-to-peer finance using creation right the the artistic creation uh or or any other kind of creation and and so i think that richard said a lot of the existing financial system is really intended for very wealthy people to do these kinds of things and that these things exist well for them so you know

people can do very fancy foundations to split up their inheritance in cool ways and do tax arbitrage and things like that or like you know put their art in a certain way that they never have to pay tax for 25 years uh so but um you know you're kind of seeing democratization of all these kinds of things where because the cost of each transaction is going lower because the because there's a network effect to information uh whereas you know like in the traditional world if you want to set up a certain legal entity like i might have to pay some lawyer 50k 100k to set it up and it's just boilerplate just copy paste but there's no network effective information but the same thing gets created again and again and again uh which is you know the opposite of

innovation right it's kind of stifling uh so i think from that lens from from from seeing how nifties have grown and you know how like top shots are now a lot of them are worth more than like very well collected basketball cards uh for many years like it does appear that the market gives a big premium to liveness uh and it gives a big premium to being able to do stuff uh for individuals so i think you're already seeing the democratization and it's only gonna be i think it's going to be bigger than people realize or anyone can imagine because it's we haven't really seen this before in human history how would you say compared to traditional finance defy

affects the the cost of trust as someone who's not in that system it's really difficult for me to to say so how many transactions are actually prevented in the traditional finance space because trust is too expensive to establish or even impossible in some cases i think it's um the information asymmetry in the traditional finance would be quite staggering to a lot of people that haven't worked in it before just the amount of information within the um you know within the large you know investment banks and trading firms around the world um across multiple layers in terms of access

but even particularly down to you know um uh information around you know order flows and those sorts of things um they're just uh you know tightly kept secrets that you know only the most senior people with the investment bank c and traders within the bank see and and the information asymmetry that um they have you know those i guess those two parties you know sort of larger investors and um investment banks have given their i guess status within a traditional financial system if you look at default everyone can see everyone's order right i can see i can you know you can track wallets you can see every transaction flow

you're basically breaking you've basically broken down um a lot of the information asymmetry um that has been i guess create a lot of the barriers within traditional markets um and that's how you know a lot of the values cut up is between who has that informational advantage over who doesn't and i guess you know that was one of the interesting thing you guys covered when you went through you know the game flop situation and i thought that was really valuable insight to a lot of people outside of traditional markets so to see d5 disrupting that and breaking that value out into a very democratized level and distributing that value across the whole ecosystem as opposed into just a peer group or a very small group of

people that have much better information over everyone else i think is a pretty exciting thing to see if d5 breaks up these walls where value quote-unquote sticks in traditional finance then where do you think d5 protocols can actually build their modes and retain that value into the future um i think um this comes back to i think we're starting to see in d5 similar to what we'd see in um traditional blockchains that um there is a there is a moat around around and i mean these time frames are so small it seems to be weird saying it but there is a moat around experience and longevity and i mean we

are still only talking about platforms that are in many cases less than a year old but you know a platform that's survived or is innovated or has a longer track record than another i think we'll start to see the benefits of that accrue more over time as well um and it just stands to reason that a platform that's you know seen billions of seen billions of dollars trade through it um consistently over a long period of time and has been able to hand that been able to handle that um you know without sizable hacks or you know maintain um a solid platform we'll be able to offer and we'll only have to offer

investors a lower return than a new platform that's doing the same thing so you start to get into that sort of cost of capital advantage topic that we spoke about earlier um when you start to build a moat around you know the reliable platforms that have a stronger track record will start to get access to capital liquidity at a lower rate than a newer platform um and that'll give them a a moat to basically protect them against newer platforms and then that just puts the onus on the newer platform to be more innovative and more valuative to make up for the higher cost of capital that it's going to have to pay that doesn't mean that moat's completely defensible and you know it never is if you could look across any technology or any sector but i think that's the first one we're

