Trading CLARITY, Bitcoin Bottom Signal, Are Vaults Securities & The Onchain Revival

Transcript

Nothing said on Zerox Research is a recommendation to buy or sell securities or tokens. GMGM, welcome back to another episode of ZeroX Research. Joined today by Mark and Ryan from the Blockwork Research team. How are the vibes today, guys? Bullish or bearish? >> All good. Always bullish. vibes are a little sus today, but I remain bullish as usual. >> Yeah, they're they're a little mixed as the uh the NASDAQ is kind of selling off hard. Um you're kind of getting more smoked on equities than you are in crypto for the past few weeks. But if you need some positive vibes, uh want to

give quick shout out to two conferences we have coming up. um digital asset summit in Asia in Singapore October 7th and then another one uh D London November 10th through 11th at the Hilton Park Lane in London. Um the digital asset summit series is consistently my my favorite conference in the industry. um incredibly high caliber uh speakers and attendees and just great room to uh to mix yourself in. So I know Mark was at D London last year. Um what was your read on on that conference?

>> Yeah, it was good. It was interesting because last D in London, it was kind of when we now started to talk about tokenization and now it's like this whole massive trend. So it was kind of like an early signal on that. And also the location is kind of fire because it's like these old buildings next to the river, but inside is very modern. So you do get that London vibe. So it's kind of like almost the architecture is blending TRFI with crypto, the the the historic with the modernization. So yeah, I mean I'm I'm not going to go on too much about the actual quality because you've done a good job there, Luke, but yeah, definitely don't miss.

>> Yeah, certainly uh one one to look out for um coming Q3, Q4, uh, great events to attend. Um, particularly if you're you're looking for optimism around the tokenization theme. Um, historically markets have brought out RWAs as just being like a a bare market narrative, but what we see now, I mean, over 10x growth and and like tokenized asset supply, then onchain volumes ripping across uh, spot and per like that narrative has legs clearly. uh not just a bare market one.

Last week we had some movement on clarity act odds as uh there was an agreement on the ethics provision language. Uh we saw odds spike up to just short of 50% on poly market. um bunch of names in both like crypto equities and and crypto kind of rallied with that news. Um but this has since retraced back down to 35%. So despite that movement um it didn't really stick and the bill's huge. It's very consequential for the industry. Um, but

kind of the window to get this over the finish line is uh is shrinking and like there's not much time left before the recess. So, Mark, I I know you've been looking at this bill uh pretty deep and what's your read on on whether or not you think this can get over the finish line. Is is 35% like barely priced odds or would you price this differently? Yeah, I mean unfortunately me reading the text in depth doesn't give me a great greatest picture of what's happening outside in Washington DC. But to be honest, I'm going to lean towards what the polyarket odds are

saying. I'm, you know, talking to people who are familiar with people who are actually the the decision makers. And I think right now it's almost like you're you're pricing in like a futures in in backation where as the time gets closer to that recess date in this next month in August those odds are going to continuously drift drift lower. Um I think it'd be a huge upside surprise if we do get clarity pass. I think it in my head for the months I've been following it it needed to be done this month July and we only have a couple days of this month left. And so I've kind of, you know, normally I'm optimistic about things, but I've kind of lost hope on on on this one. And I'm my my mind is going

to what will SEC and CFTC and OC regulations be when this doesn't pass? And I'm going to say that because hopefully I'm wrong. You know, hopefully I have egg on my face and clarity passes and when a whole different dynamic come next month. But for right now, I'm not feeling it. If they can't get it over the finish line uh before the recess, do you think this bill gets revisited in 2027 or is that um is that really just downstream of how midterm elections uh resolve and and who who controls the House and Senate?

>> It's going to be I think it's going to be the latter. And I tried to do like, you know, I can't say what every single, you know, Senate member is thinking. So I just try to do like a quick search on previous bills that have headed up to recess when at least one the Senate or the House flips. And I when it does flip, I think there's new priorities that come into place. And so all the bills preceding that event just aren't as important anymore. And so and most of them actually end up dying. So you if I think even 2027 even even then I'm sorry I I don't want to be a downer but even then I I don't even I think if it doesn't pass or when it doesn't pass that's it for now and I think we're going to have to lean on

those tripleta agencies for any kind of clarity. >> Yeah. So I like the framing of like the odds kind of decay into zero like a futures expiration. So like as they drift down the the bare case kind of gets increasingly priced in as the base case. But if there's an upside surprise here like who do you think wins the most? Or if you were to if you were to put on a trade to get long the upside surprise like how would you structure it? What would you put on? Not financial advice of course.

