The Dark Side of Token Launches | Arthur Cheong & Sean Lippel

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Good to be here. Likewise. Thanks for having me here again.

Yeah, of course. Arthur, I want to pick on you first. So beginning of this episode, I want to talk about this idea of like low float, high FDV venture market seems like it's getting pretty out of whack, at least in the later stages. We saw like Monad, Movement, BearChain, like these, the speed at which I'm seeing, like, you go raise a Series A and then you turn around and raise your Series B, or you do a strategic round and then you do the Series— it's getting very, very, very fast. And I'd love to hear, Arthur, you had this tweet. It said the model is breaking. MerlinChain, last venture round was $800 million FDV, trading at $1.9 billion now. For SAFE, last VC round, $1.2 billion FDV, trading at $2.8 billion FDV now. 2 to 3x before any investors or team unlock. Tell me one more time that valuation doesn't matter. What do you mean when you said the model is breaking?

I think there was a lot of expectation among the crypto VC that as long as they get into any good deals and before the token unlock, they will usually see at least a 10x on the investment compared to the last round. For most of the infrastructure or layer 1, layer 2 project, they are able to raise at between 300 to 700 million valuation. They usually start trading at 3 or 5 billion valuation. And then if the market does well, they will trade up to like 10 or 15 billion valuation. In fact, that have happened during Q4 to Q1, right? We see Stai Network went up to 10 billion. We also see Celestia launched at 2+ billion valuation and went up all the way to 20 billion valuation. So That certainly set the expectation very high. Yeah, but I don't think this is sustainable. There is more and more new projects launching. A lot of them are definitely high-quality projects, but the money that is coming in to invest in these so-called altcoins are not keeping up with the pace of the project launching. So I don't think we are going to see so many of them launching and sustaining at 10 to 15 billion fully on a fully diluted basis going forward. At least even if some of them happen, it'll be more like outliers rather than the norm.

Yeah. Can you maybe explain for listeners, maybe we can actually zoom out from that question, which is for those unfamiliar with this idea of low float, high FDV, what does that really mean?

I think it really refers to where For a project that have a pretty high valuation on a fully diluted basis, usually refer to more than 5 billion at launch, where the circulating supply are less than 15 or 20% of the total supply. So there will be 5 to 6 times more supply that will be coming into the market over the next 2 to 4 years. Yeah, I think generally these are referred to some of the low floor high FTV. Obviously we have seen some of the even more extreme example in the past, like adding some of these projects associated with SVF in the past, they would float even less than 5% or less than 2% when they launched. So I think Serum at one point had 100 billion FDV and the market cap was less than 5 billion. Yeah.

So Sean, I throw this next one over to you, which is, do you think, so Arthur's saying that this kind of like high FDV, low float model is kind of like breaking. Do you think that the window for launching a token seeing that instant 2 to 3x is now closed?

It's a really interesting question. I don't think that's empirically been proven to be correct yet. I still think— I mean, expecting a launch out the gate at maybe 10x is probably a bit too ambitious. I still think some of these new token launches, are still coming at a minimum of 2 to 3x. A lot of it, as Arthur alluded to, is the fact that just a percentage of the circulating supply is actually out at launch, which creates a whole bunch of perverse incentives that Arthur unpacked a bit. Ultimately, let's actually think about the incentives that are driving these types of outcomes. So for VCs, super helpful for them to get into a deal, within a year have the token launch, the ability to mark up their book, and then market to LPs that, you know, they've got a 3x investment or maybe a 10x investment. The problem is we've seen, and, you know, this has been talked about, you know, at length on Twitter, you look at WILD, a bunch of other names, you know, since then it's effectively been down only. And I think the perverse incentives here is if you're looking to actually, you know, decentralize the token, put it in the hands of more people, Really tough for a regular retail investor to buy into that project knowing that 80% plus the supply is the overhang essentially, and VCs will effectively be dumping on you. So I think something about this needs to be fixed. So I, until the launches come at something less than 3x where VCs are entering, I think the dynamic will remain. Um, but, but I'm with Arthur. I'm as, uh, concerned about this dynamic as ever. And it's why you've heard, you know, prolific, you know, chance of bringing traditional ICOs back, uh, where you could get retail in at the, at the same, the same price. Um, so I mean, you know, it's, it's the, it's the market dynamic we're, we're living in today, unfortunately.

So why is this, why is this happening, guys? So And like the paradigm we're talking about here is like, okay, you launch the token at a high FDV, you've got like, I don't know, 10 to 20% of the token supply circulating right out of the gate. You have oftentimes no public sale. And the strategy right now is oftentimes big, big airdrop in this cycle. And we can talk about the points meta in a little bit. But yeah, you saw, I don't know, Arthur, what's a— Sean, what's a good example? Like Dimension maybe was like 8 billion FDV out of the gate. 16% circulating, no public sale, like over 100— I think it was like 100 million airdropped to folks. And I don't know what the price has done, but I'm not sure what it's done, but I would assume it's gone down. Why is this? Why is this happening? Like, why is this the strategy? What, like, what is this? What does this accomplish for either the VCs or what does this accomplish for the protocols? Like, why is it— if it's such a bad model, why is everyone doing it?