starting to see accrue to some of the default um some of the bigger d5 apps um and it doesn't mean people won't attack them and you know you see things like sushi swap and those sorts of you know really you know innovative takes on competition that you've never seen in traditional markets to sort of test these thesis out but i think that's probably the first one that comes to mind in d5 the longevity and the trust based on this thesis that you have would you say then that money markets and exchanges are the primary investment cases for now inside d5 i think they're the most i think they're the most obvious and i think they're the most disruptive and and you know that is when you know as i said to you when we when we look back at to the disruption that the internet caused

and trying to find those sort of three or four sort of key industries or use cases that would get disrupted the most and where value would accrue to the to the disrupter um dexes and money markets are a pretty obvious one and um you know it's no surprise that's where we've invested a lot of our capital just because we think that's you know that's a highly disruptive use case and it's a use case where you can see clear path the value now it doesn't mean this technology is not going to disrupt whole sorts of other industries and sectors and things like supply chain and nft and art and all those sorts of things that'll come in time um just you know the the path to value there is probably

more opaque now than it particularly is in the d5 space um and i think i think that'll come it's just for us um and that's why we're focused on this sort of financial se this financial disruption first we just think that's kind of the killer use case number one for this technology how do you think about valuing these d5 protocols and um and how much does it matter like how you would value them versus how how much you think everyone else is going to value them it's a look there are some similarities to traditional assets and then there's a lot of differences i think one of the things that got us most excited about investing in d5 was the fact that you could attempt

traditional evaluation methodology on some of these tokens um and i think that does a number of things that opens up a whole new world of potential investors into the space if you look through all markets the pool of speculative capital is a lot smaller than the pool of fundamental driven capital um and it's just go it just stands to reason as you go through the risk curve um that's what happens you know as you get lower risk you you know bigger pools of capital with d5 tokens with the d5 business models and the economics we started to see coming through there it became clear to us that you would start to see models where you could build a

traditional type dcf type approach and you could start to build multiple you know comparable multiples across different platforms to start to form a relative view on value and when you have that that opens up a whole new world of i guess more fundamental driven investors they can get comfortable with buying those assets and i think we're starting to see that and we see that in our discussions yeah with our lps and with you know particularly with some of my old peers in traditional finance when i run them through these d5 protocols more d5 applications it's you know they get really they get super excited about the ability to use or sort of use the methodologies that they've learned for the last 20 or 30 years to try and analyze these investments um and to be honest

you know when we started to use that methodology and we've started you know we've tried to use that since day one um and it's you know with some success and it's but it's it's been difficult at times it comes out pretty favorably when we compare it to most other technology in particular given i guess the rewriting we've seen in technology over the last three or four years as well so it's always been our view that when you started to apply those methodologies this technology would stand out as cheap or undervalued and the more people that applied that we'd start to see a re-rating and i think we've probably seen that play out through d5 i think the other thing that you shouldn't underestimate is um when you hold a when you hold an asset that you have a fundamental view on value it's much easier to hold that asset

through volatility and it's much easier to hold that asset particularly in a bear market or a downturn and i think that's that partly goes to the psychology of our firm if we build a thesis around value um and the market sells off 30 or 40 percent like crypto markets do it's a lot easier to hold a token that the valuation still stays the same right if the usage metrics or the revenue looks the same but the market's off 30 or 40 percent it gives you a lot more conviction to sort of ride out those downturns if you're holding something that's much more speculative in nature it's a lot easier to get worried out of it in a down market so you know it's partly a maybe that's just a

personal style type approach to investing but we find it much easier in volatile markets like this to build a fundamental view of value and help that help help that give us conviction through that volatility you said when the when the d5 market turns on 30 to 40 percent and the the valuation stays the same so um how do you think about reflexivity in d5 because i feel like we see this a lot right the value of a particular token goes up the value of its liquidity mining what goes up it attracts more tv and the valuation goes up and so you have this kind of flywheel that makes everything more valuable on the way up but then also make it crash way harder on the way down yeah i think it can be overplayed a

little bit because i think the the quantum of capital or the the quantum of i guess incremental buyer or seller in up or down ticks in crypto can often make those sort of inflationary impacts somewhat negligible um you know we've seen um uh you know we've seen i think for example solana's are probably a decent example you know it's gone through a vesting of you know 90 plus through january so you've had a huge uptick in liquidity in the token yet it's risen over that period from 1.50 to like 12 12 or 13 so i think the i think the the the um the concept in crypto that sometimes that reflectivity

