Inside Coinbase’s $375m Acquisition of Echo | Shan Aggarwal

Our vision or our mission at Coinbase has always been to create more economic freedom in the world. And we, we believe that crypto and blockchain protocols allow you to have more open and accessible financial services. And so ECHO really gives us the components to actually do this compliant fundraising on-chain in a way that we think better connects capital or investors with investment opportunities.

This episode is brought to you by Blockdaemon. You'll hear more about them later in today's episode. Nothing said on Empire is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only, and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks.

Our hosts, guests, and the Blockworks team may hold positions in the companies, funds, or projects discussed. All right, everyone, welcome back to Empire. Very excited about this one. Today's an acquisition day. There's a big acquisition, uh, that was just announced. Wanted to bring my friend Sean on the podcast. Sean, uh, has been at Coinbase for over 7 years, coming up on 8 years now, has led a bunch of their M&A efforts over the years, and is going to give us a little behind the scenes of, yeah, why they, why they made this Echo deal. But Sean, first off, welcome to the show, my friend.

Yeah, thanks for having me. Good to see you, Jano, and, uh, glad to be here.

Yeah. Um, so I feel like a lot of people know the Coinbase exec team for— maybe it's Emily or Paul or Brian, but I feel like you've done a nice job of staying a little bit behind the scenes. Um, but you've led, uh, like a lot of the venture stuff and M&A stuff and corp dev stuff in general comes through your team. So I'd love to just get like your backstory and like what you've— yeah, your journey over the last several years. And then we can get into Echo, the M&A strategy of Coinbase, all that fun stuff.

Yeah, for sure. I started at Coinbase in May of 2018. Uh, company was about 150 people at that time. Working out of a relatively small office in one front. And, um, you know, I first got into crypto before Coinbase, uh, when I was at a venture capital and, uh, early-stage growth firm called Greycroft. And I was investing in a lot of fintech, uh, and media. I was always interested in kind of like what was up and coming. And so I read the Ethereum whitepaper in early 2017, and a light bulb went off because kind of reminded me of, uh, the early App Store era where there was sort of this like new developer playground where people could build interesting new applications on a new platform. Um, and obviously that was right around the time of the ICO era, so I was spending a lot of time, uh, kind of poking around the community and participating on that end. And, uh, in 2018, wanted to make the, the leap full-time into the industry, so joined Coinbase. And, um, at that time Coinbase didn't really have a corp dev team. Emily had joined just, uh, a not too long before that and kind of built up the M&A muscle that we have at the company, uh, helped start Coinbase Ventures in 2018 and scale that up. Um, one of the first things that I got to work on was, uh, leading our Series E, uh, round in, uh, 2018, where we raised, um, around, uh, at an $8 billion valuation. And that was kind of my first introduction to crypto volatility in earnest because, you know, we raised that round, Bitcoin was sort of riding its highs at around $20K, and in the midst of that, crumbled very quickly down to about $3,000. And I saw a lot of people, uh, you know, get weak hands and try to retract their, um, commitments. So, uh, it was, it was a fun experience kind of enabling that round to close. And then, um, I led investor relations up until our IPO. So I actually got to write a good part of our S-1 and go through that direct listing process. Um, a fun fact, which is, you know, now with all of the talk around tokenized equities and everything that, uh, a lot of people don't know is actually we tried to tokenize Coin when we went public and we had sort of a, a dual-track process that we were working on at that time. But, uh, we just ran into a brick wall, um, on the regulatory side. So we ended up dropping it then so that we could, we could get out. But that was a really interesting experience being sort of the first public company, um, that was a crypto company and writing an S-1 before the age of AI, right?

So, you know, you had to do it, write a whole S-1 with, uh, with no chatGPT.

You do it the old school way, right? Yeah. So starting from scratch. Um, yeah. And then recently I've been leading, uh, all of our efforts across, uh, partnerships, M&A, investments, and then now also business operations and strategy. So at the high level, I think about my role as helping guide the company's strategy and ensure that we're operating as efficiently as possible.

Nice. And congrats on the promotion, Chief Business Officer. Exciting. Um, uh, okay, well, first of all, I want to talk about ECHO, but, um, you guys tried to coin— you guys tried to tokenize Coinbase stock. I didn't know that. Tell me about that.

Yeah, we did. Uh, we had a whole internal effort around it called, uh, Project Clementine. And, you know, the focus was really, we wanted to list Coinbase obviously on NASDAQ and have kind of a digital twin that was list— that we could list on Coinbase and make, uh, tradable, uh, on-chain. And at that time, you know, it was a different SEC, different regulatory environment. So, uh, and also just education around crypto and tokenization was much earlier than it is today. Uh, we had really good discussion and healthy debate, um, on that, trying to, to get it through, but ultimately we couldn't really find a regulatory path forward for it. So rather than holding up the, the rest of the traditional direct listing, we, we ended up going forward and then doing the listing in, uh, April of 2021.

Nice. Um, all right, man, let's get into Echo. So we're, we're recording this, by the way, on a couple days before the announcement. So I haven't, I haven't actually seen the announcement. I haven't seen any of the details. I just know you guys are buying Echo. I know what Echo is. Um, I would, I would love to hear about this deal. Let's, let's get into it.

Yeah, so we're super excited to be acquiring Echo, and really the motivation or the big picture for us is to make capital markets more open and accessible. And, uh, with Echo, we basically have an end-to-end solution that, uh, allows us to offer builders and protocols and asset issuers the ability to fundraise in a compliant way on-chain, um, and do so from their most, uh, loyal and engaged customers, the actual people who are using their products rather than, uh, just from like institutional VCs. And so I think our, our vision or our mission at Coinbase has always been to create more economic freedom in the world. And we, we believe that, uh, crypto and blockchain protocols allow, allow you to have more open and accessible financial services. And so ECHO really gives us the, uh, components to actually do this compliant fundraising on-chain, uh, in a way that we think better connects capital, um, or investors with, uh, investment opportunities. Hmm.

How did the deal— this is obviously— Echo is obviously Kobe's company. How did, how did this deal come to be? Did Kobe come to you guys? You guys came to Kobe?

Like, how did this deal come about?

