The Edge In Liquid Markets | Noah & Felipe

Transcript

I think you have to be very disciplined in public markets but I think it's actually a better Market because you have a lot more information and the reality is a so many things trade below their last private round at one point or another and and you're you're liquid right uh we kind of divide the world into two paradigms like one is fundamental Paradigm which is you buy an asset because you want to hold the asset the other one is kind of what Triad fight calls greater fool Theory which is you you want to sell it somebody else nothing said on zerox Research is a recommendation to buy or sell Securities or tokens this podcast is for informational purposes only and any views expressed by anyone on the show

are solely our opinions not Financial advice pachio Ryan and our guests May hold positions in the company's funds or projects discussed what's up guys welcome back to another episode of ZRX research today I'm joined by Dan Smith from the blockworks research team and noan Filipe from the investment team over at fa thanks for thank you the favorite podcast of ours so we're happy to be on happy to hear that um I guess before we get started do you guys want to give a short introduction of yourselves how you got started in the space and a bit about fya yeah absolutely maybe maybe I'll give the intro on Thea first that that that's the more important thing so Thea's Li token fund primarily focused on long-term Investments with teams

building onchain Financial Primitives we actually operate our fund completely onchain as well just to dog food the IND industry we're a team of three with backgrounds in private investing we run an activist strategy focused on fundamentals that means we usually underwrite to a model a three-year model on an underlying business and work closely with teams to kind of achieve that model an underwriting outcome uh we run a pretty concentrated book fewer than 15 positions and the idea is to focus plenty of hard work and attention on each of our portfolio companies so we work with teams on things like token design business development research Financial design and and and what we call Banker work you know I think our goal is to be the best liquid holder in the market uh you probably know a lot of our portfolio companies they include

names like bananagun vertex Lyra Oiler Houdini swap metaplex Camino and a few others uh maybe back around on me you know before they uh I did seven years in kind of private Equity mid-market private equity in the US uh not at all related to the space just kind of doing buyouts in healthc care Industrials Financial Services um you know the the the content wasn't related but the strategy is essentially the same we we're running a mid-market private Equity strategy in liquid tokens yeah my background um I started trading crypto as a hobbyist back in high school and then after graduating college joined a venture capital firm in the space called perfi capital and worked on the investment

team for a few years before joining Thea fantastic um so you guys mainly do liquid tokens on the public market I I guess I kind of want to understand like how you guys View view that market as like why you I guess exclusively focus on that number one and number two is Do You Think Public Market participants kind of get the bad end of the deal compared to private markets good question so the the first answer is is easier which is um you know there's less there's a lot less competition in liquid and there has been historically so a lot of a lot of really smart VC funds when you know we started in in uh early 22 it was almost an impossible Market to penetrate really

if you weren't walking into space and didn't already know what you were doing liquid you know one was much less competitive the time and then 90% of the firms in liquid burned down so it became even less competitive and now there's kind of uh only a few handful of firms really opera on the liquid side the second thing is that that's where the fundamentals are so we're really fundamental investors we like to think about Revenue cash flows um you know kind of post product Market fit investors and that really happens you know on the liquid markets here and what about compared to private markets like the public market you said that it's less competitive in public markets but do you think it's I guess easier for

private markets uh yeah you asked if we got the wrong the wrong end of the stick I you know I I I like where we play I think you have to be very disciplined in public markets but I think it's actually a better Market because you have a lot more information and the reality is a so many things trade below their last private round at one point or another and and you're you're liquid right so I think maybe this goes to like one of our higher level fund feces you know the idea of investing in fundamentals is is is controvers controversial in the space Dan and I have actually spoken about this many times over the over the past like year or so uh we kind of divide the world into two paradigms like one is

fundamental Paradigm which is you buy an asset because you want to hold the asset you want to back to team over many years you want to get the dividends benefit from the BuyBacks and if the market shut down you'd be happy holding that asset the other one is kind of what traight calls greater fool Theory which is you you want to sell it to somebody else but I think in this space we call it like periodic bubble Theory because the reason people buy these assets is is because they think that every four years there is just a bubble where everything inflates and the only thing that matters in that in that kind the Paradigm is holding exciting narrative assets so things like Revenue fundamentals don't matter at all what matters is what are you know what is the priesthood talking

about in the space what's exciting and those things will the theory goes trade you know hundreds of times above intrinsic value we don't buy that at all we think that happened twice and it's not going to happen again we actually view the industry not like it's a post 2017 ethereum where we're kind of gearing up for another bubble but like it's post 2001 Silicon Valley so in 2001 we had something like what happened here in 2020 2021 and you know everything inflated out of proportion people were looking at price to price to clicks price to eyeballs on names like Yahoo pets.com things traded at valuations they wouldn't see for 10 years then after that what paid wasn't hoping for that to

happen again which I think is the equivalent of what's happening in CT right now everyone's hoping for 2020 2021 come back what paid was saying all right so that burst let's get back to fundamentals let think about first principles and what companies here are going to actually be able to generate Moes and economies of scale and revenues and cash flows and if you did that you caught Google and apple and Amazon right instead of waiting for your pet.com investment to come back um so that's along way of saying you know I think if you're just buying the supply chain like you buy new token launches going to get smoked because people are still launching tokens at valuations that are far above intrinsic value but if you're patient you pick your spots you kind of

