498 Meet Breaking Chains Crypto

Welcome to Breaking Banks, the number one global fintech radio show and podcast. I’m Brett King. And I’m Jason Henricks.

Every week since 2013, we explore the personalities, startups, innovators, and industry players driving disruption in financial services. From incumbents to unicorns and from cutting edge technology to the people using it to help create a more innovative, inclusive, and healthy financial future. I’m J.P. Nichols, and this is Breaking Banks.

Welcome to this week’s episode of Breaking Chains Crypto, a brand new podcast hosted by the team that bought you the Yield app. In this first episode with Reese, Lucas Keeley, along with Aditya Tripathi, we discuss the current landscape and share reasons why we think the battle of the L2s is only just getting started. And ChatGPT is in the news.

While incredibly useful, we think it has striking similarities to being a big four consultant. And why is South Korea showing evidence that it’s a fertile ground for producing some notable DGNs? Find out on this week’s Breaking Chains Crypto. Hi guys.

Welcome to the first edition of the Breaking Chains podcast. And this week, as we will have every week, we have myself, Lucas, Reese, and Aditya. And so welcome to the show, guys.

And I guess this is going to be the first of many. So Reese, back in Bangkok. It’s been a while.

It’s been a while, mate. It’s been a while. It’s great to be back here.

It’s great to be back here. Great to see you, Lucas and Reese. Aditya, where in the world are you? I’m in Dubai now.

You know, it’s the crypto Miami, crypto capital of the East, apparently. Another Mecca in the Middle East. Well, yeah, quite a few luminaries are moving here, as you’re aware.

There was some rumors of Caroline moving here. That didn’t happen, thankfully. But it is quite a nice crypto community.

I heard she’s single now, mate. I think you missed the flight, didn’t you? Yeah, maybe. Maybe.

Yeah, that information is not useful to me because I’m married. Well, it would have been the dream down there, mate. So we’re just slumming it in Bangkok, as always.

And yeah, so it’s been an interesting time this past 12 months in crypto, for sure. I mean, we’ve seen it all and done it all. And here we are at the other side with a sort of a rally into the start of the year, which has got a lot of people excited.

So it seemed like a good time to start this podcast. And so, you know, funny things have happened, right? We’ve seen, you know, FTX go from the greatest minds in crypto to being, you know, proven to be complete frauds. We’ve obviously seen the blow up of Celsius, BlockFi, Three Arrows, Terraluna, etc., etc.

And the list keeps running. There was obviously like a chain of events that caused a lot of people to become exposed to what they’re actually carrying out. I think yourself and I had these discussions around what risk management looks in this space and where trust was being placed.

Then I think even the parties where we assumed to have the highest level of trust, FTX and Alimator, etc., arguably the biggest market makers in this business turned out to also not be adhering to the kind of risk we’d expect from a developed industry. Hard to say, I guess from like 2017 to now, we have more institutional capital, but it’s not being ran like institutional capital. Yeah, I think it’s a good wake up call, I think, for the expectations we have around how people behave in this ecosystem.

But yeah, I guess we’ll see this continue to wash out in 2023, but it’s certainly an eventful 2022. So the ultimate tide is out year, I’ll say, for 2022. What about you, Ajit? Do you think we look back on 2022 and the lessons we’re going to learn going forward? Yeah, I don’t think anyone ever learns anything in markets, particularly.

I think the collective mass of our learnings is called regulation. Otherwise, market participants, there’s always a new flow of new people, people who have goldfish memory. And as soon as the super cycle starts again, people forget all the lessons of Terraluna and everything.

In fact, you see Bonk and the dog… All of that’s stored on chain. We’re never going to forget that. It’s all going to be stored on chain, mate.

Did you say the Zupa cycle? I thought I heard you say the Zupa cycle. Yeah, from Mario Kart. Oh, that was the Koopas, wasn’t it? Oh, the Koopatricks.

The fun thing is I met Susu in Crypto Bahamas, right? And I asked him if he was doing PsyOps. And he said, no, I’m serious about it. And he was serious about it.

And I think as soon as… and then somebody tried to sell me a private jet in the Bahamas. And I looked at myself and I said, man, I drive a Honda. But you drive an NSX, mate.

You’re not driving a Civic, are you? I’m driving an SUV. So the market is not so bad, right? We haven’t got to the used Civic levels yet. One more drawdown, Ajit.

One more drawdown. So funny story about Susu. I used to work with Susu at Credit Suisse back in the days.

He used to work for a guy called Harge and Dave Best on the Delta One desk at Credit Suisse. And I remember him and Kyle working away and I sat on exotic trading and they left. They came in and resigned one day and set up their emerging market currency arbitrage fund and did a whip around Hong Kong and Singapore and didn’t work out too well.

Well, it did work out. Oh, OK, I see. It didn’t work out back in the day when they were doing the currency arbitrage stuff.

No, exactly right. And so like many people in funds or set up funds or businesses in crypto who come from TradFi, a lot of it’s like, you know, I’ve got some lessons learned from this. And a lot of the lessons that I learned being in CS and seeing these guys and what they’re about and then coming to us to raise money, etc.

is just like, you know what, this is not where we want to be. So we didn’t we didn’t do much. So we didn’t do anything with them.

And it’s I think the thing for me is finance, whether it’s crypto or traditional finance is a people business. Right. And people businesses are about trust and whether you believe that person with your capital is going to do the right thing with it.

And that’s about character. Right. It’s about what’s what happens when the shit hits the fan.

How do you react to it? And, you know, we can go through, you know, a plethora of stories around how managers have managed the FTX fallout and how they’ve tried to trade out of it. And some of it has been quite shocking. I really that’s that’s I think that.

So funny part is I met Suzu in Dubai two weeks ago and I asked him some of these questions and maybe we will try and invite him to one of our shows. So. So I think, first of all, crypto is slightly different from some of the other more mature markets because there are no hedging instruments.

I mean, there is a very thin options market in crypto. There is only and there’s a lot of liquidity on purpose. But you don’t really have some of the sophistication of risk management or even at the instrument level or in terms of systems.