Yeah, it was a little bit of joint, um, kind of chatting. Uh, we've been working with Echo for quite a while. They started on Base. Um, we actually launched an Echo group with the Base Ecosystem Fund earlier this year. Uh, and it was kind of in a similar vein where we had gotten a lot of feedback that people wanted to invest in the companies that we were investing in and support the Base ecosystem. And the companies in the Base ecosystem were looking for more capital. And so that was a good first step. And I think as we just got deeper into it, we realized like, hey, there's actually a much bigger opportunity here where, uh, we can really take this to the next level and, uh, uh, open it up much more beyond just the base ecosystem fund so that, you know, projects across the entire ecosystem can be running Sonar sales and public token sales from people in their community.

Nice. What's the total deal value?

The total deal value, it's a little bit in flux right now, but it'll be around $350 to $400 million depending on where the share price is.

Nice. Okay. So some, some combo of cash and stock.

It's a mix of cash and stock. Yeah. And then obviously the share prices moves around quite a bit, but it's in that range.

Yeah. Yeah. I remember when you guys did the Deribit acquisition, it was like, you know, the headline number was, I'm going to botch this a little bit. It was like a $2 billion deal. And then a week later, it's like, it's a $3 billion deal and it's a $4 billion deal. And so, yeah, obviously.

Yeah.

Good, good, good for the founders who are taking coin stock. Um, how do you come on the, on the acquirer side? Um, how do you come to, how does a deal like this come together? And I think there's a lot of founders who are probably, I want to get into maybe two things here. One is Echo and Coinbase coming together. The others, I think there's probably a lot of founders listening to this that say, oh, maybe one day Coinbase could buy my company. Um, and so I want to talk about a little bit of how these deals really come to be. Maybe you could shed some light on that.

Yeah, I mean, it's a good thought. We've acquired 40 companies since I joined, so we tend to be pretty acquisitive. It's, um, this one's actually our 8th of this year. And, you know, like the way that we think about M&A generally, um, uh, is we try to think about what's our product strategy and what are our priorities over a multi-year time horizon? Um, and that's just based on listening to our customers and what we hear from both the investors in our ecosystem as well as the, the developers, uh, and what they need. Um, and, uh, once we go through that process and we have a good sense for like, okay, great, this is the direction that we need to go. The next question is like, okay, what's the best way to actually execute on that? Right? Because should we actually like staff a team and build a product? we can obviously do that, but there's a, there's trade-offs associated with that. You're starting from scratch, so you might not have the right expertise internally, or you might make mistakes along the way, and it's gonna take you longer to actually get like a really high quality product out there. Um, and so we kind of go through that scoping and figure out like, how long do we think it will take us to build? What's our confidence level in the ability to actually like execute on that? Um, Is there a reason where we really need to be in market faster? Uh, and then simultaneous with that, we'll do a, uh, a scan of the market and say like, who are the best companies and founders that are out there? And if there's an amazing company that already has, uh, uh, what we've built outside and we feel like there's a really good cultural match with the team, then we don't have any hubris about it. We're like, actually, isn't so much better for us to just acquire that company bring them internally to Coinbase, empower that leader to actually, uh, you know, drive, uh, greater impact from a platform like Coinbase that has, you know, obviously global scale at this point and, um, and broader reach.

Yeah. So it's, it's a build versus buy conversation, basically.

Yeah. Yeah. Yeah. Ultimately. But starting from like the strategy of like, what do we want to achieve? You know, and it's always a hard thing. Like a lot of people will reach out to me and say like, hey, yeah, we're running a sale and like, we want to sell our company. And, you know, at our— Coinbase has its hands in a lot of different parts of the market. So like you can rationalize doing a lot of things, but we need to really like focus our efforts and focus our M&A dollars and focus our integration effort really on the things that we feel like are aligned with the direction that we want to go. Um, and, uh, otherwise you, you, there's a risk that you get pulled in too many different directions and then, you know, things get a lot, uh, uh, uh, really complicated and messy quickly. So.

Yeah. How do you think about, like, how to price, how to price an acquisition? So this, this acquisition, you said like 300 to 400 or something depending on the, the price of obviously Coinstock on the day of the deal. But yeah, like, how do you get to that? I'm guessing it's not a revenue multiple because I don't think Echo makes money right now. Like, how do you come to a price?

Yeah, it's really dependent, right? Like you have mature businesses like Adarabit that have recurring sustainable revenues and profits. And that's, you know, been across multiple cycles and you can do more of a traditional financial analysis to, to think about, uh, uh, what the valuation there looks like. Um, but then on top of just the obviously historical performance, the reason that we're usually interested in acquiring a company is not just based on what the company has accomplished before the acquisition, but it's more really about like, what can we accomplish together? And like, what does the future look like? Right? Like, what can we create together? in a lot of cases, you know, we're mostly buying technology and teams because we feel like we can take that technology and team and then like really commercialize it, right? And we can drive acceleration in the business. Um, and that creates like, that creates a win-win, right? And so, uh, you really have to take a forward-looking lens to these things and forecast out like, what does this look like in 12 months or 24 months? What does the revenue ultimately end up looking like? And then we underwrite to basically that forward view in most cases.

Yeah. Yeah. One of the things I've been most impressed by, by Coinbase's M&A, which is, yeah, really your team is actually the integration and the ability to like retain the founders even after like their 2-year earnouts end or their 3-year earnouts end. And if you look at a lot of the businesses, it's like, you know, you guys, I'm sure I'm going to get some of these wrong, so correct me. But like, I think your custody business was Zappos, your— the prime brokerage business was was Tagomi, derivatives was Fairex, Coinbase Cloud or staking or whatever it ended up turning into was Bison Trails, uh, asset management was OneRiver. I'm sure, I'm sure the list goes on and on. So how do you think about like integrating these businesses, keeping the founders, keeping the teams? Like, tell me about the integration process.

Yeah, you've done your homework. That was a, that was a good recap. I'm impressed. Um, this is something that I'm super proud about, actually. Um, 3 of our exec team members are folks who came through acquisitions. So Greg Toussard, who was the founder of Tagomi, leads our institutional business. Rob Widoff, who was an early Coinbase, uh, engineering leader and then started Unit 410. Um, and then Jesse Pollock actually leads, uh, Base, actually came through an acquire too.

Oh, I didn't know that.

