Inside Crypto's Liquidity Chess Game | Evgeny, Nick, & Omar

Transcript

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ecosystem today at scale dospace ecosystem and stay up to date with the gasless blockchain on X at scale Network that's scale Network big thanks to scale for sponsoring Empire right everyone welcome back to Empire we've got a fun episode we've got three guests today we've got Omar and Nick co-founders of second lane and then we've got ienny uh from Winter mute so Omar Nick if Genny welcome to the show guys thanks yeah ifny I brought out the socks for this one we're doing a little sock reveal so look at by the way look at that flexibility though I was say Yan that's a for people that don't appreciate Yan's

like 6'4 and uh that's yeah it is yeah I got uh some special socks I got loaded up with the winter mute swag and when did we do that event you've get in December or something um yeah December yeah we had like a end of year predictions kind of event at good predictions in there maybe we can yeah maybe we can revisit some of those so anyways guys I wanted to um to do to do this podcast Santi and I have been talking and you know everyone on Twitter is talking about like low flow high fdv and Santi and I had the we recorded the Roundup yesterday and talking about who's responsible is the founder responsible is the VC responsible conclusion we kind of came to is maybe no one's responsible maybe all parties are responsible the SEC is

responsible a little bit so you have Genny there's this um I'm gonna pick on you for this kind of broad opening question which is there's this underbelly of how tokens trade right there's the retail and there's like how you trade maybe just on coinbase and binance but there's this kind of like underbelly where things are trading on Telegram and things are trading OTC and prices get set with market makers like can you walk us through just like what I will call the the broad underbelly of how tokens trade right I I think it would be it's kind of like three stages in general tokens go through like there are primary rounds where well it's like C DRS serious a and beond where Venture funds invest basically and U yeah we are

present in those rounds for example with vent side um then like the very last stage is when the token lists and that's usually on some exchanges some sometimes decentralized but quite often these days on I don't know big exchanges like binance KX buy bit coinbase um but then there is a second stage in between where token is not listed yet but there are some deals happening behind the stage basically trying to well trade tokens before they listed trying to trade softs uh trying to yeah trade basically any kind of like exposure to those those tokens like recently like this this whole matter about points being traded as well as

really interesting because we have some platforms which basically trade the points um which ultimately convert to those tokens at some point so it's really a lot of ways to get exposure behind the scenes these days and I think yeah my uh basically the guys from second Lan probably have a lot more to say about this what do you think is the most um misunderstood thing about how tokens trade like before or pre tokens going actually onto an exchange like what is the most misunderstood or just like the least well-known thing that that people don't know probably about how's the how's the toomics had decided basically how is it

decided who controls what who controls well basically how much of the float is released on day one how much of the float is being invested within first year L of the loot a lot of those things are pretty isoteric to most people um we actually incubated a few Protocols of the last two years so we've been very much like in the weeds of trying to trying to understand like which uh yeah which which model makes the most sense uh but ultimately like it's it's it's it's a pretty tough uh thing to figure out because you need to on one hand please a lot of investors that invested into you in early stage uh on the other hand you need to make enough Supply available on day one uh finally you need to make sure that yeah there is some

kind of like balance between the people who get access to token day one and investors so there should be like some upside for people who invested in into those early rounds and often those interests are very much conflicting yeah so I want to draw attention before we go to the secondary markets because I think that is a really good signal into how things will trade uh just interest in the market what is the role of the market maker because I don't think people really appreciate you know T typic when you look at the the pie charts uh I guess we're no longer using pie charts because of a team that really messed it up but but nonetheless within the pie chart there's a certain allocation that goes to Market making activities like it is essential for people that don't appreciate this like um IPOs for instance in traditional

markets like you have roles of book Runners JP Morgan goldens of the world that are there to kind of really just create markets um and sometimes I get it terribly wrong like look at the there have been IPOs where they totally botched it they mispriced it like uh they you know stuff went wrong typically investors as in traditional markets and in crypto are locked up for a year uh depends on the project but I'd like people to if you could comment on just what is the role of the market maker how do you typically the standard by which the best teams kind of work with you guys and what is your role in those kind of early moments where it's so critical to kind of create liquidity in the market yeah generally there is definitely a lot of misconceptions of uh

what market makers do um which yeah we can totally go into today I I wouldn't mind touching upon some of those um but ultimately the role is we B like if you think about day one there is usually only two well two basically ways for well two kind of factors people who can buy tokens from it's either people who got them on day one usually as air drops or points or stuff like that or it would be market makers and the air drop people they usually well sell so it's usually the offer side of the equation but uh in order to see the book in order to see a liquid book you need to see bits and offers and basically market makers are providing those bits and offers on the

basically when the token just gets listed on Exchange and they keep providing those bits and offers throughout the first day and Beyond basically to make sure that people can trade in and out uh in a most efficient way uh very often those tokens are getting listed on multiple exchanges and so very big role of market makers is actually making sure that the prices across those venues are similar like not necessarily exactly the same but very much s similar up to like I don't know 0.12% for example um so it's ultimately making markets efficient I would say um and I think on this very first tick on like the very first U like basically once this Tok when the token just gets listed uh it's pretty important that the

price make sense as well like I don't know if a token launches and it's priced at uh like it's fully D valuation is priced at price of Bitcoin for example at fully Del valuation of Bitcoin doesn't really make sense to anyone and it doesn't really it's not really good for market for it to be listed there as well because people who will buy into it they'll just lose money like it's really nice for token air drop people but anyone who buys will be completely screwed and there were yeah there were times in the past when it happened let's double click on that and I like to bring in the second lane guys because I heard it from Omar that you said look the best projects that have performed really well once they launch a token are the ones

that have really robust secondary Market activity meaning there's just investors that have been early on the cap table that you'd rather clear them out before uh to create just like Less sell pressure but um I'm curious like maybe start with youny um like we have all seen the Birch Khalifa candles right file one point like there there's a the vast majority of projects like you know have this Dynamic where it's just down only how do you solve that like what um they're all clearly having market makers like try to fix this but maybe a good example be like what has been the best project in your opinion that has gotten like the best kind of performance out of the gate and I know it's very