So you might have 18 monitors to trade, but you’re not really looking at any of the processes, ops or anything that you might see if you’re trading at a trading floor at Goldman. I disagree with that. I would actually disagree with that.

And the reason why I would disagree with that is you can buy portfolio management systems, be it infusion, be it Elwood from Brevin Howard. You can get numerics, etc. And they all have the full risk suite, the full vol surfaces.

You could you could get an option from the guy. What’s his name? Anshul Jain, he used to run FX Options at JP Morgan. Right.

And you see this stuff. And recently, I have gone through all this stuff and seen all the tooling that exists for options and option market making and option pricing and etc. The problem, the real problem is this, right, is the ISDA for bilateral agreements or standard is there’s only just come out, I think, last week.

Right. So as soon as they come out last week, everything is bilateral. And yeah, crypto, right.

You’re dealing in bearer instruments. Right. So when you’re dealing in bearer instruments, how do you get institutions to come and trade with you when regulated institutions are capital constrained due to Basel three? So they have to play on the CME or futures.

You’ve got cash settled or physical like Bitcoin, etc. And let’s say I want to trade with Goldman Sachs. I’ve got physical.

They’ve got synthetic. I want to tell a call option to Goldman and I want to give them my collateral as Bitcoin, but they can’t take it. So then I have to give that to, let’s say, Anchorage, which is partly owned by Goldman.

Anchorage holds it there and Goldman loans me money cash against that collateral. And then I give the money back to Goldman as a margin. It’s just impossible to do.

And so you remove the key liquidity providers from trad five from from the space. It doesn’t mean the tooling is not there or the pricing mechanisms that you look at someone like Orbit or QCP or some of these other guys. They’re like all very advanced, experienced options traders.

And it doesn’t matter what you’re trading the option on. You’ve still got the same Greeks. And depending on the way the asset moves.

But where are these option markets? Right. I mean, most of this stuff is bilateral because when I try to trade options on Binance, I mean, there are very few options on on some of the more liquid tokens. But FX markets is still bilateral OTC, right? There is a lot of money to be made.

But if you look at just basic FX, it’s bilateral OTC, right? So if you’ve just got bilateral OTC, it’s no different than that. The problem is, there’s just not enough players. Right.

And ultimately, let’s say that I’ve got, you know, you’re dealing in an 80 vol asset class and you sit there and say, well, I’m just going to run deltas against it. Well, you’re going to take a lot of the vol of vol in crypto is actually quite high because you just have moments of vol. Yeah, I mean, I would say one of the things we had, you know, not all of our audience is going to be very, you know, come from the same experience as us.

One of the things is Suzhou is most of Suzhou and 3SE struggles are essentially with their counterparties. So, you know, there is not like, yeah, they might have made some representations or sent some letters to their counterparties to borrow, which may not be entirely accurate. But that’s something they can resolve with their counterparties, because there’s no, unlike Gemini, there is no retail money involved here.

Right. I mean, as far as I’m aware, at least not directly. So I think that’s kind of a mitigating factor for the arrows, as long as they bilaterally, trilaterally essentially settle their disputes with their counterparties, they’re in a good shape.

But they’re not they’re not going to. I can guarantee you there’s no one in their right mind going to enter into a new bilateral with Suzhou or Carl Davis anytime soon. Right.

Because ultimately your risk reward for that outcome is if something goes wrong, it’s very easy to say, well, why would you do that? Why did you do that in the first place, given the history? Like if we look at the history of managers or people we’ve done DD on. Right. And we look at people and say, oh, this guy’s really good.

This man has got great performance. These guys have done amazingly well. You do a basic background check on some of the some of the key players in this industry, some of the key founders.

Right. And you say, OK, what’s your background? Oh, you’ve got an SEC sanction for fraud and embezzlement. Oh, you’ve got an SEC sanction for market timing or you’ve got liens over your assets.

Yeah, it all exists. Right. And you can’t.

I don’t know if crypto markets are at that level of maturity. Right. So we might be expecting a little bit of a higher.

I think we might be talking about a slightly higher end of institutions. Then I think like typical crypto funds or family offices or hedge funds or liquid funds. But what’s your point? This is not necessarily my point.

This isn’t necessarily the Wall Street and some of the some of the ideas. And Wall Street also is quite forgiving. Right.

So LPCM guys came back and started another fund. I mean, we have 0.72, which is running really well. So I think 0.72 was just a family office now.

Right. It’s not like it’s a hedge fund again. It’s just a family.

Most hedge funds are family offices now. Right. Because they are trying to avoid regulatory reporting departments.

Even Archegos was a family office. So no one particularly likes to be regulated. So I mean, so I think I genuinely believe Wall Street is very forgiving.

And crypto Wall Street is even more forgiving. So it’s not entirely inconceivable that there will be some counterparties that are willing to take a risk. And, you know, that’s kind of it.

I think that’s why they’re starting this GTX exchange, which I think a lot of Twitter folks made a lot of fun of, which will essentially trade claims on FTX. Right. So that’s a pretty interesting idea.

Do you think it’s now like since the FTX stuff came out and Sam was involved with retail money, Suzu and Kyle have come to the forefront because they’re essentially the cleanest, dirtiest shirt in the laundry now. Right. That’s what it is.

Right. You have Doquan, retail money. Sam, a lot of retail money.

Celsius retail money. Yeah. Tom Brady money.

You know, you don’t want that money. You don’t want that stuff man. You don’t want Tom Brady’s money.

Yeah. And it kept getting darker and darker. Right.

Like Harry Potter. Yeah, that’s right. And by the time you get to the end, you have outright, you know, you have a polycule, you have outright fraud.

That’s exactly right. And now you have like Su and Kyle go, well, at least we didn’t defraud retail. We can probably take a shot.

Right. And this is like they’re starting their character arc. Right.

Is that this is our prime opportunity. That’s where I saw it coming from. They have got like now we are the cleanest, dirtiest shirt.