And, uh, so I think the, the takeaway there is, uh, we think a lot about the integration, both with the like nuts and bolts of how do we pull the products and the technology together, but Uh, the most important thing is the cultural integration and the people. It's like, are the people the right fit with our culture? Do they share our mission? Um, and we really want missionaries, not mercenaries, right? And I think like in M&A, especially traditional M&A, a lot of, a lot of it is mostly mercenary, right? It's like, how much are you going to pay me? And like, how long do I have to stay? And what's my earnout? And like, that's it, right? And there's nothing wrong with that fundamentally, but like, if that's the case, then whatever your incentive structure will usually dictate, like how long the team stays around and like how long you have to accomplish whatever the goals are you've pre— that you have for that acquisition. But when we do our filtering, we're really focused on like, is there long-term alignment here? And if, if you do have confidence in that, then that's where I think you get that situation you're saying where it's like people stay for 3, 4, 5, 6, 7 years, right? And there's a lot of continuity that comes with it. So we put a lot of energy into thinking about the cultural integration and generally how the teams come together. And I think that's in most cases the crux of the problem and where a lot of things can either go very right or very wrong.

Yeah. So is Kobe going to work at— is Kobe a Coinbase employee now?

Yeah, he's a Coinbase employee. He's a Coinbase.

Yeah, there you go. Uh, that's what you call them, Coinbase?

Yeah, they're Coinbase.

Yeah. Um, that's cool, that's great. Um, that's a good hire to get.

Across 30+ networks and 180 endpoints, Blockdaemon Earn Stack unites staking and DeFi into a single institutional toolkit for crypto rewards with multi-layered security, full asset control, and 24/7 support, Blockdaemon Earnstack is built for scale and regulatory clarity. Non-custodial staking and seamless DeFi access all in one stack. Direct access to DeFi with no intermediate smart contract or vaults. To book a demo, make sure to click the link in the show notes or head over to Blockdaemon Earnstack to find out more. Thanks to Blockdaemon for making today's episode possible. The machine economy is here. Devices are monetizing data for their users all over the world. Tokenized robots are generating revenue for token holders. The first machine economy free zone is live in the Emirates, and it's all happening on Peak, the machine economy computer. Head to peak.xyz. That's P-E-A-Q dot X-Y-Z to find out how you can benefit from the age of automation, or click the link in the show notes to find out more. As always, investments in blockchain technology involve risk. Terms and conditions apply.

One thing I was thinking about going into this conversation is like, so you guys acquired another company that's maybe a little less known, which is, uh, Liquify. Um, and now that you do this acquisition, I can kind of see you guys pushing into becoming like the capital stack for companies, right? Before, like, the last 10 years of Coinbase's business was obviously for the, for the trader and for the investor. And now it seems like you're pushing into the financial stack for the companies. Tell me about Yeah, Liquify combined with Echo, like what's, what's the end goal here? What are you really doing?

Yeah, I think the end goal really is to bring capital markets on-chain. And, you know, today Coinbase primarily serves as a secondary trading marketplace for crypto tokens. And with Liquify and Echo, it allows us to provide issuers of tokens an end-to-end stack that helps them start a company, manage their tokens, fundraise, and then ultimately launch and grow. And the initial focus is really on crypto tokens and crypto projects, but I think the bigger picture is we see this convergence between traditional finance and crypto where tokenization is the bridge where you can have traditional assets that are tokenized and brought on chain. And that same infrastructure, uh, with Liquify and Echo that is purpose-built to support those capabilities for crypto tokens is applicable to other assets as well. And so these give us the components now where We can really rebuild the capital market stack from end to end, uh, and provide, uh, all of those different pieces just within the Coinbase product suite.

Yeah. What's the north star for Echo? Is it capital deployed? Is it like number of issuers onboarded? Is it secondary liquidity, community participation? Like, how do you think about the north star?

Right now we think about it as, uh, capital raised, like on behalf of projects, right? Because that's both. Providing access to capital for the companies that are looking to raise money. And it's also meaning that individual investors and real people are actually getting access to these opportunities that they might not otherwise have.

So is the vision— I've got my Coinbase account, I've got Bitcoin, ETH, and SOL and whatever and stuff like that. But then there'll be a tab where I can be like, oh, you know, Series A investment into this company. Oh, public token sale on Sonar. Boom, opt in, move some of my USD and USDC into one of these.

Yeah, exactly. You got it. And then in the future, then once those tokens launch, they can trade on the Coinbase exchange. Um, they can be issued on Base and they can trade on, uh, uh, open on-chain infrastructure. Um, and so it really gives us that, uh, uh, pre-listing component that historically we've, uh, been missing from our products.

Nice. What else is needed in this stack? So you've got the cap table stuff with Liquify, you've got the fundraising with Echo.

What else do you guys need?

I mean, I think a big piece is going to be the regulatory components because like the, uh, the infrastructure with Liquify and Echo is it's on-chain infrastructure. So it's applicable to any token. Right. Um, and then I think the next question is like, well, which tokens can you actually support? Is it crypto tokens that are commodities? Is it securities? Um, how do those things differ? So, um, there will be a lot of work that we need to do over time, uh, to get clarity on the regulatory front so we can actually actualize. Um, that vision, and then I think downstream of that, uh, you know, there's, uh, uh, things that we're thinking about around like, where do these tokens trade? Obviously they can trade on the, uh, centralized Coinbase exchange, but, uh, we also believe that they over time should trade on-chain on, uh, DEXs, right? And which DEXs, what are the permissions or compliance, uh, components that you need to actually trade various assets on those DEXs? I think a lot of those pieces are things that we're starting to think more about. We've already laid the groundwork for a lot of that. So you might have heard of a, we have a thing called the Coinbase Verifications where you could basically tokenize your KYC on Coinbase. And then once that's held in your wallet, now we can actually say like, that's Sean who's transacting on a DEX. So you can have securities or capital markets that effectively are operating on chain. By taking a lot of these primitives and leveraging them that way.