I think it's it's definitely beneficial to I mean it's it's beneficial to so many different asset types. I mean it's it you know so it's like which one is it most beneficial to and it's it might probably be DeFi tokens because you know it it explicitly says that you know just because you have any kind of value cruel directly linked to a blockchain doesn't inherently make you a security. I think existing DeFi tokens, the ones who um already had an had an ICO, those ones that already are generating revenue, those ones that are already doing buybacks, um I think those benefit massively because th those

things are more or less allowed. I also think that methad would have would have been a good one because it explicitly allows for for raising of funds without necessarily being classified as a security up to 200 million 50 million a year. So I think though like metadon maybe even because of that the tokens that launch on that platform um but you know inversely I think even if it doesn't pass though some of those tokens also could do well because I'm still going to I'm still leaning on or expecting that SEC espec specifically will have some more um rules around this and possibly even like

exemptions like innovation exemptions, tokenization exemptions, you know, DeFi exemptions, these kind of things. Um, you know, they're working on one right now. It got some push back because it it was about tokenization and people were concerned whether they were talking about the synthetic tokenized assets versus actual um onetoone backed. So, that's getting reworked, but you know, I'd expect them to have others on the plate as well. And so that's my long-winded answer of saying it's hard for me to name a specific asset, but I do, you know, even Meta Metad, but I do just like altcoin, D5 really for the clarity. I think they're they're they're probably clearer winners from it.

>> Yeah, good shout. Ryan, you have any any views on how to play it or or which side of the odds you want to be on? Well, I definitely don't think it's passing just for the simple fact that like I don't think the Republicans are in a good spot for the midterms and I don't think like passing crypto regulation really improves their positioning if that's like their hallmark success for this year. Like I think people are just going to be like what the hell. So yeah, I'm I'm bearish on clarity passing. Um I also don't think like we need clarity for a bull market. Um, so I don't really think it like it'll have short-term impact because it's like seen as a good, but like long term I don't think it really affects the the bull case for Bitcoin. Um, with that said, like if I

was to put on like a trade, like if I did think clarity was going to pass. Um, I think you just kind of read the room like every time we get positive news about clarity, it's like crypto equities pump really hard. So like coin, circle, hood. Um, I think those are probably your best points of trade. DeFi tokens. Like I do agree in the sense that they should benefit, but like I still think there's way too much capital that's like risk averse to like bidding onchain stuff. Um, so maybe like some of your your bigger cap DeFi tokens that like are already well integrated. So maybe like the unis and a of the world. Um, but the thing is like they've already they said screw clarity. We're going to start like driving value back to the

token anyways. So I'm not sure how much of an impact it is. Maybe there is like an impact in the sense like there is an amount of certain amount of capital that wants to bid these assets and is just not able to under the current regulatory regime. If that is true and again I I really don't have a read on that. If that's true I think they'll pump but like if the capital that wants to bid these tokens already can like I don't think it matters that much. I think though ultimately like I don't think clarity's passing so I don't think it really ends up mattering all that much. >> Look I want to take back my answer. I'm going to go with Ryan's. I [laughter] like I do like the crypto equity play for this specifically. I mean, regulations affect regulated companies, right? So, I think that makes sense.

That's a good shout. >> Yeah. So, so the way to play clarity passing is uh registered securities. It's um interesting angle there, but I I kind of agree. One thing I'm I'm open to is the scenario that we kind of saw play out in July of 2024. I think it was with uh the poly market odds on the ETH ETF getting approved. It was some the line was something like will will this get approved prior to the end of July 2024.

It was priced at 9% at the start of the month and then there was huge momentum in a 3-day window. Odds went to 100%. and it got over the finish line and ETH ripped I think it was like over 20% in a day and and had a huge move. Um I'm kind of open to something similar playing out uh for for Clarity Act. Um not to say it will or that it's likely, but markets can move that way. And I'm in agreement. I think um like when we saw the movement on Clarity Act odds last week, it really was your Coinbase Circle Hood that kind of led the leaderboard on that day and

um particularly Circle and Coin those have sold off a good bit from their their bull market highs. Um Coinbase in particular is kind of holding a major level on the chart. So, how would I play it? Uh, if I if I wanted to uh to play the Clarity Act line, I I certainly wouldn't be playing the Poly Market odds. Um, I'd much ra much much rather play something like Coinbase equity. And probably how I'd structure it is like a options risk reversal. um at this level like I wouldn't mind selling in an at the money put for like six months out um particularly if I if I

have uh you know a bullish bias to to crypto from this point in time and then I'd take that premium to buy some like shorterdated call option exposure um because if if those Clarity Act odds move from 34 up to 100 and a few weeks. Um I I wouldn't be surprised to see Coinbase over 50% higher in a few months period. So >> I remember that those odds on Poly Market. Uh I think it was a little bit different back then because one poly market didn't really have as much liquidity and the types of traders let's call them speculators were different

because I remember thinking I thought e ETFs were going to get the green light despite the poly market odds because I was looking at Twitter profiles for like James I'm going to mispronounce his last name but I'm not even going to say it. Um he's the Bloomberg ETF guy. um a very Italian last name begins with B. I was looking at some other uh ETF issuers as uh like ETF analysts as well and they were saying that they thought the odds were higher. They don't even they didn't even know about poly market odds back then. They were just giving their own takes on it and so I was kind of like leaning with them. But now I think the market's a little bit more mature and pro and they're probably participants in it as well.