Yeah, I think it's really about the way that crypto does the anchoring, which I think is you have a classic duration mismatch where you can't really just calm liquid stuff immediately with private market stuff. But I think that is something that a lot of projects have done. So like you look at, okay, let's say, um, some of the liquid stuff has been trading at 10 billion, uh, fully diluted basis, but the circulating is way higher, like 7 or 8. And you launch something like a competitor, you think that you have— they should have similar FDV, uh, but the circulating are way smaller. Um, and I think the market just, um, shouldn't work that way. Uh, but unfortunately this is how comparisons are being done because you have Avalanche, Aptos, and Swiss, like a proper L1, are trading at $10 to $20 billion valuation. And it just leads to the anchoring of, oh, another very high performance, good team, good project should also trade similar to that valuation at launch with a way lower float. So I think that it doesn't really give that project enough chance to grow into that valuation, which a lot of these older projects have a chance to. To get into. And another thing is, I think, I think there's a lot of these like a private bilateral agreement between the market makers and the projects and probably within the exchange that we are not privy to. But in a lot of the traditional— so like a listing of any token is very similar to IPO, right, from market structure point of view. But in traditional IPO, the market makers are usually the investment banks, and the investment bank, they usually need to underwrite a certain amount of the, um, initial, uh, offering. So they are taking some risk with their balance sheet if they are pricing it too aggressively. If it's down only, they will be actually be forced to like buying back. They're actually getting dumped on if they are pricing the IPO incorrectly. But, uh, in the crypto space, I do not think the market maker have such a risk. A lot of times they probably are kind of risk-free. Either they do a pure servicing model where they're getting paid a retainer every month and they just provide liquidity or they get a token loan to market make. But I don't think market makers suffer financially from being pricing the— anchoring the initial trading price too aggressively. They don't take the downside. But I think in a person bank—

Arthur, there are some incentives. The way I understand it, and I've never been a protocol pricing a token working with a market maker, but the way I understand it is the market makers do get incentives for being able to keep the token above a certain price. Can you explain that dynamic?

Yeah, so this is something more well-known, which is like a token option. So let's say a token launch at initial was like a $1 price. They will give the market maker a token option, like a strike price of $3 or $4. So if the token went above that, the market maker able to exercise the options to buy certain token at $3. Obviously, it's like a free call option to incentivize the market maker to contribute to the growth of the project. But I don't think I've seen any kind of contract where the market maker actually being penalized if they are setting the price on the wrong— because they, they do play a pretty big role in setting up the initial listing price and anchor price. I think generally 3 parties play a role in this: the projects, the market maker, and the exchanges, and obviously the market demand. But let's, let's be honest, like the first minute No retail is setting the price for that. It's obviously always market maker. Probably Shawn has a different color to add on this.

No, I think what you articulated is pretty correct. I mean, I want to not be as finger pointy as say it's all incentives. And I think Arthur's right in saying sort of the reference point. When you launch, in building the imminence around the protocol, attracting more dev interest, retail interest, like all that flywheel works much better with a, with a higher token price. Like that, that, you know, is indisputable. Um, so you understand like incentives for both VCs to mark, mark up their book at launch, plus just attracting retail interest, uh, and, and protocol devs to build on top of the project or the layer 1. So, you know, it makes sense while while you're setting the price super high. Thinking through the second-order effects I said about just retail effectively getting dumped on, I do think the market structure that Arthur alluded to also is part culprit. I think regulatory as well. I think most teams feel comfortable in the current regulatory apparatus, especially in the US, of doing an airdrop because there's not an actual exchange of monetary value for token. And I think unless we see a, you know, a change in the— that regime or stance by the SEC where teams feel comfortable doing that public sale, I continue to think like this dynamic will, will probably remain in place. Like, we, we've not entered like the mature market structure with invest in banks taking risks and underwriting. Market makers are very mercenary and projects want high token price to attract interest. So I think you combine all that in the pot and we kind of are where we are.

Yeah, it's that— two really good points there. One is, yeah, I hadn't thought about the regulatory, the regulatory reason. So you used to go on like— so it initially started with ICOs, right? But ICOs, obviously, if you did an ICO today, like SEC is knocking on your door tomorrow. And then the other way was like, I mean, CoinList, like a lot of really good projects actually launched on CoinList. But I imagine maybe I don't know what's happened with CoinList. I think they're still around. I saw their CEO tweeting about hiring crypto-native folks or lack of it. But yeah, like if you think how— if you think about how a lot of the most like the best L1s launched, it was like low FDV, like generally actually like a pretty fast unlock. So you didn't have these venture like token unlocks coming that people were worried about. Retail, I remember like you could buy some of the best L1s at like 200 million FDV or 300 million FDV.