complicated answer because it also depends on what the Market's doing you know but in in your opinion like why is it that that the vast majority of projects have that like just down only for a while Dynamic I think one of those minor misconceptions is that actually market makers decid that price uh but in reality nowadays the price is like much more often decided between the exchange and the protocol um and also sometimes is decided by the pre-launch markets like on Avo hyper liquid for example so basically is exchange or this like free launch market they pretty much decide where the token will open and if this price doesn't really make sense if

there are more sellers and buyers for example yeah it will in inevitably just go down like what keeps bu bugging me a lot is yeah you do see like birge Khalifa kind of candles pretty much in every launch still I really don't get who those people are who are buying into like the very first tick every single time it's it's very confusing to me like you just see it it's % a bet trade to buy it's a very first sck but still people do it and they just p through I always tell people like just just sit it out like you're there was another more sophisticated player that's maybe doing some hedging some weird stuff like just wait for a bit but anyways wait for 10 minutes yeah yeah Omar nick uh how do you see like this problem and what are

you seeing on the on projects like with secondary Market before they list the token and how important has that been for performance like after they have the token live I think Nick if we just go to the most recent movement was Celestia for us at least because we did the prg and post TG s re assignments with that's what it what we call it in our uh side of the market um reassignment mean that a buyer comes in and a seller comes in the seller is usually the investors and they buy it from the seller to buy it and then the team gives a consent or an agreement in which the soft the original agreement between the investor and the team gets reassigned to the new buyer

and then they get the tokens in their wallets when it once it gets distributed so what happened on Celestia was just to go back from the first stage they had around at 10 million valuation and then the second round was at 1 billion valuation and it that jump is pretty high from that 10 million to 1 billion so these seed investors who bought like a couple of millions of tokens they were like you know what once it's at 1 billion we might think of the risking a portion and then at that point our work basically started because we got in a lot of hype around that time whom buyers reached out to us and but buyers I mean large institutional funds um literally till I would say probably

we did literally to the end of tge at the beginning of TG we were closing deals on that one literally the day before tge we were closing deals we did millions in transactions on that one because these guys knew something Santi at that time they were like you know what if we buy these tokens at that moment it will go from 1 billion to three billion and Beyond and it did so I think Nick correct me if I'm wrong I think we did pre- TG around 30 to 40 million USD and then after TG we're still closing deals on the secondary market and I think we still have hit like 30 40 million on the secondary Market market for Celestia and we all know how the price evolved from $1 to $3

within a week or two and then it jumped to 10 and jumped to 15 and at some point it was at 20 as well which is 20 billion valuation so and like do you see this Dynamic for other projects where if you have a really good because because we've all seen like the a of the world where for the most part you have an implied price on the on the points or the the the token pret tge but a lot of times it doesn't have really good volume behind it so it's not really I would say accurate unless like you're talking about Celestia you have like like very good volume and the ability to do reassignment um like the question that I

have in this case is these reassignments of safs like the the investors are locked up for a year or six months at least uh the price activity is usually happening on the airdrop amount and then whatever is carved out for market makers uh but what you're saying is these institutions like that are buying it sounds like it's most institutional or large individuals they're also probably buying as well yeah yeah they're also probably buying the token list right it's sort of a multi combination where they'll they'll buy the loog tokens at a discount and then once the token launches it'll continue to get more exposure if it's yeah just to give you idea there on the discount

what we see on our end if it is investing over a year or two then you hit like discounts from spot 40% 50% discount the reason why we have SE seen that movement is the most impact on the market when it dips it has been around 40% so people tend to cover that on the basis that if they cover that option then they're good to go and then you see the other side in which if gny probably knows this as well in which market makers buy those position as well and hedge on those that's a different type of bet as well and just to back up on your point on on the points thing Santi I mean we've all seen the most movement

on igir for instance everybody is bullish and still is bullish and then we saw the movement on the points we saw the trades on the point hitting in 50 cents so due to the low liquidity on that point and then the conversion wasn't one to one so it was a bit off on that point and then we saw that the points and the actual Market of OTC at this moment there's a difference between five to 10x on that measure and it's all due to the low liquidity which Nick also mentioned um in the notes like that's a tricky thing to do um because it brings us on a scale on a different level and different level of speculation at the

same time and um the thing that I have seen and and you probably know that Santi is the jitto thing jitto has been one of the better performing in stable pricing in the last couple of months the way that they have done it the way that they have actually launched the project given the air drops and also splitting it up into multiple years like gradually building the price up I mean I'm Amazed by the resilience on the chart level as well I've been following it I was like holy [ __ ] there still doing solid on the pricing side I want to talk about like uh further unlocks like for instance arbitrum and other projects that are constantly unlocking and of course we we've seen

the price action on that recently Nick I want to turn it over to you maybe to comment just on this point around tge and the Dynamics at prge a secondary activity and the performance of tokens like what do you think projects really get right and what do you think projects really don't get right as it relates to like you know the token launch well going back to your original point in terms of this Dynamic that you see in secondary markets we're using Celestia as an example and you kind of saw the price get walked up over time right as the project got more exposure this happens all the time you kind of like you're able you know there's a lot of capital allocators who are using secondary markets as their primary vehicle to deploy Capital because to

Omar's Point you're able to get this stuff at a discount teams may be cleaning up cap tables there may be investors who invested in previous early rounds they've now seen these large markups and they're able to capture liquidity ahead of getting to the the token launches right um a lot of the time it's just management of portfolio risk right um they want to get liquidity for the next Investments I think what teams get right is engaging in the secondary markets understanding that if you have a lot of liquidity that's been locked up for a while whether it be employees foundations the investors there's other um offshoots to alleviate that um liquidity demand that wants to

get out there so you know to your point with arbitrum and you know there's been a lot of foundations that are using secondary markets to raise Bridge rounds and stuff right um you know SE has some large unlocks there's going to be a lot of unlocks coming out here in May right um SE has a large one here I think actually today um employee tender offers aren't something new right in the traditional space Tesla or sorry SpaceX does this on a yearly basis and it allows those private companies to a supply liquidity to their employees um their investors as well as in most cases for for least SpaceX they've had a markup for every single round um so it looks good for being able to raise additional liquidity in the future um so