>> Yeah. Just to add to that, I think it's a bit different because like the ETF stuff was like purely just like legal questioning and like basically Gendler just capitulates like I don't he knew that he was in the wrong like denying these assets ETFs and like just figured it wasn't worth the political juice to try to do that anymore where this is completely different. Like there's no political backlash to really saying no to clarity like you're not going to get caught up in court battles and whatnot. So I don't think that scenario is very likely. Um whereas I I agree with Mark like I thought the chances of Ethereum the Ethereum ETFs passing back in what was it May 2024 significantly higher than the 9% just because

did Gary want to risk going to battle again and and ultimately losing because he was in the wrong. Um so yeah I I don't think it's a likely scenario but it's the Trump admin like anything can [laughter] happen. So maybe it does have that wild card effect in >> Yeah. And they they didn't have Elizabeth Warren going around saying don't let the ETFs pass like she's doing with Clarity right now. So that's another wedge. >> Yeah. Good shouts, good critique. Um perhaps more news coming out of DC and the SEC in particular. Uh Hester Pur uh Cryptomom released a statement on vaults

uh with an interesting title, Headstands and Summer Vaults. A statement on crypto vaults and lending strategies. And basically this this kind of read is like a a warning to some of the activities in um the DeFi lending space. Vaults in particular related to curators and their activities and some of the the key language here. Vaults and lending strategies may implicate federal securities laws in several ways. um a vault that holds securities or allocates assets to investments in securities could fall into investment company territory. So kind of despite as you know pro crypto as um as this regular

has been uh and how pro crypto the administration and environment has been. um she's still pointing out that, you know, there's there's some red tape here that does apply to some of the the products in the onchain financial system. So, I'm curious if you guys have any interpretation on on what this means or or how it could implicate uh particular activities in in vaults and the curator space. To be honest, I'm not surprised because uh I had Ha Pierce on as a guest a few weeks ago on a different podcast and she

when we brought up Vaults she said something very similar and at the end of the podcast after the goodbyes me and my me and the other panelists were talking about it and I was like this doesn't sound super bullish for BS like everything else was a clear example but for BS she was a lot more careful media trained language around it and we wondered it we wondered if it was you know a sign of something to come. So, you know, uh this is that sign. And you know, I get it because, you know, even with some I'm I'm not going to get a lot of love for this, but even with some crypto tokens, they appear to be securities, some of them to me, or security like, you know, whatever.

That's not mince words, but you know, if it looks, smells, and quacks like a security, as some vaults do, I you know, I'm not I'm not mad at, you know, it's the SEC. This is their job. you know, you can't just put it on a chain and try to get around it. You know, that that's a massive loophole. You we could you could start to see a lot of companies like large of fintexs and banking institutions abusing this almost um for their, you know, even for their retail customers especially. Maybe not the banks. They're probably a little bit too regulated, but more of like the FinTech, the Robin Hoods, the new banks, etc. Um and this is why I think, you know, um you know, if clarity doesn't pass, this is why I think we need some exemptions.

we need these regulators to put out some exemptions like like they've done in the past. Um, so this is what I'm banking on and I I don't think anything is going to happen anytime soon because it's not like this administration is in an extreme rush to put this, you know, their foot down on any of these crypto protocols. But I think it's something to be reckoned with. So maybe maybe next year when post midterms after pri after priorities get um realigned again. Yeah, not not just vaults and lending strategies, but many tokens and structured products across the board certainly at least from my read look a lot like unregistered securities. Uh

looks and quacks like a duck. Um just like you said. So my my read is like as these products see maturity and adoption growing traction like as they have um there are going to need to be carveouts or exemptions or um or at least a clear framework for how curators can offer these products. Um whether that looks like certain mandated disclosures on kind of the the strategy architecture or certain curators uh need licensing to engage in the certain products um or at least a degree of like

transparency and disclosure in the same way we we want to see that for tokens. Um that that's kind of my read on what we're going to need for vaults as well. think this is bearish, bullish, or kind of just um just uh more more news out of DC at the moment. >> Luke, can you bring up the Amorpho chart? >> The a morpho pair. >> Yep. I actually don't know if it's moved at all. I'm curious.

>> But I do think that this is probably net slightly bullish. It just it just it it shows that it's on the regulators mind. And like I said, it's not like they want to stamp these things down. It probably so for it to be on their mind this early probably means they're already thinking about how to regulate it, how to do the disclosures, the ratings, whatever is necessary. And and then by the time and by the time that kind of clarity comes, hopefully the large institutions can can get in, can step in. Let's put up the chop.

>> Yeah. Here's the um the a morpho pair. Of course, a had brutal selloff post um all the service provider departures and uh the fallout from the kelp exploit. Uh meanwhile, Morphos had incredible resilience in um deposits and active loans, particularly from like the RWA sleeve of listings. So, Ryan, what's your what's your read on what this chart's telling you?