We might as well take a shot. And like they just reemerged, you know, on crypto Twitter and started, I guess, started their like PR roadmap for GTX. Right.

And there are so many others out there. Right. And we don’t even know.

I mean, and there were founders that started dying at the bottom of the market. It’s not even clear who was actually dead, but there were two or three folks who were, you know, without mentioning anyone in case they’re actually dead, who were declared dead or lost at the bottom of the galaxy. I know what’s absolutely dead and isn’t going to rise from the depths like Lazarus.

Right. Is going to be Terra Luna. That’s absolutely dead in the water.

I think the sunset. Really? Have you been watching the token price? The classic. I think I’ve still got some three X levered on that.

I bought like point zero zero zero zero zero one. Are you telling me I’m up like 10,000 percent? Oh, dear. No, I think for me, 2022 is really, really simple.

It just shows that you can’t let the children manage the money anymore. And I think we started to see, you know, as as the institutional big players entered the game, simple players who started out as, you know, crypto native were just getting completely destroyed. Let’s let’s take a very, very classic case of poor maths.

Right. Terra Luna modeling stress testing. I don’t know if you saw the stress testing paper on Terra Luna, but that stuff was just like that came from Harvard.

Like, really? And, you know, you could just pick holes in the math instantly. And no one checked it because it came from this guy. He’s at Harvard.

And this is great. And I think Stanford. Yeah.

When Rhys and I modeled it, we were like, you are not. This isn’t this is not this is this was last November 21. We learned that.

What was your liquidity threshold of Terra Luna before you thought it would crash completely? 10 percent, 10 percent or something like that. It was like it was just like we couldn’t get away from it. It was like, really? 10 percent of UST from Anka would collapse it.

Yeah. And we were like, why would we why would you touch that? And I think I think the the tough thing for us is you can’t go out on crypto Twitter and say and just be a hater. Right.

You just better just to shut up and and say nothing and trade accordingly. But what was happening was like the big players would come into the space, be it the Citadels, be it the, you know, the the other big market makers or the big hedge funds. And they would just point a gun at the sheer lack of depth and liquidity in the market and say, OK, we can move this for a billion dollars or we can move this for half a billion dollars.

And the risk reward is is perfect. And it’s amazing. Like if you see, you know, the rally in Bitcoin at the start of the year, what happened? It was the start of the Martin Luther King weekend.

US market closed 4 p.m. And all of a sudden there’s this big move in BTC and the market starts to go and go. And then it just gets a massive short squeeze and it’s pushed all the way through 20k. And everyone’s like, oh, it’s the start of the bull run.

No, there’s literally zero liquidity for the next three days. And they’re just picking out all the stops and going to just force it higher and higher. Did you notice that the subsequent rally was also Friday? Yeah.

And then in that time, you take some like Coinbase stock is up nearly 100 percent as of Friday close in a week. All right. Hold on.

What’s going on here? I mean, it’s like GameStop all over again. Right. It’s just, you know, you’ve got to you’ve got to realize that the crypto market itself is so manipulated.

And I just don’t understand. Like, you know, if I was a regulator, it’s the one thing I’d want to clamp down on is that the market manipulation in crypto. And that’s the structure.

Right. If you I mean, market making, exchange, custody and venture, they’re all sitting in the same firms under the same umbrella. There is no like segregation of any sort.

There are no Chinese walls between these things. There are no controls. So it’s you know, there are I mean, it’s like the securities market from the 1920s or something.

I don’t know, the pre-1934 act and a lot of rules after that. So unless unless there is kind of, you know, segregation across these things, at least custody and exchange and market making, you’re always going to have a very opaque, unpredictable markets. And, you know, it’s very, very hard to short anything in this market.

Right. Because it’s so easy to liquidate anyone. Oh, no, no.

Absolutely. Absolutely. And it’s only been made worse.

Right. Because we had like all the market maker money was obviously on FTX. Right.

And that some got out, but not a lot of it. So we’re just dealing with very thin markets. Even, you know, before this all this fallout happened, it was really FTX was the driver of volume because it’s arguably it was the best place functionally to trade.

I guess from a top level anyway, like I don’t think anyone was aware of like the old God mode that Alameda had access to. It would have been nice to have to have that setting turned on my account. But, you know, the books were thin in specific assets, but now it’s very, very thin, you know.

So I was going to say other things that have kind of changed going into 23 is ChatGPT and OpenAI. I mean, what thoughts on that? I’ve got some big thoughts on that. And ZK.

So, you know, how the venture business runs on memes. So the three biggest things right now are OpenAI and everyone is really excited about ChatGPT. And there were a whole bunch of Web3 VCs that I’m aware of who are pivoting to AI.

And there was quite a bit of a Twitter joke going around about who is Vitalik pivoting to AI or something. So that’s one. The other is ZK zero knowledge.

And most people have zero knowledge about zero knowledge. I’m probably one of them. But now with ZK rollups going live.

Makes a mockery of KYC zero knowledge. Depends on how you use it, right? NKYC, no knowledge of your customer. But I think Ethereum scaling has pushed zero knowledge research forward by at least two or three years.

So let’s see. I mean, Q1, we’ll have a year full of ZK rollups going live. So I had a bit of fun with ChatGPT.

And I decided to see, OK, how good is it at, you know, it’s written by geeks for geeks at the moment. But ultimately, what if it was a bit like Bitcoin, really? What if I asked it to do something for me? I said, can you make an interpretive argument about the 13th century poem Fowls in the Frith, which is a five line poem written in the 13th century. And the text is really simple.

It says Fowls in the Frith. The Fist is in the Flood. And I’m on wax wood.

Such sorrow I walk with for best of bone and blood. And that’s the poem. So I asked ChatGPT about this.

And it said Fowls in the Frith is a 13th century Middle English poem that is believed to have been written by an anonymous author. The poem is a humorous and satirical work that centers around the theme of the relationship between the humans and nature. The poem takes the form of a dialogue between a group of birds who are discussing the arrival of a group of hunters in the forest.