I think teams get it right when they engage early and they understand how they can use secondary markets to access liquidity across these various um profiles Nick how uh how important are the or how impactful are these unlocks so yeah like May is a big month for the unlocks right like pith um I think avac I think arbitrum has a pretty big big unlock I think Aptos has a pretty big unlock this month like how how actually impactful are these depends on how much is getting unlocked depends how much liquidity is in the market depends on the sentiment at the time in the market obviously if you're coming out with you know a 50% of your total Supply in one go into a bare Market your spread your spread on the

order books is dismal um you're going to have a bad time right and that's why teams need to recognize that there are other liquidity you know there are other Solutions out there to alleviate that pressure and in fact it protects retail investors as well because that liquidity isn't reaching the the spot markets which of course is going to have a detrimental effect on the price so when you're at I mean there's a lot of funds that are spun up on a week basis that hit billions of dollars in AUM that deploy into secondaries it's a market that hasn't seen a lot of growth in the crypto space because there hasn't been a lot of coordination around this everybody wants access to high quality Deals they everybody wants to feel that they're getting the best deal right it's

kind of like a bragging thing among asset allocators right they want to feel privileged they want to have the access Etc um so again teams just understanding that there are options um Can alleviate a lot of these issues because again if you have you know 10% 15% of the supply coming online in one go of course people are going to sell especially the employees you know they all have families they have their own needs what they want to do in life you've been working on something for years most of these projects don't get to a liquidity event right most startups fail um crypto is very unique in that it can kind of accelerate the path to a liquidity event versus traditional equities where your options are limited through m&a or if

you're lucky enough to get to an IPO or something right tokens are essentially that IPO moment for a lot of this stuff and I think what you see a lot of the time is that the rewards um are put ahead of the actual work right um yes hopefully that answers a little bit about the question I think two two recent um events were actually on arbitrum which I had the first unlock around March around that time it was trading around two bucks right now it's trading there you go and right now it's trading on one so that's that's the first thing the second one is suie when I was in Paris it was trading at 150 and above um that was the most recent event that they had

they announced some Partnerships and Etc and right now because the unlock just happened like three days ago or something like that and it's trading at oneish so there is definitely an impact there and what we did before this unlock we had a huge buyer volume for that yo because people looking around 10 20 30 million buying the first unlock at that moment so what usually happens for the first unlock is people want to buy it like between five to 10% discount from spot so imagine if you had closed it like a month ago you would have a solid deal if you had done it and move on to potential and the thing there is is not that you're actually selling your position and moving on and risking on a proper

manner but also stabilizing the price at that moment because it creates a cascading effect if one sells the price drops like 5 to 10% then the second one goes on and then the price goes literally on the downside and we still have on our end people whom we know whom are thinking of selling but not selling because the liquidity isn't that good enough to sell that kind of position on the market and that makes it tricky to um do such movements um let's talk about like the just a bit of a pivot because um I think it's relevant in terms of how how particularly funds and sophisticated investors think about like the liquid book versus buying stuff at a discount

for instance Sol is a good example of this you know there are auctions right now happening every so often people kind of it's very telegraphed uh and they're trading at some discount the first one was you know 50% discount is to spot um and then that that discount has sort of compressed a lot of strategies i' I've talked to just institutions that are bidding they're like well we have a huge um liquid so position why would like I'm going to sell that and buy if I can get it at this discount and so there there's a lot of that I think that happens in it's not just one or the other it's not that for Celesta it's like I have a liquid position but if I can get it at a

discount and then depending on how it trades then it also impacts and can have further cating effect in the in the order book um but I want to get your thoughts on on the sole kind of auction and tying it into this kind of why things perform the way they do and trying to kind of understand that but if Jenny I don't know if you have thoughts around so and what you're seeing in the order book and uh is it fairly obvious what like certain Market participants are doing there definitely like you will still you will still see some selling pressure from those S auctions ultimately because like they would have to be executed in a way where well in order to basically provide

dollar proceeds to the well the party who is selling those uh locked Lo selling this locked salana um well you need to sell some salana yourself and then but then ultimately yeah just like I mentioned those basically people who are sit in a liquid salana position they sort of like Leverage their positions further so they get a lot more locked Soul than they had unlocked s but it still generates a bit of selling pressure um and we definitely see it and we definitely see it in this we with with salana price action last couple of weeks um but yeah also really interestingly yeah it's it's a very competitive uh it's a very competitive auction from what we seen uh primarily because of those people who sit on the

liquid salana I think there's another thing to that as well um because we have seen a lot of funds selling those liquid position due to tax um option alties in which they need to do it so that they can avoid and buy cheaper Soul instead and then avoid the taxes over last year that's the other component to that as well they need to do it and we talking in millions in so you're saying forance concretely a fund because Soul ran up to 200 so if you would have bought like sold a 200 in December it's now sitting at 150 you're going to sell that 150 clock that loss and then buy it in the auction and and

and push it or the other way around Santi if you have bought it early on like a bucks or 30 bucks and it had jumped to 200 and you would be paying taxes over that 10x um which is booked in L year ESS you're yeah that's the thing so you could theoretically hold that but I guess if you're a year in to that position long-term capital gains you clock that you collect the carry on it and then you buy sold at 90 bucks or whatever the clearing prices now in the auction yeah y That's the other that's the other aspect to that at the same time what we are seeing on the auction side which is the FTX auction just to be um clear on that option because um I don't know roughly probably more than