do a few Investments a year you can get really really good deals on the public markets no anything to add there yeah to to address your point on do public investors get the short end of the stick um I think it depends on how you're viewing the liquid token landscape I think if you're using a narrative lens then the answer is probably no because you're focused on the token going up as opposed to the characteristics or fundamental characteristics of the token um but for us as fundamental investors I I definitely think that there is some degree of adverse selection in public markets and part of this is just a function of there being limited regulatory Clarity a lot of the businesses or protocols that we're looking to invest in um we hope down the

line have the ability to generate cash flows um and we expect those cash flows to be uh given back to token holders um but generally many tokens or many projects before the launch tokens um structure their raises with safes plus token warrants so they're raising equity and token um and so as a venture investor typically there is this Divergence in incentives compared to Public Market investors where there's this question or where you benefit from value going to equity and token as opposed to Value going purely to token so I think the short end of the stick for liquid investors today is um less

Clarity around whether um an equity entity will ACR value or whether a token um will ACR value and for that reason generally when we're speaking with teams and doing our research prior to making Investments and we're paying attention to has the team raised from the equity enity in the past um how is the team being incentivized and things along this lines that way all although we don't have this contractual obligation for cash flows to be paid back to token holders we do understand where the incentives of insiders are relative to public investors that's a really interesting point there Noah I want to expand on it a bit so have you seen a historical change in the the split between you know the like token only

teams versus token and Equity teams like how has that changed through time yeah so I would say in 2020 to 2021 um Venture deals were almost entirely raised via Saft um so pure token offerings to venture investors and then I think that um towards the end of the bull market beginning of the bare Market called 2022 um we started to see safes plus token warrants become a bit more popular and certainly by the end of 2022 it was one of the main ways that people were raising um capital is via token plus equity and I think the main reason why that change occurred was because a lot of investors that invested via Saft

um started to realize some of the downsides of legal protections of saffs during the bare Market when there were a number of teams that didn't deliver products but had capital and realistically should have returned that Capital to investors but investors did not have the capabilities to really claw back the capital um and so I think it was mostly a function of negotiating leverage change as well as uh Venture investors wanting to have U more legal protections before a token goes live um perhaps now that the market or I guess in in the end of 2023 we definitely saw a bit more saffs come back into Market but certainly I would say that the majority of raises that are taking place still are with safe plus plus token warrant um so I think that's where

things kind of stand today uh I think long term there will have to be this new structure that's created that is a bit more fair for all Market participants um but I don't think that that conversation is really taking place between public investors and private investors to to Warrant finding out what that equilibrium is yeah but I will say there has been a trend towards uh more clarity around token versus Equity at the public market side because public investors are no longer accepting um you know these splits so I think what Unis swap did with the front end for example they can get away with that because Unis swap is is kind of Market darling it's in a leag of its own but if you saw a 100 million $200 million market cap

token do that I think it probably fall substantially within within first few days of of announcing uh and I'm talking about the the fact that usop is sending front end fees to an equity entity that's opposed to do a token I don't think tokens can get away with that anymore they were able to get away with that in 2020 2021 but look at Market investors we kind of all agree that that's that's a that's a red that's a red line for us that that if if a token cross crosses it we kind of it's very hard for us to want to own it okay that's that's really interesting perspective and then it's like just to maybe contextualize this for the audience in like a very simplistic way let's say you we had like protocol a and they raised a series a um or I'll say

protocol one protocol one and there is a series a and it comes with a safe so a simple agreement for Equity plus this token warrant um when those investors execute that token warrant like what happens to that Equity side like let's say every investor uh executed the warrant like does the equity side still exist is that or is everything converted into this token so generally the equity exists and there have been in a few rare circumstances that when a token is launched the team will um terminate the the safe um prior to converting into priced Equity um many times there will not be a conversion um from safe into priced Equity but the safe will still

exist um so I think it's very much case dependent but certainly after a token warrant is converted into a token the equity still exists most of the time it would be completely up to the team to make the decision to um remove the need for the equity um but I think as as Venture investors you still would want to have Equity exposure so that you can impart some of your legal protections if if needed and how do you think about the uh uh the Divergence between you know the team needing like the lab's entity needing to sustain Runway to continue operation continue paying their team a salary uh versus like the the push and pull between token holders kind

of you know demanding a return uh on their Capital um like May it's a little harder with like the Unis swap example just because they've been around for so long they're pretty well sustained um but like for that example right like you know they're going through this huge legal battle so they turn on this front end fee in the same day uh that they got the notice and so presumably one could say okay well you know they're making a couple million dollars a year uh well tens of millions of dollars a year and they're using this presumably to fight this legal battle like how do you think about the dynamic there between when you return cash flows back to the Token yeah and then may maybe this is actually one of the the things we get a lot talking about fundamentals and and cash flows