Or even less.

Yeah.

And less. Yeah. And then, and then no airdrop and, you know, pre-Uniswap, I think there wasn't really like a thing of an airdrop. So what do you think the— what is the better model here? Like if you were advising a protocol, what is the better— is an ICO the best model, but just don't do it in the US? Like what is the best model?

Yeah. So I think it's a combination of both. I think that the initial object reasons for doing an airdrop is actually very powerful. You're rewarding the power users. That were experimenting, taking the risk of using the protocol before it become more widely adopted. But at this point, it's kind of become like a different game where there's industrial-scale farming, a highly anticipated protocol. So the point of being able to have a genuine airdrop to early users has probably passed in many cases. I think it still should— it's still a very good mechanism, but, um, in many cases that probably should not be the only way of distributing token initially. I think combining both is actually the best way. And I think that Coinlist is still a pretty good platform. They are still conducting public sales, but obviously the exchanges are also still doing it, the Binance Launchpool and Launchpad. But obviously these are not enough to support the number of tokens they want to launch. And this is where we are ending up with right now.

Sean, what's your best model?

I think we're still in the trial and error phase of this. I think the pendulum has definitely swung too far. Like, think about all the slack that we gave Sam about the Solana launches with this same dynamic. And it feels like we've taken it and are now repeating it at scale. So I think decidedly we could say the pendulum swung too far. We're currently in a paradigm, um, that isn't working for, for really anyone. Um, so I think, I think it is probably right to think about a combination, um, that is both some sort of airdrop, but I am actually a proponent of the points schemes and it's been pointed out, like at least from the lever respect, like you can, you know, certain type of activity that is not beneficial to the protocol, like in real time, you could course correct for that, right? Um, and you know, the type of activity you want to incentivize, uh, you could also incentivize it based on the point scheme. So I think a point scheme, but I don't think a, a, a one point in time airdrop and that is it. I think that leads to industrial air farming. So you want to have an approach that kind of combines all these things. Maybe it's a coinless list, and, you know, it's folks that have been involved in the community, have contributed to the protocol in some way, that kind of like secures your seat in the coinless offering. And maybe you do like 5 to 10%, that way you do, you know, 5 to 10% upfront in an airdrop. And, you know, Jason Yanowitz alluded to like what you're seeing is these large unlocks that the market has pretty good visibility into that come over time, and they're stair-step functions. And I think probably the deals that we've done that I probably feel most comfortable with are almost daily vesting over maybe a 4-year period of time. It smooths out that curve in which you don't get this precipitous drop in price and a huge unlock happening at a specific point in time that can be gamed in many respects, which I think actually lead to even bigger drops. So I think aligning both the team and investors, which usually are about 30% of the total supply, having a more linear supply schedule plus an airdrop that's more points-based, that similarly maybe doesn't unlock right away all up front. I think some sort of combination of that, like I said, I think by trial and error, I think we will arrive there. But unfortunately, it's this mix of incentives and probably the regulatory side that puts us in this current paradigm.

Yeah. Shaun, the other thing you mentioned a few minutes ago is just that folks want to get the highest valuation possible. And that'd be— I don't know what it feels like. What's happening right now is like, whenever I see a founder maybe raise like their Series A, let's call it $10 billion or $5 billion or something like you got— two things come to mind. One is DFINITY or ICP, right? And two is some of the SaaS multiples that we saw in 2021, where they were— where SaaS companies were raising at 100x valuations, which I don't know, it feels really frickin good in the moment because you're like, oh my God, I just created this $10 billion company. But like, it is a— I don't know, like 9.5 times out of 10, that's going to end horrendously. So I'd be curious how you think about like maybe Arthur, I could pick on you for this one. Like if a founder comes to you and it's like, let's say they raise a $300 million valuation back in January, they're like, Arthur, I've got a term sheet. From Andreessen, $5 billion. And it's like 3 months after they raised $300 million. What are you advising them to do there?

No, I think from a founder perspective, they should definitely take it. From their perspective, they can— obviously, there is always a big risk of raising an evaluation you don't deserve. I'm saying this from a perspective that the project are probably quite close to deserving that valuation. They should definitely take it. It gives them more cash to do this. But it's really about how they should manage a launch. Um, like, I don't think that they should raise, uh, at like 5 and then immediately start to launch at 5 as well. I think at least the current market structure, uh, is not receptive to like the public. And it's what happened in the stock market. So the public market and the private market price things in a very different manner. So if you decide to do that, you are going to get a lot of issue in the public market. So the founder will need to pay attention to how do they balance the public, how the public market will price this versus how the private market is pricing it right now. Because right now the gap is big.