But no, it’s not. That’s a five line poem. It’s just kind of off on a tangent.

So, you know, ChatGPT is like a consultant. And I’ve been a consultant at PwC, right? So, I mean, it sounds like it knows what they’re talking about. And ChatGPT is very good at that.

But it may not necessarily know what ChatGPT is talking about. It’s a bit like PwC and McKinsey over there. Do apologies to my friends.

One of the questions I really wanted to ask ChatGPT was, sir, where’s the token? And unfortunately, there is no token and they’re starting to charge. And I was I was hoping I would get an airdrop for using ChatGPT and it could be like WebT all over again. That seems to be not the case.

What about what about when buy an answer? Can ChatGPT give us a when buy an answer? I haven’t tried that. Well, given it, it actually thinks that my 13th century anonymous medieval poem paints a picture of humans as being destructive and disrespectful towards the natural world. And the birds serve as a metaphor for the innocent victims of human actions.

This poem is also a call to action, urging humans to take responsibility for their actions and to show more respect for the environment. This is a five line 13th century medieval poem. And you’re right.

It’s like dealing with a consultant. I mean, you can turn anything into a climate change activist. And I think we’ve just done that with ChatGPT.

Oh, well, so I think AI is a big meme, ZK is a big meme. And then I think there’s a lot of excitement around the Moo programming language and some of the smart contract platforms. And we’ve seen the Aptos, the 5xing of the Aptos price.

Some say it’s because of Binance. Binance double dipped into two successive rounds of Aptos. That’s quite rare for Binance ventures.

And then Korea had 40% of the volume. And Aptos had this hackathon going on in Korea. So there was a bit of excitement around that as well.

So pretty good for the Aptos guys. I mean, they do have the vibe, which is quite interesting. To be fair, they literally couldn’t have launched a worse time.

Between all that chaos going on with FTX in the market and a lot of those liquidations kicking off, it launched into a bloody mess. So at least it’s had some resurgence once things have come green. And we saw that also with the Optimism token.

It’s an all time high. And those like the new shiny toys kind of thing, Ajit, you know, like there were the new shiny things that came in late to the cycle. So they’re getting their attention now and probably for fair reason.

So they do have some market differentiations that sit aside from the other chains. It’s still very early, right? I mean, this is year one for Aptos and Mistin and QLabs, who are sort of building smart contract platforms or developer experiences that will directly compete with Ethereum and CosmWatsom. So they’re looking to build safer, more object-oriented programming experiences, which might be a better fit for gamers.

So that’s kind of the promise. And the move came out of DM, the Facebook Libra project. So it’s kind of, you know, some of the primitives they built in were supposed to make smart contracts easier and safer to write.

Let’s see how that matures, the whole dev tooling. But there is some excitement around that amongst a lot of VCs. So we saw a lot of famous VCs, 16z, Jump and so on.

Temasek got into quite a few of these very large coins as well. Now, but obviously, you know, that has nothing to do with, I’m sure when the price was going 5x, people weren’t necessarily thinking about the benefits of more programming language. I think it was more of a liquidity driven rally.

And as you said, it kind of, you know, Aptos launched into a bad market. And there was also low liquidity, but I think they were doing a Korea hackathon. And the folks in Korea, everyone I know, I think was pretty excited about that.

And I don’t think people remember that Korea has always contributed to some very big up moves and quite a few tokens, including Ethereum. So 2016, 17, I think our friends in Korea contributed quite a bit to the price jump in Ethereum. And Korea happens to be the land of DGems.

You know, DoKwan came out of Korea. Some of the riskiest players come out of Korea. There was this TV series.

What’s the name of that TV series? Oh, the game, Squid Games. Squid Games that came out of Korea. So there is something going on in Korea with utter and complete DGem vibes.

And there is something to be said about that. Sorry, there’s only one. What’s the greatest thing that ever came out of Korea? Do you think if you really, really had to think? Gangnam Style? Exactly right.

Gangnam Style. Do you remember Psy was the guy, right? I’m trying to work out if that song is the one hit wonder of the world, right? Or is that, or are we going to be the Chesney Hawks? The one and only could be the other one hit wonder. I think Gangnam Style is it though, isn’t it? Yeah, I would love to have one of those hits against my name if I could get one.

It’s a bit sad to have only one hit, but then I would rather have one. So there are quite a few blockchains that are one hit wonders as well, especially from the ICO era. So hopefully the third generation blockchains will not end up there.

And some of the L2s that are coming out now, I think Polygon will launch an L2 Arbitrum Optimism. ZK Sync, StarQuare, Scroll. There are quite a few L2s that are coming online.

So we’ll see how the L2 wars have just started. And so we’ll see how the Arbitrum haven’t launched a token. StarQuare haven’t launched a token.

Polygon, ZK, EVM. There are people who complain about Polygon being not a true L2, but a sidechain. I think they will get their answer in Q1 with Polygon launching a true L2.

So we had Alt L1 wars. Now we are going into Alt L2 wars. And purely from a tech perspective and ecosystem perspective, these are going to be really exciting times.

Whatever happens to the prices, I think the tech wars are always fascinating. This compared to 2018, 2023 is maybe our 2019. I guess we’ve had a year of down only markets.

When I think back to that last cycle, the developer communities are so much richer now. The activity level is… Because before, in that last cycle, it was, yeah, maybe it’s not going to work. Maybe we don’t have product market fit.

But I think in this last cycle, although soaked with liquidity, I guess from a lot of economic stimulus, we saw a lot of product market fit in different verticals. Not only DeFi born from that down market, but we also like the NFT market ran in this cycle and really brought in some Web2 users into Web3. They don’t really care about… Because let’s be honest, the average person doesn’t really care about DeFi.

They don’t care about finance. That’s not where the value proposition sits for them. But the NFT community seemed to bring, obviously, a lot of people that had a wide range of interest from a wide range of communities they wanted to identify with.