50% has been sold by this time but okay okay um and what we are actually doing there on our end because we have clients who are actually interested in buying those position we have bidding on those auctions but yeah at the same time the price has gradually moved up from the 50% discount which it initially was roughly it moved to to around 40 maybe 30% range by now because everybody's interested in Soul to be honest and on a weekly basis I think the auction is around 200 million each each week basically in the last three weeks which is a pretty high amount to be honest and um so that's very good for the soul

obviously on the on the OTC side and the other big component of that why you're seeing that discount um close and I think there's been a lot of narratives put out there on crypto Twitter it's bullish they're super excited for salana it's actually a mechanism of the auction itself and the way it was held right before you have an open price that everybody knows right now it's a Clos bid so it's going back to kind of how the Silk Road auctions with the US Marshalls are held and I participated in those you know years ago as well so I'm very familiar with the process but the Clos bid style gets a better execution price so when you have everything televised and it's broadcast out there it creates more demand and more interest and more participation um for this stuff

so the estate and Galaxy have uh done a fantastic job of getting that best execution price by kind of tweaking the way that these auctions were run I think initially they um thought demand wouldn't be there or they had to do an exploratory um first trch right to see what what it looks like and then they can better Tinker it from there um so that's kind of why you've seen the discounts close I it's not necessarily a mechanism of oh people are super bullish which yeah of course some people are um but it's more so just a mechanism of how the auction was actually ran that's that's very true Jenny I want to go back to you um just as a matter of Interest like post FTX the market maker landscape has changed pretty dramatically um you I

want to maybe just get your general thoughts on like how you see the the state of the market um you know what are some the the the things that you know have changed and uh maybe kind of how do you see it today and going forward um because I think it's it's for a while there felt like there was no liquidity and there was no market makers other than a few folks like you guys but how do you how has that kind of changed in the last year yeah I think the lack of liquidity was primarily not because there were not enough market makers but simply because there was no enough retail interest so as a market maker you typically want to provide more liquidity when yeah retail is trading not necessarily when uh yeah

basically informed participants are trading so big part of the liquidity Gap was simply because of that it was just like not interesting to provide liquidity from that perspective um but also a significant part of it was just because bunch of market makers just exited primarily on the US side of the equation like if you well if you think about like all these big us firms who couldn't trade on binance anymore for example because of uh all the regulatory issues that binance had or they had because they were own binance so that did create a quite a bit of a gap uh as well but then we had quite a few new entrance uh for example like there are bunch of trefi European market makers uh

entering the play entering the space even on the tocket market making site which is very interesting like yeah we definitely did not expect that on our side um but equally like on tocket Market making side basically it's a a very crowded space at the moment so pretty much every second prop trading firm is be thinking oh should we go there because it's like I don't know those those options look so lucrative those those deals so look so locative and they started to think should we hire like a few Business Development people should we go into the space so it's it it becomes to be pretty crowded in general and uh it definitely does help for the protocols to pick the best ones because there's definitely over supply

of over supply of people who provide this um but it's um yeah it's definitely became I would say even more competitive than it was in 2021 to 3 degree Omar do you have something to add there too yeah I wanted to understand H how do you pick a market maker I mean believe me I I have done Investments myself personally I mean over 100 200 stuffs but each and every time the founder reaches out it's like what do you think about this Market maker and what do you think about this Market maker and I'm I think about you guys obviously but it depends on the type of the project as well I mean if you are um someone like aair for instance they would probably definitely reach out to you and if if you are a bit of a um

lower high project then there might be other options but what do you think are the best things criteria to choose a market maker in depending of whatever you do let let's let's put it like that yeah I would say it really depends what you want to achieve ultimately if you just want to like okay start inv this maybe obvious like there are a lot of protocols like on the lower side of the grades who want to achieve not necessarily like the best things like I know they just want the token to go up for example or they want to see the volumes explode and yeah I cannot really advise that like that's not the stuff that we do like yes there are a bunch of uh market makers who do this kind of stuff um

yeah that's all I can say about this um for not watching on YouTube there's nice quotes around market makers there uh but ultimately yeah you need to diversify yourself right it's uh if the protocol is just looking for any liquidity whatsoever yeah they they can go with basically like two three four market makers and call it to day that's fine but if you want to see something more like bespoke that's that's basically where we are trying to insert ourselves a lot more basically I know for example if you at deck and you have a token and you want to provide liquidity not just

for a token but also on your decks uh for example that's where we step in quite often if you um if you genely like want to see more defi exposure that's also where we step in as well like providing liquidity on one inch for example those kind of like extra Services I would say um OTC is a pretty big uh big example OTC Venture like basically everything about like secondary market like off chair off off screen liquidity um also very important so if further down the line you're looking to yeah sell some tokens from the treasury or maybe your employes want to sell yeah definitely like that to me actually would be one of the main

reasons why you want to engage with the market maker in the first place because they they would help you to get the best best best execution for for those kind of uh well for those for those transactions true got it you've getting Assad tweet from uh Alexander Oso Povich The Wall Street Journal guy um that reminded me of the predictions conversation we had back in December and so his tweet said Robin Hood is now routing the largest share of its customer crypto orders to wintermute so if you pull up there I I'm not sure where this is from but it's a market maker it says Citadel 12% winter mute now 10% all other individually less than 10% 30% um so it's yeah it's winter mut and Citadel I'd just be curious to hear

more about like the winter mute strategy of pushing more into the traditional Capital markets world yeah V is pretty unique and that we are very generalist uh yeah prop traing F like a lot of most of our competitors they just focusing on one nich they either doing I don't know Market making for protocols or they only doing OTC or they only trade like most liquid THS uh all they do D5 for example we basically doing it all and yeah I cannot necessarily comment a lot about the nature of our relationship with Robin Hood but ultimately it's yeah it very much fits into our general strategy of being everywhere pretty much whether

it's defi whether it's trading on binance or coinbase whether it's training trading on Rob Robin Hood whether it's OTC or providing liquidity for protocol tokens it's it's all part of the yeah General Vision uh for vute going forward um with that particular form yeah I guess just for listeners to understand like where is this 10 and 12% that's coming from that's basically called 10q you can find it on Robin Hood website you can find it on s website and basically what this 10% means is that uh this it means that yeah Vint mute generated 10% of revenues for Robin Hood uh for that particular quarter but that's that basically doesn't necessarily mean that we are I don't know train same volume as Citadel it just means that we generated almost as