and I I kind of see it as a misconception of the market because fundamental investors don't need you to return Capital to them at all they just need know the capital is theirs so like Amazon's had one of the best runs in in kind of stock history based on what I would consider fundamentals because but they haven't returned a penny of cash flow right or bought back a penny of shares but but the shareholders of Amazon know that those revenues correspond to you know that they own those revenues as as stockholders in Amazon so that's all we need as as fundamental investors we need it we need the capital to go to some kind of Dow that's controlled by the token or or even just the Assurance by the team that the cash that the cash flow belongs to the Token then then you

get into Capital allocation right is it better for the team to to keep those that cash in house and use it to grow to defend themselves in illegal Battle Is it better for them to buy back shares to pay dividends you know I think in most cases it's better for the team to keep the cash and grow right we don't want the capital back if you're still growing we just want to know the capital belongs to the token and that the team thinks of it that way because then we can build a model what you you're what you're trying to avoid is the idea of building a model and then have finding out that there's some other entity that gets to keep the cash and kind of getting rucked so to so to speak on the token side yeah I think that makes a lot of sense and one thing

you brought up is that you'd rather see the team keep the cash just to grow and this something we've talked about internally a lot is that a lot of these companies are very very early stage and growth companies but I feel like a lot of CT uh or in general like in investors look at Unis Swap and say hey why don't you just return some fees um do you want to I guess kind of talk about that and expand on when you think like Unis swab would stop being a high growth company and when it would start being like hey let's actually return some of our fees or maybe not Unis swap but in general let's say project one like Daniel said in general you know as long as the team this is like a like a you know frequent debate in kind of trafi but in General as long as a team

thinks they have a a high return investment to make they should they should make that investment and like high return you know is defined by the hurdle rate of the of the investors so anything above 20 30% irr should be good and like if you're in a growing industry and you're a team and you have somebody hire that you think is value add that's probably the best use of capital because almost anything you can do provided the industry works out and the thesis and the industry works out you know almost everything you can do that you think is value at is a kind of a responsible CEO of a project will be will be value ad so I think we we we tend to defer to the team on there you know that you return Capital when you're the the management team and you say I don't have

a good use for this so instead you know instead of hiring somebody or building out you know a V3 I'm going to go spend it on a token 2049 project a party at that point maybe maybe that's capital you should be returning but anything that where it's growing the team or kind of part of a good Faith Mission to grow the company I think we we we we tend to defer the team on keeping that and using it for their best best and highest use hey guys permissionless the event for crypto natives is heading west to Salt Lake City and we're bringing the biggest names in crypto together for an incredible campas event join me on the rest of block works on October 9th to hear for more than 200 Industry Titans including Nick white from Celestia shiram from IG and Keon from Mona the

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bridge to a new chain all hacka found participants will receive a free ticket to attend permissions so if you're a developer come join us in Salt Lake City team up with fellow devs and build the multi-chain future I want to go back to your point on fundamentals and valuation and I want to start off by asking at what point do you view some of these and like you guys said your fun Al investors but some of these things are and potentially should be valued as growth stuff like Celestia and stuff do you think that they need to come down a hell of a lot more like another 90% on top of whatever 80% has already been down or do you just say we're not going to look at these at all I only care about stuff that has pmf yeah and and I think Celestia has pmf but um yeah

Celestia is in the two- hard bucket you know like there there's not a model that we can write there's not a good faith model that we can build to justifi valuation so we're just going to leave that alone we're not we're not long we're not short it's just out of our out of our scope um you know and I I think this is the other kind of what we call like fundamental misconceptions in the market so one is do you need to return Capital the answer I think is firmly no the second is this kind of distinction between fundamentals and growth fundamental just means you have a model right we call it like a good faith model can you point to a model that says here's valuation here's why and if you can then it's a fundamental investment I

might disagree with you on the assumptions or predictions you might say that you know um your Dex is going to grow 400% a year for the next five years and end up taking up you know 10% of Global Financial transactions if you say that that's fine that's a fundamental investment in my mind then we can talk about assumptions where we think that the industry is is kind of still needs to mature is on the idea of just not having a model at all and just trading purely based on on narrative so I I completely agree first and foremost and love the perspective and it's it's funny to think that that's like not the base case for uh investment decisions in this industry today but when you think about the like blockchains have applications

which are look look a lot like businesses built on top of them and you can run these models and they look a lot like trafi because the businesses look a lot like trafi but when we think about l1s it gets a little bit more gray at Le at least in discussion so I'm curious about how you contextualize like you know you said you put um seles kind of in that bucket off to the side it's like look we can't run a model on this that makes sense um but what about let's say ethereum or salana or one of these other large base layers like how do you conceptualize a valuation model for like one of these Bas layer l1s I'm I'm happy to take a stab there um I'll I'll start by saying I don't think that there's a clear valuation model to be used for l1s

there are a number of ones that you could attempt to use and but I don't think there's one that's been agreed upon um I think that there's been discussion around like equating um tips plus Mev um and backing into the present value of that as like cash flows and valuing as business um I think that's one potential way of going about it I think the other kind of line of logic is to think about l1s or some of these like Bas layer infrastructure tokens as Emerging Market currencies um as far as they grow with their usage and most people will own the token um to use the underlying application or speculate on its future usage um and so my personal view is that like true valuation