So what are your thoughts on that, man? Yeah, so I think NFT is… See, we are looking at… It’s my personal view, right? So I believe we are looking at the financialization of everything on the internet, right? So whether it’s culture, right? Whether it’s art or music or anything, right? So anything can become something you can own. And by extension, you can essentially sell or rent, which means you have a variety of property rights attached to a digital object, which wasn’t possible before blockchain. So this is fundamental.

It’s phenomenal. I think people might have got a little bit too carried away by it in terms of how quickly things move. And that brought a lot of capital into blockchain.

So pretty much every L1 or L2 has 300 plus million to spend. And that’s way more money than I think we used to have in blockchains in total. Even at ConsenSys, we didn’t really have that kind of money.

So I think all that capital has brought in a lot of talent, right? So a lot of money is also getting wasted, of course, like on conferences. I mean, there are some good conferences on parties, on yachts. I mean, just straight up rugs and all that stuff.

So there’s a lot of grift and all that bathwater stuff. But there is also a lot of baby. So we’re seeing much better talent coming to the space, whether it’s on the tech side.

In fact, a lot of Web2, you know, the Google, Facebook, the FANG folks really forwarded because tokens seemed like the fastest path to wealth. The ad industry, which is Web2, wasn’t really getting anywhere. So it brought a lot of talent on the business and commercial side, but it also brought a lot of talent in terms of ZK research.

I used to complain that we don’t have enough PhDs in this space because, you know, we can’t really get the kind of research Google guys were able to pull off. But now we have that sort of talent. We’re seeing a lot of Stanford PhDs and Cornell PhDs coming to Web2, which is pretty phenomenal.

And, of course, there are lots of app devs, right? So now people complain about not having apps. But for the first time, we have DeFi. And DeFi is getting people really excited about tokenization, right? So I’m seeing private equity funds and dealing with banks and a lot of these yield-generating asset owners who are essentially saying, look, before DeFi, the last cycle, we tried to do this real-world tokenization and securitization, but we didn’t have anything.

You know, we couldn’t do anything because you issue a token, then what? Right? Now it’s possible to trade that token. It’s possible to borrow against that token. So I think this is a pretty phenomenal shift.

And now you can use NFTs in some of the DeFi protocols. And the next generation might be gaming, right? I mean, Internet has always been pushed forward by gamers. Gamers, the trend for Internet culture, I mean, have since Tetris and Pac-Man and Nintendo and God knows what else.

So maybe, you know, the next generation will be Web3 gaming. And, yeah, sure, valuations have been crazy. A huge amount of money has been wasted on the play-to-earn pieces and God knows what else.

But, you know, it’s not the failures that make the Internet. It’s really one or two successes that show people how things can be done. I mean, people used to complain about Google Search, right? There is no business model.

There is a search engine. There is no business model. It went on for years.

And then suddenly Google has a business model. They surprise everyone with their earnings. So I think we will see some of these pretty cool things happen on Web3 as well.

And Lens Protocol, Firecaster, you know, people are starting to explore now things that are not necessarily focused on financialization. You know, so we know that we can financialize everything on the Internet, but now people are starting to explore use cases that do not focus on financialization, right? Like Vitalik’s speech at HCC last year referred to. So hopefully, you know, we might be looking at what Mark Andreessen talked about, but can’t always give an example for that.

This is really the next iteration of the Internet, and it definitely is the next iteration of the Internet culture, right? Everything my son does on Discord is happening on blockchain. This show is brought to you by Alloy Labs. As much as we love talking on the show, we believe that action is more valuable than talk.

Alloy Labs is the industry leader in helping fearless bankers drive exponential growth through collaboration, exclusive partnerships, and powerful network effects that give them an unfair advantage. Learn more at AlloyLabs.com. Alloy Labs, banking unbound. It’s interesting you say Mark Andreessen.

Obviously, he was one of the founders of Netscape back in the 90s and came out of NCAA Mosaic. One of the things that Mark said, which I think is probably the best way of summing up why Web 3 and tokens or crypto is here to stay, is if you think about Web 1.0, it’s an untrusted network. Web 2.0 kind of built on the untrusted network with kind of single sign-on social media, be it log in as Google, log in as your Facebook account, et cetera.

But in both Web 1.0 and Web 2.0, we’re still paying for things with credit cards, either manually writing them in or writing in our card numbers and entering our security code to get the transaction done or using a PayPal. Everything becomes centralized around some kind of payment system. The reason why that exists is because it’s an untrusted network.

But Web 3.0 is a trusted network. With a trusted network comes all the financial services that you can then employ on a trusted network that you couldn’t employ on Web 1.0 and Web 2.0. So that payment system or the ability to move value around a trusted network is the important factor for why crypto needs to exist. And to be fair, the writing is still on the wall as to whether or who wins the Web 3.0 kind of value system or value payments war.

Maybe there’ll be multiple payment systems because we have multiple currencies. But the thing that I think people need to understand is that crypto is here to stay because you’ve got a trusted network. And in a trusted network, you need a zero-knowledge, trustless payment system on a trusted network.

And that’s the only way that we can do that. And it’s very interesting that people don’t understand this concept because they haven’t quite understood what Web 3.0 really does mean for the evolution of the Internet. We’re starting our Layer 1 for reasons that we don’t believe have been solved in Web 3.0 yet.

And when we think about the problems we ran into in our DeFi portfolio and why we had to build a Layer 1, it just became glaringly obvious that if we didn’t do this, institutions wouldn’t come. Or if someone else didn’t do it, institutions can’t come. You’ve got a good experience of doing this, and we just found it didn’t work, right? Yeah.

The current ecosystem isn’t designed to be guarded by regulation. It’s not designed to have safety rails, and that’s the counterparty of the true custody of having control of your own, being your own bank. That means you have to treat that capital with security that you’re probably not used to.

Or manage risk you don’t know how to understand. And that is normally abstracted out to a financial institution in real life, right, off-chain. But when you take assets on-chain, you have to absorb that responsibility.

And when we talk to large institutions around the fund and how they’re viewing this space, from some large funds we spoke to only a few weeks ago that everyone would know, the response is we love the space, we know this is the direction, but we can’t touch it. We can’t deploy assets into a compound pool because we don’t know the counterparties. And we have regulations and other, I guess, restrictions on accessing that capital.