Nothing much really in relation to the the SEC comments. Seems like the market doesn't really care too much about it because in my mind like this would be bullish a bearish morpho. Correct. >> Like Mark, would you agree with that? I would be I think uh an kind of an infrastructure layer like Morpho in particular sits somewhat insulated to um to the comments whereas it's much more so the curators. >> Yeah. But like now if curators start falling off like or whatever >> does that not affect Morpho? Like I understand morpho infrastructure like morpho is not the target of this but like if now all of a sudden every

curator >> on morpho is a security or whatnot >> does that not like impair their overall bullcase? >> Yep. In in practice though I don't see the work of a service providers being that distinct from a morpho curator. That's my read. At least what what the market says now is like it's kind of a nothing burger. >> Yeah, that's definitely my takeaway.

It's a nothing burger. >> Yeah. >> Would you be long or short this pair, Ryan? [sighs] >> I wouldn't touch it. I I I don't really have a read either way. Um if you zoom out, I'm sure this pair has or at least on the obvious side has gotten destroyed. Yeah. Yeah, that's a that's a tough [laughter] one. I don't know. I uh I think A's probably being overly discounted, but like they had a really rough year. I'm not sure I want to long them yet.

Yeah, bad bad year for A. Um that's for sure. my if I if I were to trade the pair like I'm ultimately incredibly constructive on Morphos's vault architecture um at the same time with like large token overhangs and whatever it is a 100 to 140x price to sales on a implied basis assuming a 10% take rate compared to a that's you know been in the 10 to 20 range um it's a bit more compelling to me. Uh at the same time we had Morpho Midnight launch recently with um fixed rate fixed

duration vault products which uh I've been the longtime gigab on kind of onchain fixed income products with um Pendle principal tokens and uh given the work we've done there over the past year and a half like you can get onchain term structures of of significance with uh fixed yield, fixed duration instruments and you're starting to see the beginnings of that on Morpho Midnight um which I think in the long run is going to matter a lot more than what the market appreciates it to be right now.

So ultimately I'm pretty constructive on that. >> I I've been waiting a long time for fixed rate seals in in in crypto. I I maybe I expected it too early. I remember 2017 getting into a saffron ICO because they did risk tranching and then for the senior you can senior trunch you can get fixed deals. I was that was I was way too optimistic on on yield market structure back then but we finally have some semblance of it. I'm looking forward to everything else that comes with that. credit credit spreads yield curves you know the whole works and I think it's a a vital first step or maybe second step for for more

institutional risk capital to move on chain use with that as a benchmark absolutely um all right we we open with some some commentary on the NASDAQ uh equities have been selling off pretty hard this past week um they've kind of made new range lows. Um, this of course comes off the back of like one of the strongest stretch in in equity price action history um from April April through early summer. U meanwhile like most crypto majors are above their lows and kind of like showing some some relative

strength to equities. you've kind of been yeah more smoked in equities than crypto over the past few weeks here. So, I put out this research report uh last week titled bottom signals kind of looking at some high time frame metrics that are pretty characteristic of cycle lows um particularly for Bitcoin and showed this chart. I think it was end of June. But yeah, the the top panel is the uh 14 period um moving average of the weekly RSI of the NASDAQ Bitcoin pair

and the bottom panel is uh the price of Bitcoin in dollars. And what you see is that whenever this smooth RSI kind of eclipses 66 as an arbitrary level, uh that tends to coincide with um major cycle lows on Bitcoin or or at least a zone. And what we saw over the past few months is basically the NASDAQ Bitcoin pair blew out to the upside. like NASDAQ uh was incredibly overbought against Bitcoin um with pretty high reading on that smoothed RSI

and you know it's a 14 period moving average on a weekly chart. So it's pretty high timeframe stuff. You you don't get a signal like this often. You get it basically once every once every four years. um and looking at what uh what historical returns look like um from that point in time is it's it's overwhelmingly positive across the board. Um this is the price of Bitcoin and dollars on the left here um from that signal. And then this is the NASDAQ Bitcoin pair um over the next three years from that signal. And the red line

is where we are now from from that signal. So cherry cherry-picking this metric alone um it kind of suggests that uh Bitcoin might be near major cycle low and that outperformance against the NASDAQ is kind of the likely scenario here. Um if if the current context resolves to how similar situations did historically and uh we've been talking about realized price for for quite some time. Um certainly if you're a newsletter subscriber um we've wr written about it a bunch but it historically it kind of represents the downside target target or

or deep value for a bare market and it currently sits around 53k it kind of estimates like the onchain aggregate cost basis and in a bull market you know paper bitcoin uh from centralized exchanges and and perpetual futures that drives moves spot price up to significant multiples above realized price and uh that that creates downside risk. But in the bare we see it retrace to the realized price level um which we're we're just a bit above um not much more downside to go. So, taking all this together, I kind of try to paint a um