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yesterday the latest coinbase earnings as well and the ratio of retail to institutional volume at least particularly for coinbase it's very much institutional so going back to your point around how active you are you really want retail to step in for you guys to get excited about these markets what have you kind of seen both on both of your sides like your assessment into kind of where we are in the market um cycle and also what are the most um kind of from your Vantage Point the most interesting projects that are catching a bid uh that are really you know people are excited to you know get get exposure to

nothing s there are no exciting things nothing that summ very well that was it [ __ ] no no I think I think we are definitely like not there yet I think well from my perspective like the most interest the cycle is basically in Bitcoin ETF and so most of the retail interest actually will go there in a comment but basically like my my general theory is we had a Bitcoin ETF listing people basically on the threat side bought into that uh Crypt native people exited why that and then they started playing all those games with all the tokens that we've seen last six months or so or nine

months or so um and that's basically it so I don't think there was a lot of like all the new money in crypto ecosystem basically comes from this Bitcoin ETF flows that's basally my current work in theory yeah I think people severely underestimate mainstream media's war on crypto and the effects that the narratives have had I'm sure you all saw that commencement speech the other day and the crowd reaction to just Bitcoin right um we live in a bubble on crypto Twitter right um we amplify the very best of what we're doing within the industry and we try and mute a lot of the negatives that are put out from like the current Administration um we've endured four years of hostility from regulators right this was always going

to happen as soon as institutionalization was put on the table back from those original preliminary conversations with the SEC right we had Barry lined up we had the Winkle bosses in the rooms Etc this was always the strategy to bring liquidity to this industry was to the institutional um rails and this is kind of the net result of that over five years the head of the CBOE said when they first started launching products we will tame Bitcoin right it's not the The Playbook is well known with how they create more um claims against the underlying assets gold market is the perfect example of this you see a lot of debate and speculation around paper Bitcoin and the impacts of these future products right they can just they have

unlimited cash that they can always just print and deploy into these products right and slam prices through Futures obviously this is a very expensive strategy to suppress price and it can only happen for so long because the bid on spot is so large at this point right so your cost to suppress price through f Futures in paper um increases exponentially um so it's a symptom of the environment I don't think retail is going to be coming back in the US until we see some changes around policy that enables retail participation to be easier otherwise we live in a post choke choke point two you know um choke point 2.0 environment where you've seen a lot of access cut off myself I've had bank accounts continuously I've been debanked

many times from Banks and just having crypto right and now you've had these data surveillance um initiatives for years it and now you have all these subpoenas coming to the exchanges all of a majority of transactions are mapped to identities at this point as well right um so this idea of the you know crack down on compliance and regulation it seems daunting and they try and paint crypto to be a villain in reality onchain compliance is coming right like if you follow what the guys over at bis Bank of international settlements are doing like project mandera for example the biggest um thing slowing them down right now is the localized regulations there's there's so much in crossb

settlement and payments right there's a lot of changes that are happening in settlements moving from T3 T2 down to T1 this you know the changes the rules that were put in or brought forward by the SEC last year they go into effect in 17 days here in the United States so there's some big infrastructure changes happening at the DT dtcc level which is the depository trust Corporation so all the private equities essentially sit there it's the foundation of the financial markets in the United States so there's a lot of changes happening there and until we see policy changes from the you know Biden Administration and it's not just Democrats who are against crypto right it's individuals who have interests to see the status quo

remain as it is um so I don't think you're going to see a big Resurgence of us-based retail or Canadian you know as well which I'm a Canadian can't buy more than like a thousand bucks of crypto right it's brutal man and they've pushed out all the good companies offshore at this point um and yeah I mean the the the volume in institutional speaking to uh um if if's point is that it just comes from these products and the institutional Capital isn't necessarily going to slow down because a lot of the time these you know the broker dealer networks in the United States they have long compliance periods and creating the products and the structures getting the sign offs that takes six to eight months the ETF came out in what January so you

know you're coming into this like summer slowdown you know sell in May and walk away wake me up and September Ends um I think we're going to see a continuous ramp of new products and new counterparties coming into this Market but it is primarily going to be institutional driven and that's more than enough right if we have a sailor style buy coming in every single day um I don't have any concern about short-term volatility um but I do think there's going to be a huge concentration of that value that's coming in towards Bitcoin um because it just has the most Clarity versus a lot of these other assets that are still up in the air um and there's some big court cases going through the you know legal system in the United States around secondary markets

you know watch the Ripple case watch the coinbase around secondary trading what is a security what isn't when does it not become a security these are all questions are going to be getting resolutions in the next year or two um and once those definitions are set then you'll see standardization start to happen and once you have standardization that's when you get broad the Two Worlds can really come together this concept of like permissionless um it doesn't bode well um to integrate into the Trad five which is heavily permissioned it's heavily walled right um so I think you're going to see a huge split in liquidity over the years between permissionless ecosystem and permissioned ecosystem and

the permissioned ecosystem will have more liquidity because the majority of wealth is concentrated in the hands of the few institutions in private Equity but at the same time n the same thing is happening on the European side as well I mean Santi knows this as well by the end of this year you can actually ask your meard license which would cover basically all Europe that's what we're doing on second lane side as well because we have our us side covered next phase we are focusing on the Europe inside to take the license on the marar and cover basically all Europe to do these OTC trades and soft trades Etc as well so what gives us that is it becomes more like a not a localized setup but more a centralized setup in which you

know what kind of rules there are for each and every party and then it's pretty clear so everybody who has a different license from Spain or Portugal or whatever they just Bridge towards that new license and get it done and it covers all Europe at once and then Things become a lot clearer for everybody to know oh this is what we getting and we should be doing this and this that so those are the things that would be very helpful down the line to get in the next phase which is retail on all fronts yeah um yeah I would suspect retail comes more into Play Once the institutions are

able to offer products to their client base um why would I'll push back on that because like crypto's always been a retail Market first yeah I know but I'm talking where things are going I'm not expecting I'm not expecting in my underwriting process I'm not expecting like The Sovereign of XYZ to come in and and Max bid I just think this is a retail phenomenon and it will continue to be a retail phenomenon first and then the institutions rally behind that like uh am I worried about regulation there's nothing I can do other than engage and other than you know as an industry like self- police and try to do within the best of our ability there's certain things that we know we need to get very right and the most thing the most