When you don’t know the counterparty, that really makes things very hard to manage from a risk perspective. So what’s that commingling problem? Yeah, there’s a commingling problem. So all of a sudden you’re commingled on-chain with someone who’s sanctioned, right? And then all of a sudden, if you think regulators fine you and they get to keep the money to fund their budget in some jurisdictions, if you’re a bank using a compound pool and all of a sudden you’re commingling with a sanctioned address, what stops the regulator coming in and saying, oh, you’re commingling with sanctioned addresses, here’s your fine, thanks very much? The risk reward just isn’t there.

Yeah, I have an anecdote about this, right? So when I was working with Sany building out Aave Arc, so we went to Genesys and we were essentially doing a road show around Crypto Wall Street, all the centralized institutions. And we spoke to the Genesys guys and they were like, oh, who’s the counterpart? Who are we signing a contract with? Are we signing a contract with the Aave company? And we’re like, no, the counterparty is the smart contract, which is a pool, right? This is where everyone deposits collateral and then they borrow against collateral. So they were like, oh, wait, so now we need a credit counterparty.

But the funny part about this is they essentially swapped a billion in Bitcoin against a billion of USD. So, you know, because, oh, sure, they had a credit counterparty, but at the end of the day, I mean, what was that counterparty really worth given the quality of the asset? So I think there are some, you know, and meanwhile, while all of the centralized, you know, crypto institutions have, a lot of the crypto institutions have collapsed, Aave, Uniswap, I mean, Aave Compound, Makedao, these things are running strong and really have been almost a symbol of financial stability. By the way, on that note, we are the guys who built one of the few centralized products that stayed strong throughout this crisis.

So yield.app. I have to give a shout out to us for building something that has really done a great job of staying strong throughout this credit crisis we’ve seen. Jay, that’s an interesting point you make around like the response that Genesis had on the counterparty because it’s a little bit of like a misnomer, right? Because even though the pool is pooled assets, there’s still provable ownership of who owns their share in the pool and you could define like a million counterparties, right? Is that how a liquidity pool works? You can, but then, essentially, if there is a default, right? So how can Compound or Aave default? Let’s say the smart contract gets exploited. No, no, not the counterpart, not the contract itself.

Then you have no recourse, right? So there is no one you can sue. Whereas if you sign a contract with Suzu, then you can potentially take suit to court. Yeah, no, absolutely.

And I’m all for like the immutability side of the responsibility and ownership on the code. But if we look at like Tornado Cash, for example, if you deposit into Tornado Cash and those addresses are sanctioned, we know anyone that withdraws from those addresses while the pool itself is a smart contract, the ones affiliated are the ones that are then impacted by their ability to transact with those assets, right? Yeah, you can prove in Tornado Cash that your money was clean and it wasn’t. So you can essentially, you have traceability of funds.

Yes, you do. And you need to provide those proofs, right, if requested. And I know there’s a number of like fairly well-known influences in the space that have gone down this path with Coin Center, et cetera, around pursuing what it means to have to prove innocence yearly.

I think it’s what they’re requesting for this kind of thing. I know there’s ongoing lawsuits and things. It’s a very like interesting directive from OFAC that I don’t think anyone really expected it to happen that quick or out of the blue kind of.

And I think that was an interesting moment for like what is, because we get into the what is free speech kind of thing when it comes to that. And that’s a can of worms. But as far as like an institutional level, that makes that look like poison, right? Like it makes that very difficult for them to touch.

And that’s the actual, the tech behind using proofs. I mean, Tornado Cash is fantastic tech. It’s very cool.

And some utilities such as using payroll, like using ZKs for payroll to abstract away like what we take for granted in institutional or traditional finance around anonymity, around the value of the assets you hold is something that tries to replicate. But unfortunately has other, like by default, the design of it has a lot of other use cases. I think, see, so now we have come to the elephant in the room topic, right? So we spent some time talking about markets and macro and interest rates.

But the big challenge, at least in the US this year, to the entire industry is going to be regulation because the public perception of the industry, which was going quite seemingly well with Tom Brady and Matt Damon and even Sam was the darling of- And Larry Diven. We had Larry Diven. We had everything.

We had everybody, right? We had Reese Witherspoon. Every celebrity wanted to work in this industry. We were getting everyone from Google and Facebook that we wanted to hire.

And now it’s a slightly different environment. Now everyone’s friend is calling and saying, why don’t you maybe get a real job? So I think the public perception of the industry was hit really hard by, you know, Sam and FTX in particular, because they were so well-known and popular and the size of the debacle was global and about 8 plus billion. So I think that’s also brought- Gary Gensler was meeting with Sam.

Mr. Benham of CFTC was hanging out with Sam. So it’s kind of brought a lot of egg on people’s faces and which puts a lot of pressure, like Laura Shin said, right? It’s not that they’re going to look after Sam. Sam has made them look really bad and they’re going to make an example out of him.

But I think the bigger challenge is that there’s a lot of pressure on people in policy circles to do something. And that might be a bit of a knee-jerk reaction than anything else. That’s a good point, Lucas.

Do you think the flow-on effect from that and Gensler’s obviously affiliation with Sam and how the SEC looks in this is going to lead to like an overcorrection in where this is going? No, I don’t. Gensler was taught crypto and blockchain at MIT before he became the SEC chair. He knows the product inside and out.

He’s not stupid. The other thing a regulator’s job is is to look at the industry and make regulation that is helpful to the industry but protects its users. Another job of a regulator is to help in the formation of capital and capital markets.

And if, for example, you come out and overregulate and you stop the formation of capital, then you are going against your mandate too. So I also think that the Sam-Gensler meetings are a little bit overblown. I used to meet with the Bank of Japan board regularly when I ran cross-market trading at CS.

I used to go meet with them because we had such huge exposures to Japanese clients and the yen. I was wondering who was responsible for those buybacks. Exactly.