range of potential paths for Bitcoin both into year end, but also out through 2029. And I actually kind of think it's it's only like coin toss odds if the low is in at this point in time. Um I mean, the year could end up at 80,000. Uh we could draw down to mid to low 40,000s before then. Um but regardless I think most of the downside of the bear is behind us and for the the patient and initiated and and optimistic like the uh suggested return profile for Bitcoin for 2027 and 2028 is in my opinion like quite quite

favorable from here and likely a better spot to be um than to be in the NASDAQ at this point in time. So, little bit of um bullish optimism here. Hope the people can uh can can dream again. But curious, you guys uh have any takes on this? You you disagree or um or agree on any of the framing? Think the lows in or we be looking to the upside again? >> I guess I'll I'll start. Um yeah, no, I I I definitely agree. I think the low has to be close if not already in. If the low isn't by the end of this year, like I

think you seriously have to start questioning the Bitcoin thesis. Um, so like to me, if you are still long the overall Bitcoin thesis, you still think it makes sense in today's world, then yes, I agree 100%. Um, if the bottom is not in anytime soon and NASDAQ and gold keep ripping against Bitcoin and those RSIs get even more overbought, then like you might actually have to start questioning the Bitcoin thesis at that point and like actually asking yourself like is Bitcoin doing something wrong? Um, and I think you can actually make a convincing argument that may be the case, right? Like quantum will come eventually. Uh people can

debate about timelines, but it is eventuality. And the current high priest of Bitcoin seem more concerned with like ordinal spam, which isn't even spam at this point. No one's doing anything ordinal related on Bitcoin. This hasn't been an issue in a year. Like it just naturally died off on its own. So, um yeah, I I I think bottom is near for sure. Like just purely from what you said and what your report says. Um, I' I'd be concerned if it isn't, though. So, I don't know what to do in that scenario. I am very much like I am willing to go down with the ship. If if that's what it is and Bitcoin fails, I I will fail with it. I'm I'm comfortable with that.

>> Yeah, I'm going to jump on the bandwagon here. That was a great report, by the way, Luke. Um, and it's very interesting that that RSI NASDAQ to BTC symbol signal comes once every four years. That's a very very odd thing that keeps happening it seems. Um I'm hoping that it's at least from the the model that it's more about in the short term Bitcoin rising than it is NASDAQ falling like it's been doing recently. Um I you know this AI bubble stuff might be getting a little bit stretched. Um hopefully earnings can catch up because you know I don't want both sets of my portfolio to be feeling it at the same time. Never a good feeling. Um I you know I did fade the fouryear cycle last

year. I think it was like September October. Um I was like yeah I think four year cycles are dead. Look at the ETFs. Look at the DTO like external pressure and like the whales influence and the BTC miners influence having less and less over time. It all made sense in my head but then I forgot it was Bitcoin. And so I'm not going to make that mistake again, you know. Um, I believed in it last cycle. This cycle I didn't. Next cycle, I'm I'm I'm a believer again. I've repented for my sins. And I I I think that history as well as the the great data that you put out in the report is is pointing towards towards that the bottom is there or or hopefully already gone past us.

>> Yeah. So, it's like we're we're at or we're at or near a low on a pretty high time frame. Um, and we should be looking for one. And if it's not set, uh, or we continue to drift lower like after your end, um, this time would be different and that would invalidate the thesis. But I kind of think whether it's to the upside or to the downside um related to the four-year cycle like the four-year cycle is going to be innocent until proven guilty. Um there there was a lot of narrative you know back in uh the the top Q3 Q4 of last year that you know

this time is different because of institutional adoption the holder base ETFs treasury companies whatever it might be and um the the four-year cycle thesis was kind of treated as like a useless left curve. um frequently was called like a dumbass on the podcasts for or still believing that it might be in play. Um but then everything gets cut in half and the four-year cycle thesis is is validated almost to a tea. So I'm kind of looking to the upside here that like this time's not different. Um, and we should be looking for a low in

accordance with the cycle in the same way like we should have been looking for a top back then. But like Ryan said, uh, this is one we'll take to the grave. Um, captain will will sink with the ship and if if the load doesn't hold before year end, then uh, a lot more bigger problems at play. Um, >> and I'm just wondering how much lower can it get because we've had we've had the believers in the fouryear cycle help push the price.

We've had record levels of ETF outflows. I mean, when I say record, I mean since ETFs even existed, right? We we have Michael Sailor selling BTC. We have talks of implosion that go selling down. We have geopolitical um let's just call them events happening, right? we have high inflation, right? Like, and Bitcoin is still not even at realized um at its realized price, right? So, I'm like, what, you know, quantum fears? I can keep going on, right? I at this point, I'm wondering, can what is actually going to push this? Can something push this to its realized price or have we actually seen the bottom? That that's all that's going through my mind.