important thing we can do is like is like uber if we create really solid consumer products then it's then it's game over like we can't control the stable coin Bill we can't control how quickly or not these things go but if Uber faced incredible amount of pressure from lobbies that had a really strong interest not to allow them go into all the different jurisdictions they want in every single one of them because why because people love their product so you know I look at some like stripe and it's like okay we've actually come a long way you know payments embedding stable coins in payments makes a lot of sense and businesses from time like so the more we

can build that you know because and not just pure speculative you know like trading which is which is fine then I think we'll have it stand a better chance of moving this further along not just in the US but like in Europe and other places too but you know we're also in duai I mean that there's like some pretty there's a very big divide between how countries are trying to regulate and and and you know Embrace this te here so I don't know um but I'm not sitting and looking at the order books there's still interest right I mean from your guys perspective like the question is and I asked this on the panels like who would have predicted prices would be at all-time highs in rates at five and a

half and no one if you believed it you didn't do it with conviction so it doesn't matter no one did it but like the question is where are flows coming from because most um the largest font of funds in the US says there's no LP interest to invest in crypto funds and so where are the flows kind of coming from from your perspective is it from kind of Middle East uh Europe Asia like who's bidding on this stuff that's a good question I think what we have seen if we go to Q4 Q3 Q4 last year but we saw on movements is each and every month had a different because we have this top five that we put on like top five of order book that we have on

let's say in December it was dydx and and in February it was something else and then it was starkware and then it was St Celestia so each and every time it we get constant new buyers and new sellers and the sellers are usually the typical um BCS whom have been this space the more um let's say who have been like 10 20 years or now maybe 10 years in the last 10 years in the cycle and they know what they're doing and then um you still have a lot of these guys they hope to well the only thing that I that I'm still amazed Santi is because I've had this chat with many VCS as well in the last year or two and the one thing that I wanted to know from all of them is

like do you have a proper risk management that's the thing that I've asked him and believe me I have seen only one and yeah you know the answer to that question no more no one it's only one you you sping you're gonna be venture capitalist and you have no idea how to Der risk good luck you learned that that's the issue yeah it is it is I mean just to go back in 27 218 I mean Nick and me both were trading at that time soft for salana for instance at 20 cents at 50 cents whatever and shout out here I think you guys were the guys that did some of the largest transfers of Soul sub a dollar we did we did for some of the well-known funds out

there that are largest holders yeah these are the guys listening to the guys that did it behind the scenes true yeah yeah I mean the OTC market was highly fractured at the time right like there's no coordination there's no Central platform to uh organize and consult consid solidate all of the counterparties and the assets and the service providers that's essentially what we provide now right taking a fractured Market the main participants who have the majority of the flow and consolidating that the underlying business always wants to take place just lacks a platform to discover it in fact there was a in European group called Euro CLE that tried to build a program called the global liquidity highway right um that was 10 years ago they

lacked the technology to do at the time I think you could argue now that end experience here in crypto it's going to be like Robin Hood you know sex likee front ends and a lot of defi liquidity routing on the back end the idea that you can build a globally Consolidated order books is where this stuff is going um at least that's where we see it right that's kind of the the future that we're building towards and to answer your question of you know where is the demand coming from obviously it's the crypto native funds who have you know been here for multiple Cycles they're sitting on billions of AUM Etc um on the instit on the traditional you know tradire side it's a lot of just ultra high net worth who don't have the um restrictions right um to be able to deploy Capital you know

it's family offices they often sit at the top of the you know their LPS in a lot of these funds themselves right um but I think especially in the US they've taken pause to deploying I think returns from Venture um have been pretty depressed right if you look at that data from pitchbook for example um and everybody's just kind of wondering where macro is going to go as well um but there's always discretionary Capital out there that's deploying into this stuff and if we see you know Capital markets outside of the US like Hong Kong's opening up Etc Singapore is more active um there's always a flow of private Capital into here doesn't have to come from you know traditional you know VCS in San Francisco or anything like that what one dynamic in go ahead San go

ahead well I want to put finer numbers here like On Any Given month like let's compare it against like the Blockbuster month that you guys had in the last two years it was say 100 today you're at and I know the last couple of months have been softish but like where are we in terms of volume is it uh is that your primary kpi I assume it would be but how do you or like where are was are we like at 20 versus 100 at the all-time high uh do you focus more on the type of buyer recurring buyer like maybe you guys have different business models but I'd be curious to get your thoughts on around

like the state of the the market right now yeah I think it's very asset specific right in terms of you always have the same cycle right you know you had monad for example it's walked itself up from 100 million all the way into the billions in a relatively short period of time you saw fuel do the same thing right sitting down at 50 million now it's upwards to a billion it's the same appreciation path in the secondary markets um all the time in terms of like the volume you know we're probably sitting around 20 million a month at the moment to the towards the your question around kpis there's transacted volume and then there's aggregated volume in an order book right we actually publish monthly reports we've been doing this for almost a year now best report uh

there's a couple reports I look at this is top top of my list yeah I I appreciate that I mean the idea here is to give visibility into a market that's typically opaque and not very well known or understood right um but there's tremendous value for issuers and investors to engage in these markets and it just comes down to increasing the discoverability and knowledge and education it's a huge education lift right the biggest thing here to getting secondary transactions done and increasing the transaction volume is education at the issuer level because a lot of the time when you look into these contracts there's transfer restrictions right uh there's disclosure requirements to the issuer if you have an intention to trade or transfer Etc and if you don't make those disclosures and do it

the right way there's a lot of risks that you're taking um right a lot counter party risk 100% I mean a lot of people will try and structure deals who forward agreements um luckily I've never gone through a negative experience with those but they happen right um sometimes not only that but I've talked to like large funds that have an appetite to do secondary they have not done so because of this they're like I know they usually go through I know the count party I know it's like someone in the team or another in fun but we just we can't take it the issue the issue on all fronts on that side is s it's even if you do these contracts you're only on all fronts you're in breach of contract that's what it is so as a seller if you do it the team can actually say we're gonna avoid