Argus, maybe just continuing with the valuation conversation. We had Kyle from Multicoin on the podcast the other day and we were talking about just like different ways to value a crypto asset. And the way that they think about this at Multicoin is a lot of it is based around MEV. Actually, Kyle was on the podcast, but Tushar had a great talk about how MEV is the only way or the best way to value a crypto network, which is kind of a controversial take, I think. Would be curious to get your guys' take on like just how you think about valuing a crypto asset. Like, do you— there's the DCF way, there's like fundamentals with like fees and emissions. There's MEV, there's like none of this matters and it's just what the narrative is. There's like you could play it based on comps, you could play it based on like where we're at in the cycle. There's like actually a lot of different ways that people think about valuation. So would be— would love both your takes on this.

Yeah, I'm happy, happy to kick it off. I completely understand the logic. Of thinking about MEV. And I do think that squarely fits, Jano, into the capital asset way of valuing crypto assets. I think it's correct if you play this out to its steady state and you believe that there's infinite block space and all block space is inherently created equal, then probably at that state, MEV is probably the only thing that matters. I think empirically, what we see is that block space is not created equal. Block space on Bitcoin is valued differently than block space on Ethereum is valued differently than block space on Cardano. I think it's tough to make that attestation that MEV is the only thing that matters. I think even with things like Solana, the blocks are now almost completely full with increased activity. So things like priority fees and base fees do get you squarely into a capital asset way of valuing things that are more DCF, that take into account things other than just MEV. But more importantly, I think the overarching point I would make is that I think the vast majority of value creation, when you think about layer 1s and even layer 2s, don't really come from just the capital asset way of valuing, of just looking at discounted cash flows of MEV and fees, both priority fees and base fees. I think it really comes from the commodity way of looking at the asset. I think there'll be 3 to 5 big winners in the Layer 1 space that get valued as money. And I think the TAM of just M2 and money, and even if you think about gold in that respect as well, so M1, M2, that TAM is much more sizable. And looking at it as a store of value and a commodity, I think is probably the more correct way of valuing this, as long as blockchains are not homogenous. And I think we're a long way from block space being homogenous. So I think MEV is an input into the valuation model. I just don't think it's the end-all be-all in its current state, or for a while for that matter. And I think just one point to add, like, just look at like in aggregate what the totality of MEV is across all blockchains. Like, we're not even talking in the tens of billions yet, you know, like the total value of layer ones is, you know, you know, is many trillions, right? So like you can't apply a multiple to MEV today. Arrive at any sensible valuation. So that indicates to you there's at least one or two other factors at play that are commanding a different valuation multiple.

Yeah, I think that's an extremely good point. And actually, after spending close to 7 years in crypto and in crypto investing, I've come to realize that actually, valuing crypto is actually an alpha in itself, uh, because there is no universally agreed valuation framework. So who— whichever investor they are able to best figure out the appropriate valuation framework for different crypto assets will be able to generate excessive returns. Because I think that is actually what happening to the market for the past 6-7 years is every different kind of cryptos are being valued in the different manners. Like Bitcoin, obviously, like, you know, a lot of the ETH Max, they always say, you know, Ethereum generated more fees to the token holder, ultra sound money, um, you know, like we have like negative inflation, all those things, all better than Bitcoin every matters. So why is Bitcoin worth more, 4 times more than Ethereum right now? It's so Because the valuation framework people use to value Ether and Bitcoin are different. People see Bitcoin as largely a monetary asset. People still do not view Ether that way yet. Can ETH get there eventually? Very likely, yes. But it's not there yet. So people are not applying the same valuation framework people use to value Bitcoin to Ether yet. And it's the same thing with DeFi, with layer 1, layer 2. and also other tokens. So I think that could— we actually have gotten big enough as a space that different sectors of crypto are being valued in a different manner. And obviously, unfortunately, DeFi is the easiest to value because usually the protocol produces some sort of revenue and cash flow to the protocol, and it's the easiest to apply kind of like a traditional valuation multiple to DeFi protocol. And I think that actually unfortunately set the ceiling on on the valuation of most DeFi protocols. It's just because it's the easiest to value. That also means that it is the hardest to put an extremely aggressive assumption on it. So I think that for meme coins, I do subscribe to the theory that it really should be valued as so-called attention theory of value. Like you really value it by attention. It's really not about the cash flow or whatever. For layer 1, it's a combination of the the growth of the network in the future and how much user is— the user base. You can use a combination of Metcalfe's Law plus the monetary premium the layer 1 token is gradually accruing. For Bitcoin, it's probably 95% monetary premium. And then you have other governance tokens that probably like the value, the cost of attack. So I think different category of token, you need to use a different valuation framework, at least for now.