>> Yeah, the last low was much more chaotic. Um the the world was on fire in in crypto and burning down at the low um post uh post Teral Luna three arrows um BlockFi Celsius and then FTX as the big one right at the bottom uh this low much less so it's kind of a a bleed from ETFs treasury companies just largely suspended their they're buying and their support. Um, no major bankruptcies or failures at scale. Uh, this low just feels much more apathetic and of

disinterest. Um, so perhaps we need more more time for the timebased capitulation um rather than than price-based downside. Do we think the BitMX um collapse, I don't know what to call it, the bit the ending of BitMX, the OG of the Purps, unrelated? That's where my head is at. But yeah, what what do you think? >> I I think it's I think time and place makes sense. um business isn't good right now across the board and they've been out competed by Binance, Hyperlquid,

OKX Bybit um whoever it might be. And yeah, it's it's a it's a pretty um reasonable point in time to kind of close up shop for them. Moving on to perhaps uh zooming in from the high time frame cycle chart, moving to some other charts that are going up and to the right deeper in the trenches. Um Ryan, you've been looking at uh this new project, Fake World Assets, which kind of plays in the gacha space. uh similar but

different to you know collector crypt or something like that. So at a high level like what what is fake world assets? What's the what's their angle and or the traction they're seeing? >> Yep. Totally. So I think it helps to to kind of first start looking at like the existing gotchas and like where they're at. So basically how like Collector [ __ ] Courtyard, Beey, Figitals, how they basically all operate is they go out and they buy Pokemon cards and then they stock their own gotcha and then you pull it. So um this is good for curation, right? Like they get to pick what goes into the gacha and I I think that is an important part of any gacha like curating the assets. like if you

just stack it with like highv value stuff but like it's not really desirable highv value stuff like it just becomes another slot machine but the downside to this model is it's very like capital intensive and time consuming um you can't just be like hey I'm going to go stock my gotcha with uh you know PSA 10 like first edition Charizard or whatever like those are very hard to come by you need to have the right connections like these are not easily attainable assets and they cost a [ __ ] ton of money right so fake world assets basically opens up that model to anyone, right? So, how it works is they have whitelisted NFTts and if it's whitelisted, you can then go and deposit into the gotacha. Uh you can't do that on any of these like Pokemon ones. Like

it's strictly courtyard. It's strictly collector cry. They're the ones stacking or or stuffing the gacha items. You can only rip it. You cannot stack uh put your own assets in there. So, Fake World Assets is basically like kind of like the the unis swap v2 moment for gotas where now anyone could become a liquidity provider. Um, so that's like the real appeal of it to me. And then obviously like at the end of the day because this all just operates on blockchain rails like you can technically put anything into this gotcha um anything that is an NFT contract really. So the initial stuff has been like Ethereum NFTs. Um they just announced something called token

packs where you can like put tokens into an NFT and now put that in there. So like punkster tokens, Pepe Mog tokens have been put in there. They're working on a way I'm pretty sure to like get the Pokemon cards in there because like right all these existing gotas they basically tokenize these cards and like they're now NFTs. So, if you bridge those NFTs to Ethereum, whitelist them, you can throw them in there. Um, but yeah, I I am personally really interested in fake world assets because I think the open gotcha model will ultimately win out. I'm not sure fake world assets will be the one to, you know, do it right. Obviously, they pioneered it, so like they're first. Um, but it's just a much more compelling

method, right? Like it's not easy to spin up these gotachas yourselves. They're very capital intensive. I I don't have the exact numbers off the top of my head, but like the value of the items in Fake World Assetsclipsed seven figures in like the first day, right? Like to do that, if you're starting this on your own, you need to have a million dollars cash. Like Fake World Assets was able to do this with just token incentives. Like um they didn't spend any money of their own. So I I think this is a much more compelling method. I think what they need to figure out though is the curation aspect. Like like I said before, a big appeal of the gotchas and I think like you have to kind of be in the nitty-gritty like from the outside it just kind of all looks like gambling and it's like people just

want higher numbers to spin for, right? I think that's wrong. I think the reason why the NFT or like the Pokemon gotas have gotten super popular is like there are a lot of cards in Pokemon, but there are very few like grail cards in the sense that like there might only be like 500 of them and there might only ever be one for sale at a time and like you probably have no way to get that. So for a lot of these like top cards, the only way to actually get them is like go spin the gotcha and whatnot. Um, so I think Fig World Assets kind of needs to figure out that curation aspect. So like right now because you can pair with ETH, right? Like you can just take a really shitty NFT and pair it with 100 ETH. Um, there's no oracle. It's not like reading

the prices of these NFTs and then now it just like how it interprets it is that NFT is worth 100 ETH even though it's really not. So like you could have a scenario where this is just like dulges into like an ETH slot machine and you're just spinning for ETH. I think that's bad. I think they need to figure out a way to like curate and like actually make it so that like when you win the top grill, you're winning a crypto punk, you're winning, you know, 0.1% of the supply of Pepe, you're well, that would actually be too crazy. You're winning like 100K worth of Pepe. Um, you're getting like a first edition Charizard.