What do you guys, what do you think is the, what's like the end state of these listings, right? Because so there's a bunch of talk on Twitter right now about like listings and other exchanges, you know, charging for listings. And I think there's a guy, CJ, who's building Limitless on Base, and he was sharing like some, we talked about this on the recent Empire Roundup, which is, so we don't need to get into it. People can listen to that if they want to hear Santi and Rob and my take on it. But what do you think is the end, the end state for these listings? And also, you guys, I haven't actually read it. I saw you guys did the blue carpet, like Operation Blue Carpet or something like that. So maybe tell me how you think about the end state for listings.

Yeah, look, I mean, I think there's going to be a lot of tokens that get created. And historically, listings have been sort of this really big marketing event. But we feel that we should list and support as many crypto tokens as possible. Right. And I think there's a real question of how do you like filter or curate quality? And rather than trying to like impose and say like, hey, we know what's good and what's bad. Because that's kind of Big Brother, right? For like Coinbase to be determining here's like a good asset or a bad asset. Rather than going in that approach, it's like really leaning into providing robust disclosures and robust research so people can actually find accurate information that they trust and can count on to actually make their own decisions. There's so much misinformation in this space. So I think that's like why one place that Blockworks plays that's super compelling is like actually like bringing truth and bringing transparency to the space. Who knows, maybe there's like some element or play with prediction markets there to bring truth to the space as well. But I think that you'll see a lot more tokens available. We're already moving in that direction. We already have moved in that direction. And we're thinking more about how do we inform and educate users. So that they can make the right decisions for themselves.

Yeah. Getting into like launchpads as a sector. So you guys acquired Echo. The other main player I feel like is Legion and Legion had the partnership with Kraken. I would guess they go partner with a bunch of other exchanges. How do you think this plays out? Will each exchange basically get their own? Everyone will have their own launchpad, everyone will have their own like ICO product. Like, is this, is this just going to be a standard product that the exchanges own?

Yeah, I mean, I can't speak for the other exchanges. I think it makes a lot of logical sense for us and for our business. So I think it, uh, you could probably extend that to others just by analogy. Um, you know, we're really excited about Echo because we view them as the leader in on-chain capital formation. They've raised now, uh, over $200 million has been raised through Echo across 300 investments. And, you know, there's been some really high-profile and successful investments like Plasma and MegaETH and others. And, uh, you know, we think that's really differentiating differentiated in terms of being able to have like the best quality issuers and protocols that are trusting and relying on this infrastructure and a really broad base of investors as well.

Yeah. Sean, what is the acquisition that you passed on that you regret the most?

Completely passed on? Hmm, that's a good one. I don't know. Uh, there's a, well, you know, Phantom at this point has gotten very, very successful and that team is amazing. And, uh, I wouldn't say we passed, we actually were very interested in acquiring Phantom at one point in time. And, uh, you know, the company was just hot and they hit lightning in a bottle and, uh, you know, they stayed standalone and it's amazing to see what they've built since then.

Yeah, yeah. Um, yeah, that's interesting. Yeah, Fantom would have been a good one. That's a good— great. Yeah, great company. Um, how much— let's talk about the venture side of things. So Hooli and the Coinbase Ventures team, they've obviously done an amazing job. I think you guys are one of the most active, maybe the most active, uh, VC in the industry actually right now from a total number of deals done. It's either number 1 or top, top 3 at least, I think, right now. Um, I'm sure you guys have those metrics, but tell me how ventures, the venture strategy, and then how it ties into M&A.

Yeah. Um, it's a good question. We are the most active. We've done now over 500 investments in the crypto space, um, since 2018. And, uh, yeah, the, the portfolio continues to grow, especially with the Base Ecosystem Fund. And, um, we're, we're pretty committed to continuing to invest across market cycles. I think what we see is, you know, now in, crypto's, uh, sort of like in a summer or is hot, like there's a lot of people who will come in and are active. But, um, during the bear markets, capital is a little bit harder to find. So, uh, the strategy with Ventures when we started it, it was really that we saw a lot of really good builders that wanted to, uh, build protocols and apps outside of Coinbase, but there weren't that many crypto investors. And so we said, what's, what's a great way for Coinbase to actually like support the growth of the ecosystem? Uh, and that just started by being what we called an ecosystem fund, like writing very small checks mostly founder-based, just based on like, we thought this person was amazing and is working in an area that we think is, um, exciting. Uh, and now it's scaled up quite a bit and is really focused on investing in the best companies and driving great financial returns with those investments. Um, it obviously gives us an avenue to learn quite a bit about, uh, how the, uh, ecosystem around us is developing. And, you know, it's already very hard to predict the trends that are going to take off in crypto, but What I always think about is a, you usually a good leading indicator of what's gonna come next is just following the smartest people and like what they're working on. So you'll see these, it, there's this natural tendency of, uh, cohorts of companies that tend to start around the same time, whether that's in like social or stablecoin issuance or orchestration or whatever it is, there's usually 2 or 3 companies, right? And there's like one leader and then one fast follower and they're kind of going together, but that's usually an indication of kind of where the world is going. Um, and so we take it from that lens where it helps us inform that perspective on the multi-year strategy for Coinbase because we see what's happening outside of, uh, Coinbase and use that in some ways to, uh, to define the direction that we need to, uh, take the company. Um, and then once we have that direction set, then it's a question of like, okay, great, what's the best way for us to actually achieve that? Do we want to build something? Do we want to buy something? Or is there a partnership that makes a lot of sense? And we've, we've done all of them in the past.

So is the— what's the mandate of ventures? Is it just absolute returns or is it, you know, returns plus things that are strategic for Coinbase?

Really financial returns focus at this point. And then honestly, we just want to have great relationships with the best founders in the space.

So yeah, nice. Anything else on ventures that you think is unique? Does ventures like, will Hooli call you and be like, hey Sean, like, you know, this company's super hot.

Like, you guys should look at them on the acquisition side.

Yeah, I mean, there's usually like I sit across both, so I have visibility into the ventures portfolio obviously, and we can kind of see what's working, what's not working. But it's actually usually kind of the opposite direction where it's more so we're kind of thinking about like what's the strategy of the company? And then as part of that, like, hey, who are the best companies in this space? Like, who's doing interesting things? Uh, it's usually like comforting to me because I'm like, okay, great. We, I feel like we have a good hit rate and like we're on the right track with the ventures investments that we're making. If, uh, a lot of the companies that end up on that list are actually like investments that we've made. They don't have to be by any means, right? Like we've acquired companies that we've invested in. We've also acquired companies that we have not invested in. Um, so we don't take it as like a hard and fast rule. It's just, uh, it kind of gives us a sense of direction. Um, and, uh, it, it's always helpful when we already have that relationship and some embedded trust with the founder. Um, that helps like streamline the process.