All right, I'm going to, I'm going to play a little game here. I'm going to make you guys do a— I want to see how— I'm going to pull up two charts. One is EtherFi and one is Lido. Are either of you guys investors in either?

We are invested in Lido.

Same here.

Okay.

Not EtherFi, but Lido.

Yeah, no EtherFi.

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Yes, I think, I think there's multiple parts to this question that involve that, that really, you know, force us to kind of like look at to the sum of the parts and really break down like, like first starting with like the business model before we even get into like a valuation framework. Right. I think you like I kind of push the team and here internally, let's just think about this as you would any other traditional SaaS business before, and what does Lido do before we even get into how to think about valuing it? So if I think about Lido, there's 30 billion total ETH staked via Lido. Obviously, there's 28 operators plus behind that. So think about it as a $30 billion asset manager. To me, as a former fintech investor, I look at Betterment, Wealthfront as the parallels or corollaries to what Lido does and think about of that $30 billion, look at the ETH staking yield, which if you include MEV, priority fees, call it somewhere between 3% and 5%. So when I'm walking through effectively is the DCF calculation for Lido. So you look at that, you say about 5% times the $30 billion in total assets under management, you arrive at maybe something somewhere like $150 million of total earnings that goes to Lido, as we know, because they take a 10% fee, right? Of that 10% fee, only about 5% goes to the actual DAO. Right. And in that, like, that goes to pay expenses effectively. If there's more retained earnings, that could go to something like, you know, distributions or dividends, or effectively what Maker does of buying back the token. Um, so here you have like a pretty simple model as it exists today of what Lido does, right? You know, it's the leading liquid staking, um, protocol, you know, of total liquid staking assets. It's about got about a 70% market share. It's something that we look to and are excited about because we think effectively what's happening within DeFi is what's emerging is effectively the Magnificent Seven or monopolies with real moats around their business, around things like liquidity, et cetera. And then, so that's the very straightforward way I just gave you about valuing Lido. I think that's one piece of the puzzle. But as we know, market prices, that's what's priced into the market today. But what effectively moves markets is inflection points or changes versus expectations. And I think one of the things I think about with Lido, there's a lot of things happening under the surface that gets me excited about the next catalyst for Lido. To me, I think you pulled the EtherFi chart. and you see something at $5 billion, and how's that trading that way? We don't know what AVSs are live today. There's some base staking yield that EtherFi will have, and maybe on top of it, there'll be some AVSs live, and stakers will receive some percentage of that security budget. You're basically betting on the future, right? And the current price of this, anticipates that the shared security budget and the amount of rewards being generated by those AVSs will be large. Now, let's go back to Lido. I think it's pretty obvious to me that at some point in the future, Lido— well, I don't think they will create a direct competitor to EigenLayer because I do think the projects are pretty close, but I think it's pretty simple for them to turn on an LRT or 3 different types of LRTs. So you're taking on much more risk, maybe you're medium-term risk, you're low risk, depending on how much slashing risk you're willing to take or what type of AVSs you feel comfortable getting involved with. So to me, what excites me about Lido is they have a really dominant market position at 70%. And thinking about the inflection point, highly likely in the next year or 2, They don't need to disrupt themselves. They have a market dominant position, but they will turn on an LRT in some form, and you'll get this effective rewrite, rerating that to me can move Lido 2 to 3x higher from where we currently trade today. So what you're seeing is a bit of the fundamental analysis and valuing it like a traditional asset, but also the expectations of the future and what moves prices on a go-forward basis. And the last thing I would say is just also thinking about capital flows. And to me, it's like fundamentals only matter to the extent in which they show up in capital flows. You could talk about fundamentals all you want, but until the protocol is effectively buying back its own token and it shows up in capital flows, or other investors are also circling around your valuation methodology and start buying the token based on it, It just doesn't matter. So, you know, I think that's one thing you've got to be like super, super thoughtful on when, when, when thinking about entering these positions.

Arthur, before picking on you for the same question, Sean, what is the Magnificent Seven that you mentioned?

Yeah. So thinking about just like when I kind of zoom out and think about like businesses, you know, especially on-chain businesses, like I'm biased. I run a DeFi fund. To me, I think about businesses that have durability and defensibility around their business model, whether that's things like liquidity moats, like staked ETH, it's like the predominant pair. It's been accepted almost as much as ETH itself. So we look at companies that mimic what you've seen in the Magnificent Seven in the traditional equity market are companies that have very high margins, are very profitable, and have big competitive moats around their business. So I know it's been talked about before on Empire and what's referenced as like SMELL. I think we have a different variation of what we would put in that of like businesses on-chain that have big competitive moats. But I think about things like Maker, things like Uni, things like dYdX, things like Lido, which to me represent the Web3 versions of the Magnificent Seven in sort of the Web2 world.