probably uh conforms more towards the latter model as opposed to the former model and that I do think that it's very difficult to build out a fundamental valuation for an L1 um that is attempting to minimize the Mev as well as cost of usage while also maximizing its Revenue there's those two ideas are opposed to one another and so um you really just can't have a model that does both simultaneously and does both well um either the network is low fee and people can use it or use it or it's high fee in which case maybe it's valuable but I think neither of those is necessarily logically true um in the

case of an emerging Mark Currency um I think that this is probably the more fair way of modeling these assets albeit I don't think that um we have a great way of going from saying this is a potential currency into what is the currency worth just because it functions very differently from a traditional merging Market currency primarily on the supply side um and like a traditional merging Market currency um as demand of the asset grows the supply would grow as well which would limit like upside price reflexivity whereas in the case of like l1s today um typically the supply side is relatively fixed issuance in which case as more demand emerges for the

currency it goes up in value which then creates this speculative interest around it and more reflexivity upwards um and so that's kind of like a a long way of saying I don't think that there's a great way to model l1s um and ultimately think that the way that the Market's currently thinking about them is probably incorrect um so I I don't know if you have anything to add there F but that's at a high level I think no just I used to love this two idea on valuing l1's on Mev just because it kind of brought things to cash flow and where I I understand things but it just the model doesn't work um you know like salana right now has way too much Mev people are getting sandwich left and right are is your does

your model say that that ending that like like solving that problem will bring the value of salana down right of course not or like uh does your model say that creating you know better sexto deex Arbitrage designs that have less less you know better lvr parameters for LPS and create less M lowers the value of the L1 of course not so like I think that model just fails the kind of basic test of telling you whether a decision is good or bad for for the token um so I I think we are kind of in a yeah Emerging Market currency best case worst case you know l1's all meme coins yeah that's that's the other thing that I'd add um if we if we use the the

me framework to to Value the L1 my sense is that the intrinsic value is going to be incredibly low number call it less than a billion dollars um maybe it's bigger than that but it's certainly less than 10 billion um and again if we use the merging Mark Currency um example then there are a number of like negative economic principles and with how like these tokens are designed that would make them not particularly good currencies and just primarily due to the underlying reflexivity of the currency and so I do think at the end of the day we have to ask the question um if these tokens are designed to provide Economic Security and the intrinsic value of these tokens is worth much less than the

total amount of assets being secured on the network do these tokens fundamentally work um and I think today that question isn't talked about as much because these tokens traded astronomical value vales and in the grand scheme of things we still have very limited usage of L1 blockchains with less than a million concurrent users but if you do believe that these L1 blockchains are going to back um the Global Financial system and simultaneously be worth something based on like ququ intrinsic value then there's going to be this large dispersion between what the tokens security is versus what it needs to secure that makes it somewhat incompatible with the goal that it's trying to solve so I guess that's

somewhat long-winded answer to say that I'm I'm not sure that l1's uh tokens in their current form are kind of how they should look in in the long term as well as like whether the L1 that proliferates globally will have a token and if it does whether the token will exist in the kind of way that we think about tokens today we you brought up the salana example there which I think is really really interesting because uh Solano is the first chain to really prove that the idea that you can have a meaningful amount of total transaction fees with a very low median fee right does about 800 TPS on an average day and we still see a median fee that is well below one cent somewhere around let's call it two10 of

a Cent and so that annualize out over the past couple quarters now to about 500 million in fees and then you also mentioned the me aspect there um and like let's say a hypothetical here maybe we take salana out of like the idea that this Chang is salana out of the equation and say okay so let's say you have another you have 500 million in transaction fees and another 500 million in this like out of protocol tipping mechanism that you know we call them me tips but it can really be used for anything um it kind of just gives you ability to pay the current leader hey I just really want this transaction to land like immediately like here's a little bit of extra you know I'm like let's say I'm doubling my transaction fee from two10 of a cent to 410 of a cent I just want this thing to land um

how do you like think about that angle where you know let's say we do get a billion annualized total transaction U total economic value between fees and me um you know you can start to get to like a pretty decent multiple from like a maybe like a price of sales ratio if you were to consider that all as like Topline Revenue um I'm curious how you cont contextualize things there because totally agree that you know as an industry I think we've all like woken up to the fact that there is a lot of malicious me um as for what percentage of that is it's a little bit of a gray area because surgers are very good at hiding uh their their activity to kind of make it very hard to run large scale aggregations and get like the total amount of sandwiching that's occurring um but point being saying you let's say

we reduce malicious M to zero I still see a world where there will be an out of protocol or maybe an in protocol and trying tipping mechanism that says I just want this transaction to land immediately and I'm curious if you think about that in a different light than like that malicious side of the muv I guess so two two points there one look if you if you do get a billion dollars of of value going to validators right then then you can't put a multiple on that and then it's kind of problem solved on the value Cru side the the question is whether that if is reasonable and it could be I think we're not we're not L1 kind of Traders uh or it's not really the main the main business we we're just kind of thinking