Across 30+ networks and 180 endpoints, Blockdaemon Earnstack unites staking and DeFi into a single institutional toolkit for crypto rewards with multi-layered security, full asset control, and 24/7 support. Blockdaemon Earn Stack is built for scale and regulatory clarity. Non-custodial staking and seamless DeFi access all in one stack. Direct access to DeFi with no intermediate smart contract or vaults. To book a demo, make sure to click the link in the show notes or head over to Blockdaemon Earn Stack to find out more. Thanks to Blockdaemon for making today's episode possible. The machine economy is here. Devices are monetizing data for their users all over the world. Tokenized robots are generating revenue for token holders. The first machine economy free zone is live in the Emirates, and it's all happening on Peak, the machine economy computer. Head to peak.xyz, that's P-E-A-Q.xyz, to find out how you can benefit from the age of automation or click the link in the show notes to find out more. As always, investments in blockchain technology involve risk. Terms and conditions apply.

Okay. Getting back to maybe some advice for founders who are listening to this. So, you know, it's funny because you and I both know so many founders in crypto, and I feel like half the founders in crypto are like, oh, one day I'll just sell, sell my business to Coinbase. That's like the exit plan of— I feel like a lot of founders. How would you— if you're maybe talking directly to those folks, like, how would you—

what would you recommend to them?

Well, A, get to know CoinDesk, uh, and know the right people, obviously. And so I, you know, whether it's a, through a venture investment or on the BD side, like having those relationships really matters. Um, and then, you know, what I've been saying is like figuring out like what is the strategic match on like the go forward. I think a lot of founders pitch like, hey, here's what we have built or like here's what we have done. And that is really important. But what's more important to us is like, what can we create together? Like, what are the new opportunities that get unlocked if we actually do an acquisition, right? And so like the historical pieces and like what's been done in the past, what's been built in the past, that kind of like all builds up to it. But the best acquisitions that we've had have been actually situations where we've taken something that someone has built and like we've combined it with things that Coinbase has and made it into something new. Like, you know, the example— a couple examples that I give would be, uh, you mentioned Tagomi earlier, where Tagomi had really built, uh, best-in-class institutional trading infrastructure and was building a crypto prime brokerage as an independent company. And Coinbase had sort of started to scale out this custody platform. We had a, uh, a really sizable asset base at that point. We had a balance sheet at that point. And it became very clear that to scale that prime brokerage business, you would need both of those pieces. You would need the best-in-class trading infrastructure but you'd also need a balance sheet to scale at LendingDesk. You would need secure custody so that balances are actually stored where they want to trade and you can sit completely in the flow of funds. And so it made really good sense for us to combine those two businesses because one, and when we did that, what we found was a lot in 2021, a lot of those companies that were coming to say, hey, we want to buy $1 billion of Bitcoin. At that time, you couldn't really, there was no other alternative for how you would actually execute a billion-dollar purchase of Bitcoin, you needed a solution like a Tagomi, and you needed a brand and a custody platform like Coinbase. And that created, uh, Coinbase Prime, which, um, is the leading, uh, prime brokerage platform today. So that's one, one example of that.

Yeah. What— okay, so you guys have done 40 deals. Of those deals, what percentage have, have been inbound and what have been outbound? Or, or said differently, what percent have come to you and said and tried you guys, and what have— where have you guys gone to them?

I've never really tracked that, so it's a good question. It's kind of— sometimes it's a little bit hard, right? Because like these relationships happen over time, and it's kind of like, yeah, it's kind of difficult to say like who reached out to who first, you know? It's a little bit like dating.

It's like you guys— Coinbase Ventures leads a group on Echo, and so you've already got that relationship. But at some point someone does say, hey, would you be interested in selling? Or hey, would you ever be buying us, you know?

Yeah, I would say the majority are actually us prompting, um, and saying, hey, actually, I would assume, yeah, right? Because a lot of it comes back to we have more visibility into the direction that we want to take Coinbase, right? And then when we go through that exercise and we say we actually want to look externally or make sure that we're covering our bases externally, uh, then we start talking to the leading, like, the top companies within that category. Um, obviously it happens the other way too sometimes where it's just opportunistic and there's something that we had been thinking about, but, you know, maybe it wasn't top of mind at that point, and we realize actually it is super important. Um, but yeah, I'd say probably like 75-25, 75 outbound, 25 inbound.

Yeah, yeah. There's— what's the saying? It's, uh, companies are bought, not sold.

Yeah, yeah, yeah, exactly.

Um, what about investment bankers? Um, Togomi, Zappo, uh, Liquify, Echo— did all these people use bankers? Did they use traditional bankers, crypto-native bankers, or you're like, definitely don't use bankers? Tell me how you feel about this as someone on the other side, you know, in the other seat.

Yeah, look, I love investment bankers, but at the same time, we think it is much smoother and is preferred if there's not a banker involved. It's, uh, most of the deals that we have done have just been directly negotiated with the founders. Um, I think I can count on one hand the deals that we did, uh, where there was an investment banker on the sell side. We've never used a buy side advisor, um, because we, you know, have built up this team and this expertise internally, uh, that we haven't needed to. Um, and I think ultimately, like, there's starting to be more quality investment banking services that, uh, are catered to the crypto space. But usually we have, like, a really good understanding for what we're looking for, um, and already have a relationship with the company. So it's more so brainstorming between, uh, the founder and Coinbase on like, what can this become? And like, what is the future? Um, and then the other thing is like, you know, I mentioned a lot like the emphasis on that cultural integration. So like, we want to have a lot of touchpoints with the founders directly because we think that those people are going to come into Coinbase and they're going to be leaders of something for 5 or 10 years. Uh, and we want to feel really good that there is that cultural synergy and match.

Yeah. Do you have a formula at this point or like a playbook in terms of like retention? Not retention, but how you structure these deals? Okay. So on one hand, it would be all stock. On the other hand, it's all cash. Some people do earnouts. Some people are really strict on like, you know, you have to hit these performance-based metrics. How do you think about that combination of a deal coming together?