driven by price or driven by liquidity upticks or vesting all those sorts of things i think can be overplayed a little bit like it's not something to be completely disregarded but to me the incremental buyer on a uptick or a down tick outweighs any of the i guess the impact that um some of those metrics or some of those supply changes will have on um on our token trades or coin try it i think also that we're because we're still very early in the cycle there's this big benefit to zooming out like you said which is to compare it with tech big tech listed tech in in the real world where people are comfortable paying quite high multiples on you know a sector of a sector uh an app of an app

and and so i think i think once once people across the world have have said now crypto is a viable asset class you know there there is massive disruption happening here and massive waves of innovation then all of a sudden everything looks cheap actually because you know where else can you get 10 15 dividend yields you know cash flow yields on something that's growing at 50 a month right or 30 a month uh that's unheard of in in the traditional space at this point but yet you see all sorts of examples of this in d5 and and so i think and and encrypted more broadly to be honest and and and i think that that that's

kind of the because we've had the de-risking of crypto now we have the re-rating where now people say given that this could one day be the workflow of of you know these processes these kinds of activities then the price is wrong right and and you know paul trejon said that for for you know if bitcoin is anywhere near digital gold then the price is wrong because uh you know it can already be as much as gold and then probably be much higher because gold itself is so so uh constrained and now with d5 people are saying well if this is the way people trade if if you know users are going to put their assets not in these

brokerages that get their shares lent out but instead in these amm pools where they get paid uh to hold similar assets um yeah i mean i've i've seen a lot of natives get shaken out this year that the past 12 months be because of this fear of the next dump right the fear of the next cycle break and so i just uh sometimes need to remind myself and sort of the people that we invest with too that like this is the time to to to to actually see a play through and and and i think that if it plays through anywhere near the hype then everything now is still very

undervalued but if it does play through much more than the hype which historically you i mean like you mentioned with the internet just being absolutely pervasive people first thought it was like a tmt uh concept then they thought it was going to be like a consumer concept and then people realize wait a second like there's now mobile there's now smartphones and now like everyone's like there's no such thing as ecommerce it's just commerce there's no such thing as you know e there's no e needed anymore it's just the thing itself and like for me i i i try to challenge myself every day to like think about what would it look like you know in that kind of scenario and and so i think i think that the fundamental pull of investors coming in from the cash flow

is inextricably tied to the to the fact that we are in the usage part of the cycle we are in the building and using part yeah i think it's i think you're exactly right it is a that sort of i mean we use the phrase you know we've gone from that concept to adoption cycle in crypto um and i think you know to your point the if you take out the zero as the you if you take out the zero as a downside case you get a very different return profile like i don't think well there might be some freaks out there but i don't think anyone really thinks this stuff is going away now and i don't think that wasn't the case back in kind of late 2018 2019 and so it's no surprise to us that

you've also seen a raft of investment on you know the periphery services to this space as that sort of zero use case went out um and you could see like you know traditional firms starting to get their head around well i can now go through the compliance headache of launching a crypto trading desk because i know it's still going to be here in five years time whereas i think the mindset for those guys back in sort of late 2018 is you know why would i bother taking the political pain of pushing a cryptodesk through compliance when you know that whole thing might you know fizzle out in a year's time and i think we've taken that case off the table and i think the thing that gets me most excited and something we've been speaking about for years with our investors and it's so nice to actually

have the results to show them now is that you know the users will come and start to use this technology so all those concepts that everyone was talking about in 2017 you know a lot of them didn't play out and that's the same in any tech market but geez a lot of them really are playing out and we are starting to see just such staggering levels of growth i mean that's probably something again that crypto people underestimate are under rate because we're just so close to it and we just sort of live it as a sort of native asset class but you just don't see growth like this really in any other market like you know 100 300 400 month-on-month growth in users at scale i mean it's just staggering amounts of growth in