here um it could be I guess the problems there are one there's competition between l1s right you have Max Resnick saying that you got to send ibe on eth L1 to zero for the benefit of the customers and if one person does that then the game theory is you have to do it as well if you're competing and you're all converging on designs which is happening so you have you have kind of the intra L1 competition layer where if one L1 lowers it yours has to lower it as well I guess as long as you're kind of all player still and then you have the app kind of take rate as well so we're seeing more and more applications take M from validators right so you have like um Oracle extractable value is going to lenders and oracles it's not going to

validators or kind of you know tips and banana gun and telegram Bots are going I think eventually we think they go to the telegram bot who controls the order flow not to validators so you kind of have that being eaten away at both in both ends um you know on salana nobody I think nobody thinks that that number is is all desirable to your point then you kind of made the S between malicious M and and benign M our view is there is no benign M it always comes out of somebody right like if you have a Searcher taking a profit and having hard you know Hard Cash that they can use that had to come from somebody it was a tax on the system at some level maybe it resulted in uh

wider spreads you know on on on spot buys maybe it was wider spreads on per buys maybe it was wider spreads on interest rates so the borrower is um is paying more and the lender is getting less and maybe it's lvr but like you will find out that that kind of beny M quote unquote came out of somebody's pocket and it might be distributed across the system or it might be one one single person but there's n there's there's a conservation of value law right the Searcher can't make money from nobody so I think to some extent if you are trying to make it the best financial system for kind of the core players you you always want to minimize me no matter what you label it so would

you disagree that like let's say cross deck Arbitrage which would theoretically be bringing tighter spreads on chain would still be viewed as like malicious me because you know maybe in that scenario it's the LPS that are taking the hit it's yeah but the but the LPS are a player right you you you've been talking about lvr for for for years now that's that's all kind of you know sex to decks or or deck to decks me um but then if the if the LPS get worse returns there's less capital on chain there's wider spreads there's always some economic story just based on the first principle that that money can't come from nowhere so it's always a tax on somebody and that tax will have secondary effects yeah I I think your your most

Salient point there was the idea that applications kind of see this huge number that the l1s are uh generating off of their activity and saying all right like one way or another we we have to figure figure out how to internalize this for ourselves and you know ultimately our customers and you've seen the idea of like app chains or uh dexes are the ones that create and leak a lot of this Meb so there's a whole world of Dex design around how do we prevent some of this uh Ellipsis laabs and Paradigm recently authored a paper through umra Umbra research kind of like saying all right well how about we design an amm that theoretically could reduce the amount of sandwiching or you see Unis swap V V4 on the horizon and you could probably get some hooks that reduce this

uh me leakage as well so strongly agree we're seeing a lot of innovation in that space around how to reduce the value leak down to the base layer yeah they they'll figure it out it's a big enough pie where they'll figure it out I want to bring it back to something you guys mentioned earlier on which was activist investing um and I guess I just want to understand what the scope of that looks like in the context of applications what what is what does it exactly entail yeah so I think F first of all it's activist in a you know in a in a completely cooperative and friendly way uh there activists that kind of take try to take funds from the Dow we're not talking about that at all uh we just mean kind of the basic blocking tackling that that VCS do for

private companies doesn't really exist much in the liquid space so companies have a lot of support early on kind of C Series a um they have a big cap table a lot of people with with big teams helping them out and then you launch a token you know you become kind of a prior fund investment and the level of support you get goes down dramatically so what we're seeing on the liquid markets is teams that you know maybe had a couple teams helping them now have nobody helping them because they launched their token two years ago or three years ago um and you know maybe the T the token's down in most cases it is if if they launch two or three years ago and just even basic BD help basic kind of um you know token design help

because because obviously investors look up a lot more token designs than than one single team um just and just oftentimes just being kind of somebody that they can talk to every week about plans and go to market and and and bounce ideas off of doesn't it doesn't take a lot to be helpful on the liquid token side because there's so few people trying to be helpful most people are just kind of demanding value or being a pain in the Discord that makes sense um no do you have anything you want to add on yeah the the thing that I would add is that during our diligence process typically um when we identify companies that we want to make investments into we also identify three to five things that we think currently are not uh being fully optimized uh within the business

and attempt to address that after making our investment to help realize the underlying Investments kpis That We're underwriting to in our model three years downline um so I would say that activist investing from our perspective is a way to realize the underlying model that that we've built um around the business over a three-year perod and what's the most common thing that you guys identify needs to be fixed like looking at all of your due diligence over the past year year and a half two years what what's been the thing that comes up the most token design uh there's a lot there's a lot of variety in token design most of it's bad yeah you know the there there there's

different ways to design tokens uh like there are legitimate choices between again how much should you keep at the at the kind of company level how much should you return should that be BuyBacks should it be dividends there's legitimate questions but then most of the time when you're kind of making some complex game theoretical token design like that's a disaster it doesn't doesn't really solve any problems or if you're like trying to give too much utility to your token so like people with your token can do X and Y on the app and not Z that's that never really works um there's been a lot of bad advice and token design so I mean I don't yeah there's been a lot of bad advice so I think a lot of times it just kind of bring some common the token no token design definitely is the