So, I think that's what they need to solve. But, if they are able to solve the curation aspect, like I do fully think the open gotcha model will beat out the closed gotacha model. I think it's just a much better way. it like actually taps into like crypto rails and like technically you can run a gotacha entirely offchain actually I think the biggest ones in the space are offchain uh like arena club and rips or whatever like they don't use the blockchain at all they operate the same way as like collector cryp they probably do more revenue as well I'm I'm not sure on that like their financials are um obviously they're private companies but this is like how you actually like tap into what makes blockchains great and like what makes this tech great to like truly beat out those competitors So, um I don't

know if FWA is the one to win this, but I think they're on to something here. And I would definitely not discount the innovation. >> You said, uh prior to the pod, you said you spent, you know, your whole whole weekend playing around with it and farming it. So, yes. >> I'm curious like what's what's the strategy? And are you having fun on chain again? >> Yes. Well, I'm definitely having fun on chain again. Um I actually I was only doing it for the weekend like because I have to work. like this was literally taking up my time. I'm sure I could like one of my buddies like drew up a whole script to do this. Um I guess I'm lazy and just not that proficient or trust myself to like build something that works, but essentially what I was doing, so right now they're in like the

emissions period. So for the first 15 days, uh 1% of the supply daily goes to depositors and pack purchasers. So obviously it's, you know, it is being incentivized right now. So basically what I was doing was I would take my ETH, buy packs, whatever I pull, then relist with ETH. So deposit that then from the ETH fees I was earning, buy more packs, get those NFTts, deposit. So I think hold on, I'll pull up my stats right now just to give you a sense of how time consuming this was. And and mind you, this is all Ethereum mainet, so you know, this isn't like fast.

[laughter] Um, but so over the weekend I ripped, let's see, 305 packs and deposited 785 assets. So yeah, I I played around with this quite a lot. It is actually like very enjoyable. I do like it. Um, it was more fun in the beginning when like people didn't figure out the ways to game it. Like I said, you can just like pair the NFT itself doesn't matter. All that matters is the eat side. So like in the beginning when I first started like not a lot of people were like industrial farming the [ __ ] So like there was like some variety to the NFTs I was pulling and I was like oh [ __ ] I just pulled a OPE opinion or whatever and like that's cool. And then

like now people have kind of realized the game and now I just keep pulling like TTTS and friendship bracelets which are just like valueless NFTts but you know sometimes they'll be paired with like a high ETH amount. Um, so yes, gachas are fun, but they're only fun if like the items you're pulling have value outside of just like whatever the monetary value is. So again, that's what they need to figure out. I think they're on to something. Um, I like being able to also be the depositor because I like collecting cards. I would say there's probably 80% of my collection I wouldn't care if they sold if I got the money value for it where like, you know, there's 20% that's like I'm holding this regardless of the price. Um, and I like

to put stuff to work and I like to try out new stuff. So, it is an enjoyable experience. Can be improved. If this is like the final version of it and like there's no further improvements, this probably dies out pretty quickly. Um, but I don't think that's the case. I think uh they realize there I think Adam realizes he's on to something here and they're going to push forward. I think in the docs they have like a a teaser about like V2 or something where it's like deploy your own. So that would be cool because like if it's all just one big pool like technically you can now like build like mini gotchas. So maybe you build a gotcha that only pulls in like the token pack. So like you have a token gotcha that it's a unified liquidity pool between the main one and

the token pool and maybe you have like a Pokemon specific one. Um you get you get really creative with this. Like this is like the power of DeFi. This is the power of crypto. So I'm curious to see like where the experimentation goes. the the possibilities like in a sense truly are endless, but it's just a question of like do they want to pursue that or not? I don't know. >> That that sounds really interesting. Um I do like this open concept behind it. I think I agree with you. I think that gives it a leg up versus some of the others. Um but then like we saw with BitMX, being the founder of a a model doesn't necessarily mean that you will be the winner. So first mover advantage isn't really a thing in crypto except for BTC. H I just have a question. How

does how would it work with the Pokemon cards? Like how do I you know with the others ones is a single entity, single creation. I can I'm trusting them essentially. How does it work in this model if they were to do that? [snorts] >> Yeah. So they would they would still need to rely on like Courtyard or Collector Crypt to like tokenize the Pokemon cards like because they do that, right? Like their their business model is twofold. Uh not only do they run gachas, but they run like the tokenization side of stuff. So, I don't know if deposits are like open for them, but like in theory, I would say let's say I have a PSA 10 Pikachu or whatever.