You got the 10-year yields. Exactly. And I used to sit with them and talk to them about all sorts of stuff.

And there’s nothing nefarious or untoward that’s gone on. They just need information. What’s going on? What are you seeing in the markets? You’re obviously a key crossroad in the market.

You see a lot of flow. Tell us about what’s going on. And then how do we think to protect and regulate our clients? Don’t forget, FTX had an onshore business and an offshore business.

And the onshore business, which was regulated and was under the scrutiny of US laws, was solvent. There was no problems with FTX US. The problem is fraud is fraud.

It doesn’t matter what you do to regulate. If someone wants to commit fraud or will try to commit fraud, the question is, how do you stop them quick enough? And what we found is that over the course of history, where there’s a will, there’s a way to conduct some nefarious activity on a large scale. And we see it with the Adani mining thing at the moment.

We see this everywhere. It doesn’t matter what you touch. The question is, as a user of these platforms, and I’ve always said that crypto exchanges are just private dark pools without a balance sheet.

And because they have no balance sheet, the minute there’s a problem, you’re going to get rugged and they’re just going to take the money from you. And that’s always been our view at Yield Up, is that don’t put your money with any exchange because it’s not a bank. They’re not sitting there on a guarantee.

They are running at the behest of users whilst users have capital there. And the minute that capital gets pulled, the people who are last out are going to get rugged. And that’s just the way it is.

And if you look at the scale of the fraud that’s happened to FTX and you think to yourself, okay, there wasn’t just one person that knew about this. There’s a whole bunch of people that must have known that assets that were not supposed to be co-mingled were being taken off the platform and used to go and punt in whatever area you want. And maybe you thought, well, okay, if it works out, I’m going to be the richest man in the world.

Because don’t forget, he’s essentially levering other people’s money. And the outcome was the market turned and they just ran out of rope and they hung themselves. And I think a bigger problem is the way it was done.

I think the way Binance came out or CZ came out, called them out. And then I think the one that he did on Coinbase, I mean, should put him in prison. Why? Because Coinbase is a listed security on NASDAQ.

You don’t come out and make a statement that causes the market to crash or the stock to collapse because you’ve come out and said you don’t have enough Bitcoin against GBTC or Grayscale, cause the market to crash and Brian Armstrong has to come out and correct it. And so actually we’ve got over a million plus or whatever it was he came out with. But you shouldn’t be allowed to say that.

If I came out and said that in a bank and said, hey, these guys are doing X, Y, or Z and I didn’t have any proof of that whatsoever and I caused a dislocation in that underlying asset, I’m going to be charged with securities market manipulation, right? We’ve seen this with Elon Musk and a few other millionaires, right? Where people make forward-looking statements or statements in the market. And I think enforcement has generally been weak. And, you know, we still have Josh Hawley essentially starting a Pelosi bill, which essentially will ban entire trading by Congress and by the members of the Congress and the Senate, right? So entire trading, there have been quite lax securities law enforcement against the powerful and the rich.

But hold on a second. But hold on a second, right? Bitcoin and Ethereum are not securities, right? So they’re not governed by securities law, right? But the ultimate thing is Coinbase is a security and you can’t come out and FUD listed company, cause an event in a security and then you should be able to get away with it. I have a real problem with that.

I think the Elon one is like from a few years ago when he said he had enough money to take it private, wasn’t it? And it was like more of a, yeah, and that caused a huge pump. Yeah, no, absolutely. And I think this whole market manipulation piece and going back to the regulation question, right? What regulators need to do is do what they’ve done well for decades, which is find the balance between allowing capital formation and growth and evolution of the products and protecting the users of those products.

And protecting innovation, right? And protecting innovation. Of course, yeah, innovation. But the only thing that FTX did, right? And if I’m really honest with you, this is the only benefit that FTX gave the industry was it gave the trad fire companies have been working on their own chains, working on their own tokens, their own coins, their own platforms time.

And if I’m a traditional financial services institution, I would be absolutely stoked that a crypto native firm has destroyed the trust in the crypto native industry and our trust is still in place. So if HSBC came out tomorrow and said, here’s the HSBC crypto exchange, you can trade all your crypto through HSBC, we will custody it, we will manage it, we’ll give you the liquidity, et cetera, et cetera, right? You just open your account. There’s no place for a Binance anymore.

There’s no place for an FTX anymore because the trust is there, right? Trust is in that brand. And if you tell me that the minute Citibank turns on BTC trading on Velocity, if those of you don’t know what Velocity is, it’s the institutional grade FX platform. I’m not going to any other platform to trade by FX or my Bitcoin, because it’s so much better.

And there’s billions of dollars that have been spent on this. And don’t forget, traditional financial services firms, especially the big one, can throw scale at this problem better than anyone else in the industry. And they’ve been doing it for years.

I mean, HSBC has billions of dollars in digital assets in custody, right? Some of the meetings and calls that Rhys and I have had with some of the biggest wealth managers in the world, they look at what we’ve done and they go, yeah, we’d love to do that, but we’ve got regulatory capital controls that prevent us from doing it, but it’s not hard for us to do it. Like we’ve done the work, we can just turn it on when we’re allowed to. And they’re very well aware of the ecosystem.

And FTX just undermined the whole industry. And what did we see off the back of it? Well, market makers who had money on FTX have obviously had to make their spreads wider, and the market depth is now shallower. So that means volatility is higher and uncertainty is greater, which drives out people from the industry.

It’s just, you look at some of these funds who weren’t on FTX, but were with, let’s say, a Falcon X or someone who were on FTX, their claim isn’t against FTX now, it’s against Falcon X. The contagion and the problems in the industry are manifest, right? It’s just so bad. And all of this was done because the trust in the ecosystem or the industry, especially crypto native, has been completely destroyed. And I don’t know where you go from there.

Well, there is some good news for us, right? So there is a joke going around, and Henry Arslanian, who runs PwC’s crypto practice and is a very popular speaker, we should get him on a show at some point. Yeah, he doesn’t do that anymore. He’s now left that, and he is now running Nineblocks Capital, which is a spin out from Ninemasks.