the main thing that comes up also because we're purely focused on investing in onchain financial companies um I would say typically their customers or their highest quality customers are credit funds or like quote unquote whales within uh the crypto space and so I would say uh intros to those funds as well as understanding how to pitch them is something that all of our portfolio companies generally could improve on or and would benefit them from having kind of a good go to Market within those groups of potential customers yeah actually this is a good addition it's like we call it Banker work you know it's like what your investment bank would do in in in in traditional markets like sometimes it's telling people you

know what's your story like a lot of these companies don't know what their story is to investors and at the end of the day the ultimate holder in the market is the liquid fund so your VC's invest in you privately but they have to sell right they have to show DPI and they have to they have a like a legal end of fund requirement as well they have to sell your retail holders can only do so much realistically especially like where the market is today you know a lot of retail holders can make the price go up because it doesn't take a lot to for prices to go up given volumes are so low in the market but they can't be holders because they just don't have enough buying power so the ultimate holders are the liquid funds and I think learning how to tell a story for a

liquid fund buyer is is something that you know bank would do in traditional markets but we end up doing for our portfolio companies a lot in these markets because obviously we're liquid fun we know how how how we think and how our peers think um and that just that can mean like showing the right metrics on a dune dashboard that can mean focusing on the right metrics and messaging um your strategy in the right way and that can mean um you know just going out and doing a road show and meeting the right people who could be good holders because at the end day people want to hold you know people looking for for more Investments um there's just not enough Bankers in the space believe it or not you know I never thought I'd say that but we need we need more Bankers in this

industry going back to the Token design piece you mentioned at up front uh I agree with you that we see a lot of undo complexity in the token design category and I'm curious if you think there's a bit of like a less is more mentality that makes a lot of sense there where you know you don't necessarily need your token to do 150 different things if we go back to the original point point of if there is a uh strong likelihood that the cash flow that the business is generating will tie back to the Token like is that just enough yeah you have to I think less is more is is like the the the main conclusion of our work on token um I think if you're going to deviate from tra High models you have to have a good reason so you know there are

good reasons for example Apple can't reward long-term shareholders more um but with it just they don't have the pipes for it right but but you can do that with with tokens right you can decide to give some kind of increased take weight to to people who've been holding for longer or have been locked up for longer you can introduce um little mechanisms like that I think around the edges can be good uh but you you're kind of like starting at the at the point of view that less is more returning you know treating this like a like a stock is is kind of step one and then what can we how can we use the new technology that we have to make marginal improvements on this that that's kind of the right um mentality in our in our

view and there are some things you can do but there just not not as many as people thought which that's kind of like a little bit uh backwards to you know when you're scrolling crypto Twitter all day and you see people yelling about you know useless governance tokens do you think that uh you in my view that I think that narrative or that idea has really been created because we do have governance tokens over a lot of what are now like failed or dying protocols because this what we're going to see this is a startup industry you're going to see a ton of experimentation when you fast forward that experimentation three to five years okay well you're gonna get a lot of failed businesses and like so that's why the governance token if you will kind of gets a bad rap is because well there's just a lot of you know

businesses that didn't make it I'm curious if you would agree with that idea I'm I'm generally aligned although I will say that I do think some of the sentiment around or negative sentiment around governance tokens is also a function of the belief of where cash would be allocated if the protocol was successful um like like for sure there I I agree with you that there are a lot of like early stage startups that failed and so their tokens are worthless it doesn't matter kind of like what the underlying token can or cannot do um but for like the protocols that have succeeded um and are generating cash flow but that cash is going to an equity entity let's say I I think that narrative around those being like quote

unquote worthless governance tokens is is totally valid because in general they kind of are worthless uh putting aside the value that you place on on government um because you don't believe longterm that even if the business is successful the cash would go to underlying business um putting that aside yes I I I think in general um the the governance tokens are probably a reasonable design at the current paas like I think at at a high level one thing that could be done that is almost always negative for token design is creating a complex structure that is very difficult to undo um and and that I I don't think that a lot lot of the market is aware of like where tokens are going long term and so locking yourself into like a V

tokenomics model that has like a four-year Max lock is quite detrimental because then you have to wait four years for that Max Locker to fully unlock before you could potentially upgrade the tokenomics so I think like the worthless or like quote unquote like governance token model is relatively good because it's a very vanilla model that can be altered if needed I'll say one quick thing I think sometimes we come across as like giving a lot of criticism to the practice of the practices of the industry um and that's that's coming from a very optimistic point of view so I think at at they we're all believers in Industry we think that the industry is going to go from one basis point of financial adoption to 70 80% over 20 or 30 years and that's an incredible opportunity so we're focused on getting

people to stop playing games with narratives playing games with token models and kind of playing these PVP games and just focusing on all right you're a regular business with regular Val crule and and value distribution mechanisms just just focus on your core kpis focus on pmf focus on your customer and forget about all this gamification that we've kind of Trapped ourselves into as an industry so all these critiques are coming coming at it because we are so optimistic about the the kind of true true opportunity here that makes sense and I agree with both of you on the the fact that it's unnecessary to have complex token structures I think it's mostly just that Dev realizing that not devs but teams