Smell being Synthetix, Maker. I think this was actually Vance maybe who coined this. I think it was Synthetix, Maker, Ethereum, Lido, and Link.

Link.

I wanna say.

Yep.

Yeah.

Yes.

Yeah. It's a good narrative for the, yeah.

I would just add like, we, I kind of would say like, we need, you know, that version of things to work out for a rise under Trey, for fund managers to exist. Because if not, it's like, why not just invest in Bitcoin? You've got a form factor in the ETF effectively. Eventually, the Ethereum ETF will come as well. If there's not outperformance and moats around some of these business models, then it's super tough. Then we're just playing the We just need to be early game and just get in early, launch at a high valuation, get out.

I mean, I've brought this up on Empire numerous times, so listeners are going to be sick of hearing me talk about this, but like, this is what we think about it. So we have this, like, we have Blockworks research platform, right? So, and you can see like these metrics that you can't find anywhere else in the industry. Like we have the full P&L of Maker with like where all the revenue comes from, like entire income statement. And we're like, oh my God, this is like incredible information. You can look at like DAI metrics, you can look at like all the real— you can look at like all the RWA information, you can look at Spark Protocol. Like we've got all this amazing information. The question is, does it matter? Does it move? So like Maker today is doing something like 40% of the fees in DeFi are going to Maker. Does that move the token? Arthur, what do you think about that?

Yeah, so I think that this one unfortunate big picture situation is the last 10 years, the market as a whole generally like growth a lot more than value. And people see DeFi, especially the DeFi, so-called DeFi blue chips, as more of a value play than growth play. I mean, there are exceptions. There are some DeFi protocols that show a lot of growth, but those are the exceptions. So I think for Lido, most people see it as a value play. And the problem of value play is people do not assign a very high multiple to it. While EtherFi, because they are still at a relatively low, um, in terms of the market share and everything else, they are perceived to have a higher growth potential. So people are willing to assign a higher multiple to whatever revenue, um, and the TVL they are having right now. And obviously, again, we mentioned that the float is a lot lower, so it's a lot easier for market to support like a $4 to $5 billion valuation for EtherFi versus 4 to 5 billion valuation for Lido, where more than 90% of Lido supply are already circulating. And another thing that I think is also like, I think, um, Matt Levine, uh, in his newsletter have also mentioned that we can't enter into a situation where fundamentals set the floor for evaluation, but that actually doesn't set a ceiling. So that creates a situation where for certain assets that the market is super excited about, the people are really— the ceiling will go up. Um, yeah, so you— we can argue that the EtherFi will have a lower floor in terms of the valuation than Lido, but people are not looking at the floor right now. People are looking at the ceiling of EtherFi. So in the short term, until more and more supply of EtherFi is being released to the market, you might see this so-called mispricing sustain for a pretty long period.

Yeah.

Um, and also I, I think that in general this market doesn't have that much liquidity, um, to support, um, more than 50 assets to trade at more than $10 billion, uh, circulating market cap. I think this, at least this is an empirical observation, the market simply doesn't have the liquidity to support that. So adding that, one month ago somebody also pointed out the observation that the peak of the valuation ceiling, even including the new launch, can go recently, uh, it's like $25 billion excluding Worldcoin because of the flow is even like less than 5% or like 2-3% kind of flow. Um, yeah, I think that at least empirically, uh, we— the market right now, beside Bitcoin, Ethereum, Solana, uh, and probably some of the legacy dinosaur coin like XRP, we do not have the liquidity to support any new coin to go above $10 billion in circulating market cap. And above $25 billion in fully diluted valuation.

You agree with that, Sean?

I think that's probably right. I am worried about the amount of unlocks and inherent token emissions coming into the market over the next year to 2 years because of this dynamic that we're talking about, where only 20% of supply is being released. If you look at the total aggregate amount of institutional capital in crypto, I would say it's 10% or less of proper institutionally organized capital. And you could argue retail in crypto is generally smarter than retail in other markets, which I think is correct, but it tends to be more mercenary, not long-term capital. So I think it's really tough in that backdrop to support valuations north of what Arthur alluded to. So I would say loosely, that's probably correct. And it's a function of one, just how early we are in this space. And people are still figuring out what valuation methodologies to be using. And as we talked about, varies depending on the asset we're talking about, whether it's a layer 1, a DeFi protocol, or, you know, an application. So there's just confusion around that. But just the, you know, more retail capital and then just like fragmentation of just interest. And it's really tough, like when you're seeing the proliferation of more and more projects launching, like how many LRTs do we have? Like I've probably seen a very similar pitch, you know, between Kelp, Puffer, EtherFi, Swell, like we have 10+ LRTs that are launching to the market. Can the market support like 10+ $5 billion EtherFi, that feels very ambitious to me. So I think it's tough. So I am worried about not just the launch dynamic, but the emissions that are coming to the market over the next 1 to 2 years, because it just doesn't feel like there's enough new capital coming in to support it.