Yeah, there's no formula. There's no strict playbook. And I actually love it because to me, that's like the art of the deal.

That's the art of, yeah, yeah, yeah.

And in a way is, uh, you really like, you, there's the tools and the things that you mentioned, and I, I think about those as all like ways that you can achieve a goal, but the art of it is really thinking about what are we trying to achieve? What are the things that we have confidence in? And then what are the risks that are associated with that? And, you know, in most instances I've found that, um, we really would prefer to avoid having a lot of structure around a deal. Um, and I like, we don't want to have like a super complicated earnout and like milestones that, uh, cut in like 4 different ways. And the reason for that is, uh, it creates a misalignment of incentives between Coinbase and the company that we acquired in a lot of instances where the company that we acquired is squarely focused on whatever the metric is that drives the earnout, whereas Coinbase is, uh, focused on that metric, but we're also focused on other things, right? Like there's also a bigger picture.

It's kind of like just do right by Coinbase.

Yeah, exactly. And so like you actually just want to get people so that they're working on the same team and they're going towards the same goal versus having like subsets of the company that are myopically focused on like one thing versus the other thing. That's like the ideal state, right? Um, and sometimes it doesn't work out and it makes sense to have an earnout and there's good cases for, for why that, uh, should be usually like an earnout for me. I want the company to be pretty standalone and like have autonomy over driving whatever the thing is that they're gold on, right? Because like otherwise, you know, there's always a question of like, hey, I thought I could hit this, but you told me to do this, or like vice versa, right? And it ends up becoming like this argument. So, um, that's like one of my criteria is that I really want like whom, if there's going to be an earnout or a performance structure is like have that team just really have like agency and autonomy to drive that thing. And allow them the space to actually like focus on it.

Yeah.

So yeah.

How quickly into talking to a founder do you know if you're going to acquire them? And the context there is like when we're selling something at Blockworks or we're buying something like buying a product or buying a software, selling, selling our software, selling our data, whatever. I know pretty quickly if someone's going to buy. I know pretty quickly if we're buy as well. Um, but then you kind of got to go through the song and dance a little bit too. How, what about, what about for you? Like, do you talk to someone, you're like, oh yeah, we're, we're doing this deal, we're going to figure out a way to buy them?

Uh, I know pretty quickly that we could, uh, I know pretty quickly if there's a really strong case, uh, or if, um, there's a really good reason for us to do it. Now, there's a lot of things that have to go right to get a deal together, you know, like the founder has to be in like the mental state and situation where they want to sell. Um, and we have to be in, uh, motivated and urgent to actually like buy the company, to your point, right? Like companies get bought, right? And, uh, a lot of those pieces have to line up and it's ultimately like a timing question. There's a lot of times where, you know, there's a company that I think this could make a great acquisition for Coinbase, but like the timing doesn't line up necessarily, right? Maybe they raise a round, uh, very recently and it's at like a price that we think is just too far extended from from where we can get to, right? And it's just like timing didn't work out. And then you kind of regret those and say, dang, I wish I was like 6 months earlier in like the thinking, but you just kind of got to move on.

So yeah. Have you ever gotten a deal all the way through due diligence? Your team loves it. You've run up the flagpole, people like it, and then you bring it to Brian and he vetoes it.

No, that has not happened. We've definitely had situations where fundamental assumptions that we made have changed, right? Or just proven to be incorrect. And I think that's the point of why you do due diligence. Obviously, like, you hope that everything kind of checks out, but especially once you sign a term sheet, like, you get really— we get really deep into the kind of core operations of the business. It's not just like, hey, what are the financials? How's the team? It's really about how do they do compliance? Like, what's the legal background of the company? how have they managed employee, uh, uh, matters over the, uh, course of the company's life cycle? Um, all of those questions kind of come into play. And then also like, you know, we live in a volatile market, right? So, uh, you know, it's difficult to get pricing always right. And especially if you like look at it on a short timescale. So we generally try to think about things on 3 to 5 year time horizons or even longer in a lot of instances and not focus too much on a 12-month timescale. But, um, you know, in 2022 as an example, like, the world shifted pretty drastically and, uh, very suddenly, and everybody had to adapt to that new reality.

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Yeah. Let's talk prediction markets. So you guys just made an investment in Kalshi.

We did.

I don't think you're— you're not an investor in Polymarket, are you?

We actually are also investors in Polymarket from earlier rounds. Yeah.

What do you— yeah, talk to me just about prediction markets and like where it fits into Coinbase's strategy, how you think about Polymarket, how you think about Kalshi.

Yeah, we're really excited. I mean, I think the, uh, old adage is markets for everything. And, uh, we've always felt that crypto kind of enabled, uh, you to bring liquidity to illiquid asset classes and have markets for everything. And I think prediction markets are a really interesting, uh, example and, uh, uh, uh, personification of that. Um, where, you know, you see people that are kind of betting on things that matter in their life. And I think the broader trend that we see right now is there's this, uh, kind of move towards like over-financialization of everyday things where people want to have skin in the game, um, whether it's, uh, you know, if they're attending a game on the weekends or if it's for an election, uh, uh, or whatever it is. And so we're really excited about that. We think it's very synergistic with Coinbase's business. So, you know, we're planning to integrate prediction markets and offer those to our end users. Um, and, uh, yeah, we're invested in both Polymarket and Kalshi. We think both are great companies, obviously, and taking very different approaches, um, at least historically, where Polymarket has really been, uh, focused outside of the US and, uh, been on-chain since the very early days. And Kalshi has taken more of the approach of pioneering the regulatory, uh, uh, clarity that, uh, has been needed to actually, uh, drive momentum in prediction markets in the US. Um, so yeah, we're really excited about the category. Uh, and, uh, a lot will be determined in the courts over the next year, especially as it relates to, uh, sports betting, but We think there's very, very good arguments there and we think the market can expand pretty significantly.

Yeah. In like a year from now, are we going to be placing sports bets on Coinbase through like a Kalshi or a Polymarket integration?

I think you could be placing sports bets on Coinbase before 12 months.