realizing that they can't really do much on the you know for people to demand their tokens so they just op you skate away the supply side it's like oh fouryear lock nobody can sell but there's always a seller um I guess on a more positive note I wanna what are you guys looking forward to over the next year we know the 20 30 year plan is 70 to 80% of the financial system but over the next year or two what is what are some things that you guys are focusing on well right now there's a there's a there there H there is and has been a kind of quiet Moors law in in defi um and I think that's definitely under reported but the reality is when when you swap launched you're paying more

than 50 bips to go e to usdt and now you're doing that less than five bips right when you know perss were 0% on chain all on basically binance and the other centralized exchanges three years ago and now we're at three and a half and three and a half is not a big number but it's a lot more than zero right and it's kind of going up every year um we think that this you know this year we've seen options start to start to make Headway on chain for the first time after a few failed experiments in the past years um everything's getting better in in defi right like some of these moral Oiler even ABA V4 are are so much better than what we saw with ABA V1 and compound V1 and that was I mean that wasn't even five years ago right so I

mean if you just zoom out and think about what's been achiev ched in defi over five years it's it's incredible so we're we're trying to play those Trends where we just see cost going down products getting better onchain taking share from offchain right onchain spot was 14% of the market last month that's the highest number ever and it's a really serious amount of volume going on chain so I think that that is just like it's it's it's a quiet kind of Renaissance in in the market and and we're that's where most of our investments are yeah I would say in general um something f b briefly mentioned um is focus on lending markets I think that a lot of onchain financial permit is a demonstrated product Market

fit but when I think about the one that has demonstrated product Market fit as clear differentiation relative to centralized players I think that lending stands out a bit more than certain other market segments within onchain Finance um and I think in general we're we're quite interested in seeing the advancement of um kind of the the a V3 and compound uh V3 models to the next iteration um and that I do think like these pooled risk models generally are not great for um experimentation Innovation within lending um in their current form uh lending is done where any asset as a collateral or borrowing asset um added to a air compound adds risk to every other um participant

within that system um whereas isolated markets create uh albeit uh create more capital in efficiency allow for um risk mitigation across a broader set of assets um and so with uh Moro for example starting to brf fray with earlier V2 launching in the next month or two and a V4 coming at I think the beginning of 2025 I think that we'll see a lot of experimentation um and then the last part within lending besides kind of the the isolated lending is I think that Pendle is found some someone a product Market fit over the past um year or so and um while pendel in itself um has been heavily focused on facilitating

airdrop farming I think one of the next advancements that comes from the usage of pendil is more focused on fixed rates and floating rates as well as interest rate swaps and so I think those products will continue to be built out and probably find some suit of product Market in 2025 yeah I agree um I actually Philip I want to ask you about options because this is something that I feel like has been tried like you mentioned and I want to understand what this I guess next step will be for it to actually be used on chain so I mean uh so if if you look at Lyra stats over the past uh eight months they're up only and they're getting real real usage you know

we we've been tracking options for about two years we we made an investment in Lyra we made that we publicly announced in in in q1 of this year um and and the reason why consensus is that options don't work on Tain is because amm don't work for options and amm in general like were treated as a catch-all design for a while but they actually only work for for very few for a few things not very few but a few things and trading with sophisticated market makers who are only trading with you because they have a positive EV trade is not one of them and that's what happens when you try to do an options amm all of your flow is sophisticated flow right and then if you have anybody like us on onchain fund

trying to buy 40K of Soul options in 202 uh3 true story you're blowing out spreads by 30% so we're just never going to do that right so I guess um it's a long way of saying that a option amm were not a real attempt or they were a real attempt but they were a failed attempt but but now we have the technology for order books uh Lyra is an app chain settles on you know settles D on Celestia built on the op stack but it's a full order book where market makers can get competitive uh technology to what they use on derate and that means that you can get if you have the the take or demand uh comparable spreads to to derit with the benefits of being

on chain you have modularity you have much faster product iteration and most importantly you have the ability to build Structured Products that now live within defi so so I think the and that's become the Structured Products angle has become the main angle for for kind of options to take to take share so you know I think most people when they think about options they think about competing with pers on lever trades kind of zero days that's an interesting Market there are definitely advantages to options the main ones you can't get liquidated like I would never buy a per but I would buy an option uh and I say that somebody who's you know we're invested in per protocols but just my risk tolerance doesn't permit me to buy something where I can get liquidated on a wick um but more

importantly people love Structured Products in our space there's a lot of whales they have a lot of BTC a lot of eth a lot of soul and they want to get yield on those things and one of the best ways to get yield in trying any Market is with options because without options you just don't have convexity in your product design and that just limits Your Design space materially so that that's that's uh that's where we're seeing options take off with orderbook backends and structure products on the front end to give people yield on TBL Daniel do you have anything you wna yeah outside of defi what uh are there any other verticals that you think are starting to kind of get some Traction in that category of like building a real business on chain that