in a world where growth is really hard to find across any asset and i think that's why we formed that few and we remain with conviction that this is the cheapest deck in the world and as it becomes more accessible to traditional investors as you start to see more cash flow driven type returns and more metrics that they can use and put into their traditional models it just becomes obvious to them how cheap it is and you know we'll see that rewriting that we've started to see already for some of the benefits of d5 that we discussed it arguably needs to be able to reach a bigger audience whereas in in practice we are already running against the walls of ethereum so how do you see how do you think about the execution risk

to get to the necessary scale on the layer once to to support this this kind of defy growth because you do underwrite that risk right when you invest in d5 yeah i think um again stepping back to another internet analogy i think we're kind of coming out of that sort of dial dial-up phase into that sort of broadband phase right so if i think back to the sort of again showing my age here if i think back to the early 90s and the mid-90s when um you know there was internet cafes and people that go down to a cafe to log on through a dial-up you know through a dial-up service to look at this thing called the internet they did that

not because it was adding any efficiency or adding any value they did that because they wanted to sort of check out a new technology be part of it and see what it did yeah basically back at that stage everything you could do on the internet was less efficient than you could do it in the real world um or using traditional channels but people like you know it was much easier to read a paper than it was to sit there for half an hour and download some form of page that would give you the news but people did it because they kind of had conviction about the technology or they were involved in it and they wanted to push it forward i think in crypto we're at a similar stage where we're coming out of that where you know particularly the early days of d5 we're getting further down there now

particularly the early days you really needed to be dedicated to it to do it you needed to you know you needed to have a passion for it or have some some outside interest as opposed to just using the service for what it was to actually persist with it and use it and i think what we're starting to see indeed find this is really encouraging a lot of the user interfaces and a lot of the technology is becoming you know he's leaping forward at a pretty rapid rate and i think when we get excited and when we're investing now we think about what is that next leg how will we how will the technology simplify itself um and improve the the user experience to make it accessible to that less passionate user i guess the person

that just wants to use it for what it is as opposed to wants to be part of using some form of blockchain technology right and i think when we look across our portfolio as well there's some of the investments we've made at some of the people that are looking to add efficiency through that sort of stack to make it easier for the for the new users to make it easier for the developers to get to market faster and focus on what they're good at which is building user interfaces and coming up with with new ways to innovate and disrupt um and so we're starting to see a surge of activity sort of below that sort of user level which i think you'll start to see at a user level as as you know as as developers get to focus more on the stuff they should be focusing on

with their users and making it easier for them um as they sort of you can i guess right almost outsource or or just plug into you know services that traditionally they've had to build themselves and waste capital and waste time on building you know i mean the graph is a good example of that right like you've basically got an incredible middleware layer of the whole of the d fly ecosystem that any new app builder can can plug straight into and save themselves an incredible amount of time and get a more efficient service and can save their capital for where it matters which is on their user interface and on their product development as opposed to on that sort of infrastructure layer which is really going to add

any real differentiation to them when they come into the marketplace so things like that we get pretty excited about investing alongside with d5 naseem taleb said the other day that um unlike crypto he said crypto can't be compared to the internet because the internet was useful from day one um do you think he romanticizes basically the history of the internet yeah i think he's very much romanticized as someone who is using the internet and i wasn't even using it like super early it wasn't that usable at all it was slow it was frustrating uh you know dial-up modems were extremely uh unreliable they went offline all the time

they froze all the time um to even have the most simple of information presented to you took an inordinate amount of time and as i said as i said earlier if you didn't have some external desire to push forward with it it wasn't just the user experience that you were doing it for you know in those early days of using the internet there was no way that it was more you know it was easier to read something online than it would have been to find it in a traditional source i mean you could see the promise of it and it was kind of obvious to a lot of people at the time i mean you could see it could get there but no there was no way it was usable from day one richard thank you so much for taking the time today

coming on the show um we are both huge fans of you so it was a pleasure talking to you thanks for having me guys uh kendall the good work your podcast is by far the best in the industry so a pleasure to be involved i look forward to all the future episodes as well all right thanks for coming on cheers thanks guys you