Yeah. Let's go. Very cool. That's great. Yeah, I was looking at— I've been very addicted to prediction market stuff recently and spending too much time on there and The, the top 20, the top 20 trades on Polymarket this week were, were all sports bets, actually.

Yeah. Yeah. I mean, football season, you know, it's insane. It's crazy to look at the numbers, right? It's— people love football.

Yeah. Do you think Polymarket or Kalshi wins, or do you think they both win and they end up looking very different? Do you think they look the same and there's just— the market's big enough for both? Like, what do you think you guys come in and like maybe buy one of them eventually? Like, what does this end up looking like?

Yeah, I think they both can win. I think the market can be big enough for both of them to win. And, uh, you know, it's like when you think about, uh, futures and options, like in the traditional derivative sense, there's a lot of different exchanges, but there ends up being some consolidation. But, uh, exchanges have different specialties on contracts that they end up supporting. And I think you could see an interesting dynamic Uh, with prediction markets too, where rather than having generalist prediction market exchanges or protocols that support every single contract across sports, culture, media, uh, local, uh, you know, maybe permissionless user-generated, uh, markets, you see more specialization where, uh, maybe one is more better tuned for livestreams or, uh, and things that are happening like in real time, and another is better tuned for Sports and goes deep into all of the complexity with like parlays and, uh, uh, different components of sports across, uh, uh, the NFL, NBA, uh, soccer, et cetera. So I think there can be multiple winners for sure. And the market's still very early just given, uh, how the regulatory landscape has shifted within the last year. So, um, we think there could be a lot of growth there.

Yeah. So I saw on Twitter you guys just had your exec leadership offsite. How, how much of that, um, how much of that did you guys talk about prediction markets?

I mean, it was definitely a good topic of conversation. Um, it's something that we're prioritizing heading into the end of this year and through next year. Uh, and we think that it, um, prediction markets really cater to a much more mass market audience than traditional crypto trading. And, uh, that's interesting for our business. Uh, it's also interesting, I think, for crypto as an asset class because it has the potential to introduce a lot of new users to crypto that, you know, might have thought of crypto as something out on the fringe, but they feel more comfortable or familiar betting on an NFL game. Yeah.

So it's funny, I was thinking about, I was thinking about just Coinbase and prediction markets in light of the Kalshi acquisition, or excuse me, Kalshi investment in this podcast. And I was actually, there's a, I think it's a Ben Horowitz quote, I forget, or maybe it's someone else, but it's a, the battle between every startup and every incumbent comes down to whether the startup gets distribution before the incumbent gets innovation. And funny enough, in this case, in my head, you guys are actually the incumbent. Um, someone like a Polymarket or a Kalshi is the startup. And, uh, obviously you guys are, you're investing in them and you guys are partnering and integrating and stuff like that, I'm sure. But, um, why don't you just build it yourself and beat them, right? Because you're the incumbent and you could get innovation and you could launch your own prediction markets faster than maybe a Kalshi or Polymarket can go get the 100 million+ users that you guys have.

Yeah, well, I mean, we could, right? I think like you can, and it just comes down to like, I think a lot of the things that they have built are actually really hard things to build, right? Like some of the licenses that they have, you know, you can't really snap your fingers and have those licenses overnight or the operations for how do you resolve markets that don't have real-time data feeds so that you can do it in a quantifiable way. There's some discretion involved with that. And so I think it's an option, um, and it's something that we could consider. We do already have, uh, a designated contract market, which is a derivatives exchange, uh, under CFTC purview, which we acquired, um, that was FairX in, in 2022. And so I think that is an option. And, you know, we'll think about, again, the build/buy partner, uh, around how do we offer the best product to our end customers as a starting point? And then how do we kind of optimize that business over time?

Yeah. Can we get back to tokenized stocks and tokenizing your guys' equity? I'd love to hear where you think this market goes, both for like, yeah, tokenizing your own equity, tokenizing stocks, putting it on chain, even like— oh, we'll get to— I won't ramble on. I've got more questions, but I'd love to just hear how you think about it.

Yeah, I think we're, um, we're obviously like very early innings right now. And I think the biggest questions are mostly on the regulatory front, like the technology and the pieces are there where you can have tokenized equities. And I think that you will see most of equity capital markets or a lot of equity capital markets move on chain over time. Um, but it needs to be done in, uh, the right regulated and compliant manner because traditional equity markets do work pretty well overall, not for everyone in the world. You know, there are people in different pockets of the market that don't have equal access to, uh, uh, capital markets, but you still have things like T+2 settlement and all of these items in the traditional, uh, capital markets that can largely be resolved. Um, if, uh, that transaction activity happens on-chain, but I do think that there's a lot of work that needs to be done, uh, uh, uh, to give confidence around, uh, market integrity and, uh, having confidence in who the participants in a market are. on-chain. And, uh, you know, some of the most interesting companies that I see right now are those that are sort of like bridging the gap between, uh, uh, traditional financial markets and on-chain capital markets. So, um, I think about like a Superstate is really interesting in that dimension, um, where you can have fungibility between an exchange-traded security and an on-chain security. Um, and there will be, I'm very confident that there will be a market for that. It's just right now, once you have the on-chain security, there's not really a lot that you can do with it because there's— it's unclear, like, who can you transfer it to, where can you trade it, can you have lending markets on top of it.

You've seen this with Galaxy, right? Galaxy tokenizes their stock. It doesn't—

it's not—

I mean, I hope that it opens up, but it's not really doing anything right now.

Yeah, it's not. But like, I think it's a huge step, and so like, I give them a lot of kudos and a lot of props. It's similar to what we were trying to do in 2021, and I think they're setting a good example for many other issuers over time where you can actually have, uh, both markets that exist at the same time. So, um, I, I think we're, we're going to start to see these markets move on-chain. Um, and some of the more interesting things that, uh, I think will end up happening are some of the things that you see around like perps on equities. And, uh, it's difficult to have 24/7 markets on equities because the spot collateral doesn't trade 24/7. Jason Yanowitz: Right. And I think once you have that on-chain and you maybe have 24/7, 365 markets natively, then you can have perps on equities. You could see that extending to private securities potentially over time. Maybe they're, they aren't freely traded. And I think you see a lot of interesting experimentation that's happening on Hyperliquid right now with this, especially post the launch of HIP3. And you know, that's like a really compelling vision where you could have perps on everything. But it all relies on having the underlying asset, I think, ultimately tokenized and held on-chain so that you have less potential for market dislocations based on price discrepancy.