looks and feels like a traditional business and ultimately generates cash flows everything I give you will be defi adjacent so we we because that's how we think so like metaplex is one of our investments that's nfts and token mints we see nfts as defi really like I know that they've been kind of our collector um for most for most of the use cases so far but we we think that most nfts over time will be kind of financial applications asset applications but metapex is a great company really fantastic company um with a good team strong cash flows kind of everything that we look for uh front ends you know again kind of defi adjacent uh we're investors in bananagun uh really like the telegram

bot space in general you're dealing with super price in last to customers and you're giving them services that have pretty meaningful impact on their trading strategies and those people are willing to pay you a lot more so you know I kind of we like that space for that reason we like dealing with inas of customers don't ever sell to to funds as a as a kind of orderflow business because we're we're tough customers but the guy trading mem coins or trading you know 180 all tokens is a much much better customer when it comes to paying and then um you know purely defi but we're we're very excited about this this this um onchain needs more Bankers story so we're kind of always working with

people that we think of as as kind of good uh providers from the industry you know one one company we're working with called Turtle Club probably you know one of the more exciting ideas we've heard all year um they're basically a group purchasing Organization for tvl so they aggregated about2 billion dollars of of whale TBL since they launched four months ago um they're actually gener generating you know they'd be one of the major defi applications in terms of Revenue if you kind of put them on the token terminal bar chart only four months in which is quite quite impressive and what they offer to protocols is that they're they're tvl Bankers right like we've seen companies our companies try to get tvl by doing

deals with whales and and going out to Market and doing points or or incentive programs and what ends up happening is that they have to start from scr every time so they have to say you know they have to ask us and their other VCS for a list a list of people that that deposit eth or Bitcoin if the design a program ghost pitch get turned down it's just a brutal process and you know again looking at trafy the way that's been solved is you have Capital markets Bankers right you have people that say I have a roster of a th000 clients with this much capital and let me work with you for two weeks setting up your program so it appeals to a subset of these people and you can meet your goals and Turtle Club is doing that for

protocols so they're telling them here's what we have in our client pipeline here's what they want for yields you know you can lower your BTC yields because they're actually low in the market right now but raise your USD USD yields because you know Athena is paying pretty high so it's not be competitive just giving advice and then and introducing people and going out to Market and that's been working fantastic right it's just so it's it's not defi it's not a protocol right but it's just kind of this idea of of Bankers um and service providers just adding valuable valuable services to onchain protocols so that they can grow no anything to add I said nothing that wasn't really close to defi yeah

the only thing that I'll add primarily outside of defi is I am optimistic on deepin um I think that it's not particularly in line with like quote unquote traditional business models and mostly As far as the the token distribution to unlock supply side um but ultimately it's probably the market that has started to show semblance of product Market fit that some of these businesses have become modelable because they do have existing customers are generating over a million dollars in revenue and now are starting in some cases to eclipse the total amount of supply side incentives that are being issued so I think at a high level deepin

models can work um albeit they have to mature to a point where the demand outstrips the supply and just generally speaking I think the industry is still quite immature where there are probably like only one or two companies or protocols that that's true for but over a three to five year time Horizon I'd imagine that that list grows pretty maturely and and Dan I know you like this one uh you know futar key and decision markets are are awesome like I think it's one of the coolest ideas on chain and kind of like prediction markets I think we could see it impact the real world um relatively relatively quickly if if if it takes off yeah I go back and forth on futari all the time

like it's it's at the absolute core it is the coolest thing we've seen on chain this cycle in my opinion um but that does not mean it's not a really stupid idea uh I don't know it just seems like there can be so much convolution in in that process and like does it make sense for really small decisions rather than or like conceptually makes sense to me for really big decisions that actually drive a meaningful change uh in Direction which can ultimately impact value but when you see these like smaller decisions like it's getting used in Grants programs like I don't know it's pretty hard to judge the ROI of like a grants program and it just seems like it' be really really hard to use it there but I don't know and it's empirically it's seeming kind of hard to pass things they had the the uh pump.

fun competitor uh run through metad da and that got rejected which is shocking to me um so I worry that it like overp politicizes the governance process as well which is ironic because it should be doing the complete opposite uh but I don't know at the very minimum it's super [ __ ] cool it's super interesting yeah and I agree with you and and I I don't like the idea of linking the decision to um to to to a vote like to a final outcome but it's interesting when it's just information right like you have like Unis swap you can buy unisoft shares if the fee switch is approved and buy you know buy shares if it's if it's rejected it and then you know somebody can go to unop governance and say Here's what the markets are saying and that's it like that that's

the extent of it I think when you start looping in the actual the actual Market outcome into decision you can get really wonky really fast but as a source of information I think it's awesome yeah I think it's cool as well and I think it's kind of telling that new cool [ __ ] is being built on Solana and not on ethereum like I'm used to um hopefully we'll go back to ethereum so that Daniel can stop talking mus the pain in your voice my goodness oh man anyway guys Noah Philipe thank you so much for coming on this was a pleasure yeah no this was awesome guys really appreciate you guys coming on and we'll throw some links in the show notes to uh have the audience follow you guys and uh

be able to see your great takes Felipe you're phenomenal on Twitter so it's always a pleasure getting to chat with you thank you like West cheers take care oh [Music]