your contract because he sold it while we didn't want I mean I think last month we were working on this deal for a beldor project out there I had like six different calls with their internal external lawyers and Foundation to convince them to let go on secondary front and at the end they did they did choose to do it but it takes time to educate these guys because they don't know about the secondary and how to do it and then they're like ah we can do it like this and this and this and that and then that saves time I mean the FTX 3ac te teams at that point teams typically just want to make sure that whoever's buying is someone that they approve of that is like you know like in the same

it is it is long-term focused guys definitely but at the same time what they also look at is if there is a seed investors who has bought in very early on and they want to sell like 10 20% of that stake and they have done like 20x 30X then they're like okay you know what go ahead with it just to go back for another example like we all know mcoin invested at say at 50 million round and they invested 5 million and that size is right now pretty large on the open market so probably if you have such guys who have that kind of size then I would probably say let them do risk because why not if they have that amount of size and you hit tge then there is a lot of

volume hitting from one party at that date which isn't a good so that's what we tell all these guys and educate them to do kind's tokens too like in a web two like say if you're you raising money for a web two company there's GNA in the subscription agreement going to say can the investor sell normally or like do they have to get first approval with the with the with the board of the founders yeah yeah uh well if I want to ask you this point because it backfires in the sense if you if you can't if you don't allow someone that has a huge position I want to go back to his point of like how sophisticated or not crypto funds are to to drisking because sometimes they do it

in a extremely uh unsophisticated manner where they literally just hit a big red button we're like all right we're out and it's uh from your perspective um have you found that to be true do you think that crypto funds uh Venture funds have become more sophisticated in the way that they manage their positions and risk um or is it fairly obvious that they have no no idea what they're doing when it comes to managing liquidity um or liquid positions yeah it's an it's an interesting question because I mean basically if they work with us even if they don't necessarily have a lot of understanding how to do it like by the

time we basically by the time we get to the deal stage but by the time they execute it for them they should know enough because we generally try to educate as them as try to educate them as much as possible try to outline okay what are the different options that they can do um on the execution side so it's like on ourside it's it's always about education it's always about making sure that they understand what they're getting into because it's especially if you execute something yeah forward looking it's yeah it is tricky it is challenging yeah H how um what percentage of funds would you say are working with a market maker on an ongoing basis to you know trade in out

of positions and uh do it in a more sophisticated manner good question um my guess would be something like 40 50% something like this and ultimately you know like it it all it all depends on um ultimately like those Venture funds yeah it is true that they're not necessarily great at managing the risk uh but it's all about timing right it's like if the fund is nearing the exit or if they about to raise a new fund they're much more likely to start realizing some profits because they need to is demonstrate to the LPS as they actually profitable or they need to demonstrate the new LPS

that yeah VI funds that you want to invest into so it's usually all actually around those inflection points yeah I'm curious to get your thoughts on this Omar we've talked about it but like I'm like there is this um great website that just shows the amount of unlocks and the inflation coming into the market which is pretty substantial you have a whole cohort of companies combined with the fact that there are a lot of funds that are underwater or just barely just barely kind of meeting their high water mark from the prior cycle you know if they were down 80% last year was pretty huge this year has been good but they're ju so they didn't collect carry last year maybe if you're a hedge fund but maybe you are just about of that cuss so the question

was U very concretely like it is something that I'm paying a lot of attention to is for instance arbitrum the unlock a lot of funds invested in three four five years ago they're well well in the money they're going to use that to recoup and collect you know the DPI to bring them to that above the high water Mark it's a dynamic that we're going to see I think in this cycle a lot and it I am curious how you guys if that's something you're paying attention and and how you guys are monitoring that we do I mean you know we have had these chats with a lot of funds as well at the same time like when when the loock hits because we see a lot of buyers as well on the other front who want to buy these positions and then we out to them we

have a side chat and see where they stand so some of them choose to hedge that position through a market maker they just sell the position before that unlock like 6% discount to spot and get it done and move on so that's the first thing the second thing what they don't do is not sell the position because what they hit at that point is the um short-term gain position because if they were to sell it then they would need to reroute the fun to their LPS and then give them the option to just get that money which is on a not that favorable um if they look at their portfolio and they're like you know what the beted that we put in here is that substantial

that in six months to nine months it could do another 5x or 10x from this position so they choose not to sell it and um definitely some of them whom are the less educated funds they might just go for the option that you just mentioned like you know what yeah if everyone is looking at this Dynamic then I think some one of you guys mentioned it the interest wouldn't it dictate to just long coins that don't have this overhang and maybe this is why the market just likes memes and likes uh coin new coins because it doesn't have this problem like ARB arbitrum and look I'm full dis SC I'm an investor I think they they're probably they are the best L2 they have the best tech um we've had

multiple fund managers come in here say hey look the 2 to L1 trade is really interesting but you have this this ongoing vesting sell pressure Opie has it too and so the question is and I've had this discussion with a lot of managers is we love a lot of them will say we love arbitrum we just think it's gonna underperform for the next six months to a year we'll buy it later we're gonna hold eth now because of the ETF and so that's and so if you kind of play that Forward Thinking then if everyone's thinking that uh maybe the price is too depressed and you l it but I I I think that like just you would rather not touch something that has a huge unlock and just go there's there's another thing to that Santi as well

because um during our transaction on the secondary Market what happens at that point is the the the Baseline price of the investors but also on the buyer side move up so what happens when AR was trading at one let's say 150 170 there were buyers around that time buying from the existing investors so what happened they bought on 50% discount let's say and that that price is now at 90 Cent is so those guys are on their cost line on their cost basis so they were like why the hell would we sell at these points and then they will just let it fly and all these other sellers look at that sell position they like you know what

these guys sold at 90 so actually we could just wait it out and it would probably hit another 5x or 10x from this position as well so that's the thing that happened on Celestia side the cost based price gradually moved up on all front and then you had multiple levels of res resistance and also that's what it created on that side Nick you want to add anything to that no I I I I think you nailed it on on that point um in terms of like the supply over hang yeah there's obviously that website that tracks everything we're always very cognizant of that because we want to address that problem right all the teams are aware of their you know Supply unlocks this is an