Yeah. Maybe I'll ask you a hypothetical that something that Mike and I have been talking about a decent bit, which is Blockworks. And you know, we were saying, you know, 'cause Blockworks is more of a traditional equity business, right? you know, we don't, we don't have a token. Like, we're not, we're not like a protocol or anything like that. So the natural path would be to IPO and you IPO on like NASDAQ or NYSE would be the traditional, the traditional startup path last 50 years. Um, but all of our, all of our, uh, our audience is all on-chain, right? And they all have a lot of capital on-chain. And so, uh, we look at what like Leschner and Superstate are doing with, uh, kind of like Yeah. Do you, do you basically with Blockworks, do you IPO on-chain? Do you IPO on NASDAQ or NYSE? Do you IPO on-chain? Is IPOing on-chain really just, does that just mean you're launching a token? Be curious how you would think about that in our shoes.

Yeah. I mean, I think you certainly could, right? And it's better alignment with your audience. And if you did that, then you could use Liquify to manage your token table or your cap table, and you could use Echo or Sonar to do the actual fundraise on-chain. And I think that would be, that's something that we should jam on because that is, is really interesting. But I think the real trade-off that you have to weigh, I think, in that dimension is like, yes, your audience is on-chain. But on-chain capital markets today are much smaller than traditional capital markets, just in terms of like the total pool size and the total capital that's available there, right? And so it's a smaller pond, but it might be a better fit for you. And I think like while we're in this transitionary state, it probably makes more sense to consider doing something like both, like Galaxy. And that way you can both, you can cater to the crypto audience that obviously is, you know, the core audience for Blockworks, but also to a more mainstream audience that has a lot of demand for crypto-related assets.

Yeah. Yeah, it's a good call. We should jam on that. It's a good idea. What would the audience be and listeners be most surprised about when it comes to like what took up airtime at the Coinbase executive offsite? Like prediction markets feels a little obvious. I'm sure you guys talked about perps like, but what maybe took up airtime that we would be like, oh, that's interesting. You guys talked about that a lot.

Yeah, I think we spent a lot of time thinking about the rate of change from off-chain to on-chain because it informs a lot of design decisions for where do you focus your time and energy. And you know, when Coinbase started, we had to get regulatory licenses in basically every market that we, we have that we operate in bank accounts, et cetera, to provide this bridge for people just to hold crypto assets. Right. And that was like, that's really heavy, really hard, like really nitty-gritty work that does that. But once these assets are on-chain, they're portable, they're movable, you have new financial markets that can be created much more easily, right? And, uh, we're obviously investing a lot in that on-chain future and making sure that we have the right pieces, uh, in infrastructure in place for that with Base and the Base app and even just bringing, uh, on-chain protocols into Coinbase. But depending on what you believe about the rate of change, like if that happens faster, we should be investing resources in a different way, or if it happens slower, we're investing resources you know, in another way. And so we try to balance that, um, uh, mostly as we think about like which efforts we're prioritizing and, uh, how we're, uh, allocating resources.

Yeah. Um, John, anything else that we didn't talk about that you think is important, especially tied into this idea of Coinbase becoming the everything exchange?

Um, I think we covered a good amount there, but on the everything exchange, I think this is really like a culmination of what we've been talking about with tokenization, where, you know, it used to be this thing where it's a crypto asset and a financial asset. And once you tokenize a financial asset, then the lines sort of start to get blurred between what's a crypto asset and what's not a crypto asset. So, um, you know, we're really focused in Coinbase on, uh, making all of those assets available to our customers, whether those are crypto assets, equities, prediction markets, uh, uh, tokenized private securities in the future, uh, uh, presales tokens and beyond. And so the Echo acquisition really takes us one step in that direction. And more broadly, I think is a huge step for us to bring capital markets on-chain.

Yeah, I would, as we wrap this up, Sean, I would love to get your take on cycles and just where we are in the cycle, if cycles even exist more. I'd love to get your updated thesis on this.

Yeah, this was a topic of discussion also at the offsite that we just had. And you know, I think there's pretty different differing views on it. I tend to believe that, uh, we still are subject to market cycles, although not as, uh, volatile or extreme as they historically have been. I think a lot of crypto cycles now are equally influenced by, uh, the macroeconomic environment as well as crypto-specific factors. Um, so do I think that there's going to be another bear market at some point? I do think that there probably will be another bear market at some point. Will it be as pronounced or as painful as, you know, 2018 or 2022? I think probably not because we're starting to see real use cases that are less correlated with the volatility of crypto assets take hold. And I think, you know, we spent a lot of time talking about tokenization, but stablecoins were sort of like the first example of a tokenized asset in 2018. And we're just amazed to see the growth in stablecoins over the course of the last 7 years, now over $300 billion of market cap. And we're just seeing tremendous innovation right now where, you know, you have stablecoin neobanks around the world that are spinning up very quickly and offering very compelling financial services experiences to consumers in every part of the world in a way that just previously would've taken a ton of capital and a ton of time to even get spun up. So I think things like that will help balance out some of the volatility from the era where it was mostly buying and selling Bitcoin, Ethereum, and other crypto assets.

Yeah. Yeah. Will you guys slow down investments and/or slow down M&A if you think that we're nearing, quote unquote, nearing a top of a cycle?

I guess I'd say I wouldn't say we slow down the pace deliberately. We really are looking for the best opportunities that I think align with our strategy. And obviously, I think from like a pricing and evaluation perspective, we have to think about like, what does this look like over the next 3 years? And there is an element of the cycle that's involved with that, um, because most businesses in crypto do have some dependency on, uh, on the rest of the crypto market. But, uh, I wouldn't say that we, uh, sort of plan our pacing around market cycles in any, uh, in any way. Um, but we do naturally see a slowdown in net new opportunities, uh, when there are market pullbacks.

Yeah, cool. Sean, anything else, man?

No, this is great.

All good. Well, congrats again on the Echo deal. Congrats on 40 deals over the years. Congrats on the big promotion. And yeah, congrats on everything at Coinbase. You guys are crushing it and we love to see it.

All right, thanks.