Oh, he’s PwC? Yeah, he’s left PwC. He’s now the co-founder of Nineblocks, and that’s a spin out from Ninemasks. Good for him.

I love Henry. So one of the things he said in one of his recent talks is that, you know, the era of kids running the industry is over. So I was like, okay, good.

I’m not a kid anymore. I work in compliance. So that’s good.

I’m 46 years old. I’ve done it with a bunch of traders. So good for all the older men and women, I mean, who have a little bit of experience in actual risk management compliance.

Absolutely. You’re 100% right. You’re 100% right.

We’ve got a lot of time for Henry. You know, I know the fund. We’ve DD’d the fund.

We’re happy with what they’ve got, etc. No problem there. You know, there’s a great many things that we’ve got to look forward to going forward.

We’ve got a lot of things, and cleaning out all the bad actors and cleaning out all the shit in this industry is like the best thing that could ever happen to it because there’s some amazing tech. There’s some very, very, very smart people writing some very, very innovative stuff. And it is accretive to the overall financial services industry globally.

It allows people to be banked that otherwise couldn’t be banked. It removes the reliance on centralization and monopolists in certain countries, especially in Africa and the Middle East. And it allows finance to be normalized across the world for anyone that wants to have the ability to own a wallet and transfer value.

And I think we’ve got those things covered. What’s destroying the industry is that centralization on the back of if we centralize, we’ve got more liquidity. And obviously the likes of, you know, Uniswap, etc.

are really trying to address that. And how do we create liquidity but still decentralize? And that’s where we’re headed, right? Well, so that’s the best part, right? So I think while money crypto was trembling, you know, we are almost coming to the end of the show. The tech crypto made massive progress, right? Across ZK, across some of the things Cosmos has done with Entertain, across Ethereum scaling, across, you know, NFTs and DeFi.

They’ve just been, in every ecosystem, there’s been just phenomenal progress on the tech front. So maybe, you know, we really, so this year will probably be, while I think, you know, the society gets a handle on money crypto, you know, how the institutions, the capital markets, the entities in this industry should be governed and how they should manage their risk and conduct. I think that the fact that we have, you know, so much talent coming in and so much innovation that’s going on, so much research that’s getting driven forward in this space, I think we’re going to have a phenomenal year in tech crypto.

And that’s probably the, you know, I’ve never been this bullish on the technology in this industry as I am today, right? Even though I’m a little bit, I’m fairly sad about the state of money crypto. I’m extremely excited about the state of tech crypto. No, absolutely.

I think that the innovation has really compounded and really accelerated in this space. You know, there’s a lot of lessons that I think we can take away from the past, you know, not just last year, but the last few years. And, you know, getting that semblance of normalcy back into the market and people focusing on the real value of the industry, which is, you know, trustless payments on a secure network, right? That’s what we want, right? That’s the future of finance and that’s where we’re headed.

So, yeah. I don’t think you can stop the internet. So, you know, whatever happens this year, the march of the internet will continue because that’s what the kids are working on.

And that’s what we need to be excited about. Well, let’s wrap up with some market thoughts, gentlemen. So we’ve seen a little bit of a pump the last few weeks across crypto markets.

We had the rally in traditional markets a few weeks before. So is the question for both of you gentlemen, is the crypto market de-correlating or is it just lagging traditional markets right now? Some days it’s leading, some days it’s lagging. But I think it’s, you know, as more and more institutions come in, we will see correlations go up across crypto and equities.

And especially as it gets more regulated as well. I don’t think it’s, yeah. I think the biggest issue, right, is that people need to understand that crypto is now considered a risk asset and it’s a risk on asset and it’s a risk off asset, right? So when markets look dicey, it’s going to come off fast.

When markets look, you know, pretty, you know, tepid and it looks pretty, the risk looks pretty tepid, then we’re going to see that rally. And what we’re trying to see at the moment is if I were to look at correlation across risk assets, I would say the correlation has shown to be extremely high. We saw it with the sell-off and we saw it with the rally back.

The only difference between these risk assets is these risk assets trade 24-7 and the moments of liquidity are finer, right? They’re not, it’s not fully liquid across that 24-7 cycle, 3-6-5, right? You have the weekend that we had where we saw that rally higher. People are interested in the level still and people are interested in the direction it’s traveling. But I think we need to see 30,000 breach and then we’ll start to see the basis pick up and we’ll see that funding sort of, people start to lever into it and then we start to see, do we get to 100K this year or not? Now, I have a very simple view that the macro backdrop is actually quite solid.

We’re seeing inflation come off. I think that the SEC, I don’t think wants to go too hard because we need to see wage inflation start to catch up, right? Without the wage inflation that we need, you don’t want to destroy the economy. You want to maintain that kind of momentum and positive sentiment.

So, do we get one last hike at 50 basis points or do we get like a smoother 225 or something? Or do we just start to see, we’re going to wait and see? I mean, the market obviously is pricing in a hike. But, you know, we’ve started to see that inflation numbers come down. We’ve seen Eurozone avoid recession today.

There’s a lot of positives coming into the market, right? And ultimately, that means you want to own risk assets. And the question is, what’s the right entry point? Was it the start of the year at 17,000 or just below 17,000? Or is that right entry point now? Maybe you get a bit of a pullback and it rallies higher. But it’s still, you know, it’s early doors yet, I think.

All right, guys, why don’t we wrap this up? It’s been a great show. Thanks, everyone, for your time. Ajit, Reese, any final words? Yeah, it’s great.

Looking forward to doing more of these and getting some guests on. And I think we’ve got a really good blend of traditional experience and the most up-to-date happenings in DeFi and Web3. I think we’re going to make some great shows.

Yeah, and we’ll get some phenomenal guests, I think. We know everybody in this industry, right? So I think it’s going to be really exciting. Sounds great.

Thanks a lot, Ajit. Thanks, Reese. Until next time.

Thank you so much. Cheers. Thanks, Gents.

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