opportunity for them to be educated on how to leverage secondary markets to remove some of that so it's interesting because if teams start leveraging secondary markets more to kind of remove that or at least a large portion of that overhang uh to secondary markets people in the primary markets who are expecting these unlocks and you know these large overhangs it never materializes right true um and the other component it's how long does it take it for the um the new Supply to work its way through the system right um it has to be just it has to be distributed again arbitrum you know it had a very large unlock about what was a month ago at a very good time right prices were ripping everybody was

excited liquidity was high it was able to absorb better than what it would have say maybe in the mid mid of a summer where liquidity is low Etc right um so I think these high quality projects that actually have like appli application layer developing on top of them um it's a game of chicken right if you believe in something everybody's looking for that best price this it's it's you see this with salana too right like some people don't want to pay 10% higher than you know where bid is going into yet they have these long dated thesises well it's going to 10x and stuff right everybody it just always goes back everybody just wants the best price but a lot of the time the market um they're yeah they're just trying to play the

market 100% and a lot of time you're not going to um get that price that you're looking for feels great to get uh stuff at a discount or perceived discount but no I totally agree with you time of the market will be timing the market at least from my perspective um yeah know this has been a a great discussion guys uh I yeah for the point on arbit I just want to make is you're absolutely right when we talk about the price it's also important like there's way more tokens in circulation so it actually hit all-time high on a market cap basis even though the price went from $2 pre- unlocked $1.75 the day after the unlock or like a couple days after so like when you actually look at it on a circulating basis it actually absorbed it to your point actually fairly really well

because it hit an all-time high in a market cap basis the the best example of this was salana when those first unlocks are happening you know just before the big runup and stuff everybody thought oh it's doomed huge unlocks it was the bottom created a springboard effect if anything right and that's what the thing with these projects like you got to and that's why secondary markets are still great I always say secondary leads primary you get a sense of how much demand is actually there and then if you see a large unlocks coming to the spot Market you get a sense of well what's the absorption going to look like here is this going to be a cascading sell event like Omar was describing or are people just waiting chomping at the bit to bid that up and now you have a huge short interest built up and now you get

the opposite uh price this one sold was it three bucks right yeah exactly the infamous uh Sam quot tweet uh sell me all your soul job and then [ __ ] off three bucks and [ __ ] off yep and the same thing will happen on on the soul and due to these auctions as well Santi because yeah while we are doing all these weekly auctions the prices on the auctions are actually gradually moving up so the first guys won't be selling at 2x they're like who cares we are already at 2X and then the last guy would be probably at current spot at some point and then they're like I'll just wait it out for another two 3x before I even I think of selling those positions so that's what you get constantly yeah no I

mean know when I say this like uh your report on secondary Market just generally secondary Market activity is your point it's from my perspective one of the most important indicators of just demand in the market and and who's who's interested and the type of projects and how we will behave post launch um thanks man uh but yeah know this has been a fascinating discussion I'm glad we got all of you guys on because it's very good perspective on both sides you know secondary and primary and like you guys are obviously very active so uh thanks for coming on I don't know if there's anything that you guys want to discuss before we we drop uh just parting thoughts or things that we haven't covered during this discussion I think what what we would like to see is that projects have a chat with us and learn about the secondary

market and that the taboo that's on it for the founder side and the investor side that there are so many options out there that the organic growth of the price needs to be built from the primary to the secondary and then to the actual trading on the market itself because then you get a sustainable ecosystem that's what you get and the same goes for for France as well they need to have a chat with us so that they know what proper risk management is because by far very few of them know that to be honest or they're probably Deans and they want to just do the next thousand ta no on that point alone like the hardest thing to do as a venture

investor is to sell and and it is an uncomfortable thing you don't want to tarnish your like reputation or your relationship with the team but look everyone has it's it's a moment to it's risk management and so it is it I mean to your point Santi if you want to um invest and reinvest into new projects and if you sell like 10% of your original investment or get your whatever investment you did sell that move on and reinvest into new stuff what I've seen is funds that like neglect having an open discussion with either you guys or market makers end up doing the worst type of execution because they they weren't thoughtful about it they were like they're just the market starts tanking they're like oh [ __ ] just sell

it all it's like push the button you should have thought about this going into a position during while you're holding the position and even maybe having dialogue with a team because a lot of times it is a coordination communication problem where I've seen folks dump it all it's very obvious in the order book you're like did you ever care to reach out to the team yeah we don't want to have that conversation I'm like you're an idiot because they have 20 other people that would have bought your position without that ever hitting the order book like you're like that's the problem that we have and the more to your point communication transparency we true know it's not easy but you're gonna have that conversation like you know people know that there's a point by which early investors what I do what I do on my front Santi is that when I when

I invest into these projects I I do talk to them about this secondary option as well into to allow the investors once you go to the next phase of inves investment and maybe series a or series b or whatever let them the risk on those position if they want to even if it is like 5 to 10% of the original investment whatever they did let them do it why not because then you're actually doing it on a proper manner and you are structuring it on a proper Mar that's the most smartest thing to do but okay I think like that build building on that it's yeah we definitely see it on our side as well that yeah a lot of investors don't realize how appreciative Protocols are when you tell them you're going to sell and it's just it's a

general common cour courtesy and they generally like even if there is no bar if even if they don't have like 20 secondary barers lined up they still appreciate it and they appreciate it much more if they yeah could just don't D dump it yet everybody just seems to understand it's a business everybody nobody wants to tarnish their relationships um but at the end of the day you are taking on investors to help your project get to a certain point and eventually some investors their value and what they focus on it expires it it it does they reach the goal right like what more do you need from them um let them move on to the next one we need this Capital recycling we need volatility sorry velocity in these assets otherwise if everybody's just

holding everything what it's not productive anymore right it's the same argument with Bitcoin yeah gentlemen uh well I hope I'm sure listeners was going to love this discussion because you guys are at the Forefront of this looking at it on a day-to-day basis so we'll uh link to the resources of where they can find you um and um but otherwise really really enjoyed this discussion and thank you for sharing all your insights um you know thanks a lot for having us both of you thanks that was really great thank you [Music]