Yeah. And also, I want to add that I actually pointed out this issue 2 years ago, And unfortunately, it hasn't changed. Uh, is the crypto capital market have actually, uh, front-run the, the phase of market development. What I refer to this in a traditional financial market, um, we— the private— the emergence of a private capital came pretty late. Actually, it was the last bunch of players. You actually started with, um, obviously every market started with heavily retail-dominated market, as is US stock markets 70 years ago, 50 years ago. Then what happened? You have the professional investors that come into place. Who are they? They are the mutual funds. Um, they were ever active in the public market. They were doing the stock picking. If you look at the legendary investor 30 years ago, 40 years ago, they are all like the public market legends like Warren Buffett, uh, Franklin, uh, there's a few others as well. They're all stock pickers. And the, the success of VC and private equity came last. And obviously you also have hedge funds that came after the mutual fund became successful. But in crypto, we actually completely skipped over the formation of mutual funds. So there was a very under-allocation into public market investors, pure public market investors, except for retails. You obviously have a couple of hedge funds here and there, but hedge funds are not long-term holders. They usually trade in and out. The average holding periods are like weeks to months. Nobody's holding a position on like months to years. I would say yes, there is. We are seeing more and more of them coming out. But if you talk to any institutional investor, they all overwhelmingly invest into venture fund than to like a public fund, like more like what us and Sean are doing, like more medium-term kind of like a public market-focused fund. It is, uh, I would say that the split of allocation of capital is probably 80-20. 80% are going into VC and 20% are going into public market-focused fund like us. And even, I mean, granted we know that some of the big VC, they all, they also buy from the private market, but they do not look at it from like a public market guy lens. They do it on a deal-by-deal basis. Okay, I like X, X, and Z, they bought tons of Lido in 2022, but they don't really like, you know, actively manage a position. They would just done the deal, put it, I'll look at it 3 years later, 5 years later, whether I should sell or not. So you, you don't have— it doesn't help to encourage this kind of efficient price discovery in the public market. You have retails versus hedge funds, some smart money, and the VCs selling on the market to cash in their 10 to 50x returns. That's it. And the founders Yeah. So, I do think we need more and more of these public market-focused professional investors so that market can become more efficient. I think it is happening, but I think the ratio is still not at the level where we can catch up compared to private capital.

Yeah. I mean, I just think it's a sign of a growing industry. I'm seeing a lot of market-neutral or delta-neutral hedge funds launching in the industry. Where they're traditional capital markets guys coming in just saying, this is an inefficient market. I don't give a damn about crypto assets. Like, I'm just going to try to launch like a market-neutral fund. And at first I was like, man, that is like about as left curve as you can get. Like, that is just— come on, guys. But— and it— and I still actually kind of believe that. But also it's a really good thing for the industry to have folks like that coming in trying to help the help the market find like more of an equilibrium price. So now would I be in crypto trying to make like 15% a year? Probably not. But yeah, what else?

What else?

I don't know.

Can you guys share what else you're invested in right now? Is that like a thing that you can talk about publicly or no? I'll take the deafening silence as a no.

No, no, we can talk about it. Yeah, Sean, you probably— yeah, you can go first.

We, we, we can talk about it with the caveat, obviously, that you always put in every show, you know, like nothing, nothing here is financial advice. Um, uh, because we are a registered SEC investment advisor here, here in the US. So obviously my compliance officer, uh, heavy, heavy, uh, disclaimers on—

like, Sean, you did so well on that podcast until you just had to go pump Maker's bags. Just kidding, none of this is financial advice, you know the deal. Yeah.

All right.