I send it to them, they custody for it, they now issue me an NFT that like is a claim on that asset. So, what Fake World Assets can do is basically that NFT they can now put into or whitelist it. So, now if you have because I'll take Courtyard because their EVM, it's I'm a bit more familiar with how they work. all their NFTs are a part of one big courtyard collection, right? So, you just have to whitelist the courtyard collection and I guess in a sense also find a way to bridge it to Ethereum because it operates on Polygon. But once you do that and whitelist it, now anyone can deposit that. And how fake world assets works. There's no oracles. The value of your NFT is determined by So when you deposit, you have to deposit an amount of ETH. So, in theory, what you

should do, let's say your Pokemon card is worth 500 bucks, you should then deposit it with 500 bucks worth of ETH. Um, so that that's how it works in the sense like if you have Pokemon cards and they're whitelisted, all you just have to do is like determine what you think the value is and deposit a corresponding amount because basically the only scenario where you lose money in this, let's let's say I have a $10,000 Pokemon card and I pair it with 500 bucks of ETH, that card is going to get pulled very quickly because the odds on it are pretty high. It's deemed low value even though it's not because the the system only reads the ET side of stuff. um that's the only way you really like lose out or or like guaranteed to have minus Eevee as a depositor. And then obviously

because you're playing like the house role in the casino, you can lose money as a depositor as well. Um if you don't have like the bank roll to overcome like variance and whatnot. So like if you do decide on doing this like don't just like do one NFT like one position because you can you know the odds can go against you and you get picked off. Like if you do plan on doing this, like make sure you do it with a quite large bankroll in like a lot of the positions to kind of eliminate the variance. Like there there is positive expected value on the depositor side, but that doesn't mean it's guaranteed.

And then if I put my Charizard in, it's just say it's worth 10,000 and I match it with 10,000 worth of ETH, but then ETH declines in value. I know the odds won't the odds won't change because the Ether is declining in value across the board, but then Okay, you're answering my question. Yes. Okay. >> Yeah. So, like I guess that's something they'll have to figure out as well. Um like the current system works well for ETH NFTs because they're all priced in ETH, but like we ob it obviously should expand to assets that are not just priced in ETH. And I guess you could run into a scenario where like because it's also tough to withdraw. Like if people are ripping packs, you can't withdraw basically. Like it has to be like a dead period for you to withdraw your deposits. Um so there could be a

scenario where like let's say I buy a very rare PSA 10 first edition. Well, not PSA 10, let's say a PSA 7 or eight first edition Charizard. There not many of them. Let's say overnight these things go up 2x and like I can't get my deposit out. Yeah, you could lose out. So, that is something to consider and like it's not free money being a depositor like I said. Um, but I think that's more of an edge case than like this breaks the system if that makes sense. >> Yeah, makes sense. Thanks.

>> So, average Joe's crypto is is the competition in the fake world asset trenches. Um, >> not anymore. I have I've waned down my my operations for the week as I have work to do. This was becoming a full-time job, but if it's still attractive come, you know, Friday night, maybe I'll spin it up again. >> Yeah, if the listener needs some fun to do on on the weekend that's on chain, might be this. But yeah, pretty pretty fast rise since launch. Um few days above a million in fees. start to Eiffel Tower a little bit, but also today's the 28th. This candle is not done there.

Could see a floor there. Um Ry Ryan here doing his part to uh to paint the fees. But the one the one last thing I'll add and it's kind of more of a meta thing is I think we need to be like supportive of projects like Fake World Assets again in crypto. Like I feel like over the past year or so like crypto's kind of lost this like experimentive um feature of itself as we just try to submit to our Trafy overlords. Um and I think the bare market is a great time for these experiments. Like last bare market we had like front and front got super popular. Obviously you know it didn't pan out. Um but that doesn't mean you stop trying. So yeah, if there's

ever anything that's like unique and fun onchain, like always go try it out. You never know. Um the people that tried this out first day did quite well and are doing quite well. But this is like one of the best features of crypto is like you can take Adam, right? The guy that built this completely independent dev. I think it's a team of two. Spun this up and like found PMF almost instantly for it. So tap into that crypto culture. that's like super important and that's why like I was initially drawn to fake world assets is like this is what makes crypto fun and unique is like you can't do this outside of crypto. Um but yeah that's kind of like a meta view on all this I guess.

>> Yeah and it's an important one too um because certainly like a lot of why we're here is crypto very much seems like the frontier of innovation and experimentation in financial markets. um however big, however small, which includes things like certain gotcha games or or fake world assets. So I agree um all four experimentation and innovation across the board. Of course that comes with some costly lessons at times, but uh ultimately that just better informs the future. So I think takeaways it's early cycle for the initiated and optimistic. Um plenty plenty of reasons

to play around on chain again and um yeah mixed picture into year end but uh as we look out in time plenty of reasons to be optimistic. So yeah, I want to thank uh Mark and Ryan for their thoughts on and uh coming on the show and we'll see you guys next week and enjoy the weekend playing around on fake world assets. Nothing said on Xerox Research is a recommendation to buy or sell securities or tokens. This podcast is forformational purposes only and any views expressed by anyone on the show are solely our opinions, not financial

advice. Luke and our guests may hold positions in the companies, funds, or projects discussed.