How, how, how'd you know about the position I was about to talk about? Uh, so what's, what's most interesting, cause like we, we kind of straddle both worlds. Like I do do some early stage pre-token launches, um, which I would say today are mostly focused on burgeoning DeFi ecosystems outside of Ethereum. Cause when I think about Ethereum in DeFi, the core building blocks of stablecoins, borrowing, lending, Perps, decentralized exchange, to me, there are ossified winners within those spaces. And yes, we're invested in many of them like Uniswap and Lido, and I could give you our Maker thesis. I would say on the pre-token launch side, I am a believer, despite everything we talked about of, there will be— I think it's indisputable we are in a multichain future. And DeFi is sort of the lifeblood or lubricant behind all these other ecosystems. And I think about just more types of assets coming on-chain on other layer 1s. So I am excited actually about the Bitcoin layer 2 space. I do think that will usher in new DeFi protocols, things like Bitcoin potentially having a stablecoin on its rails. Things like native yield on Bitcoin, the ability to borrow and lend. In the absence and collapse of Genesis, there's still a big gap to be filled. That was a $100 billion-plus market. I think we could do it better using the power of smart contracts and what Ethereum has done. We're way further in the scaling roadmap and being able to import some of the learnings around ZK-proofs and optimistic rollups into the Bitcoin ecosystem is very real. I think There is actually tremendous demand you're seeing with Ordinals and Runes to have activity on Bitcoin. So I think about a robust DeFi ecosystem developing on Bitcoin as some of the earlier stage stuff I'm interested in. Yeah, I know I've talked to you at length also about the Filecoin ecosystem. When I think about probably one of the leading DePIN architectures, supply side for storage has been built out. With the advent of the FEMs, the ability to actually have smart contracts on top of Filecoin. Um, we're investors in something called Glyph with, with Multicoin. Um, and I'm very excited about the ability to sort of connect storage providers, uh, with idle Filecoin holders who are looking for yield on their assets. So very efficient capital markets in Filecoin. So we think about like basically solving first order problems of these new ecosystems. Similarly, on Avalanche, I personally am of the belief that Avalanche is a more actionable version of what Cosmos is trying to implement. So we're investors in something called GoGoPool, which launched, which is another liquid staking primitive, which just makes it much easier to spin up your own sovereign subnet without the same level of capital cost upfront. And like I said, liquid staking is proven, like it's just, you know, a much more efficient use of your capital. It allows you to then do more with it after. So kind of replicating that playbook of liquid staking across a bunch of different ecosystems has been something that's very interesting to us. So I would say on the, like I said, on the earlier stage front, very interested in the burgeoning ecosystems of DeFi and other ecosystems. I am actually like, I know this is something that's been talked about at length, but also we haven't seen demonstrable evidence of it working, but I don't think it means it won't work. I do think there'll be permissioned versions, whether that's Layer 2 permissioned versions or permission protocols of the same things we see work in permissionless open-source DeFi. Yes, Aave had a run at it, Compound had a run at it, but I'm actually of the view it's probably pretty early. A lot of the tooling was not yet in place. I do think even like, it may be heresy to say this, but things like rollbacks on a layer 2 in a more institutional version of a DeFi protocol actually might be the right way of doing things. So a permissioned KYC version of a layer 2. And why now? To me, it's like we didn't have the building block of stablecoins here before, like the proliferation of stablecoins, how widely they're used. $12 trillion in settlement. And we just have way more yield-bearing stables. We have more real-world assets coming on-chain with things like Biddle and what Centrifuge is doing with some of the private credit. So there's just more assets to trade today that potentially can be traded on a layer 2. And I do think, at least if there's KYC AML in place, for the vast majority of institutions, they will actually be able to play in that sandbox or begin to explore. Today, without some version of KYC AML, super tough for— definitely no bank is going to get compliance approval to participate in DeFi. And only those who are playing on the forward end of the risk curve and some of the more Chicago trading shops are willing to experiment with DeFi. So I do think that that is a narrative that will come back despite people having a run at it to varying degrees of success.

Yeah. Arthur, I'm going to adjust the question a little bit for you. So when I think of Defiance is like actually when I think about the wealth of a lot of the venture firms in the industry, a lot of them were made on the back of like 2 to 3 bets. Like there's, I don't want, you know, there's one or two venture firms that made most of their money on NEAR. There's a few that made a lot of their money on Synthetix and Chainlink. There's a few. And when I think of Defiance, it's probably Aave. Just correct me if I'm wrong. Aave, Synthetix, and Axie. Would have to be my, like, the overwhelming portion of Defiance Wealth and AUM at one point in time came from those 3 bets. So A, I mean, correct me if I'm wrong, but B, when you, like, what maybe 2 to 3 public market investments do you think could have that same impact for you in this cycle?

Yeah, that's a tough question. We We've been thinking very hard as well, and I think you're largely correct. I think that Tree Investment was one of our best investments in the previous cycle, in the previous fund. And I think this cycle is harder, and I think that's the honest answer. Um, I think that the market have got a lot more efficient. During the 2021 cycle, we attracted a lot of the smart and bright people in the space, uh, there is a lot more— every different sector, they are very smart people paying very close attention to it right now. So I think it is a lot harder to find like a 100x, like a 50x kind of publicly liquid play right now. So we are actually— a lot of our time right now, we actually spend on help thinking there's something that we think that is actually undervalued by a factor of 5 to 10 times. I think that is a lot more achievable. And I think this is really where our liquid venture thesis comes in, that we are actually— that's the thing, right? A lot of VCs, they probably wouldn't really care if they can only get like a 5 to 10x return from the point of investment, unless you're like a big fund, because it's not enough to carry the loser you have on other investment that go to zero or just like breakeven basis. But as a liquid fund, because we are able to turn over the investment within like less than 2 years or even less than a year. We are happy with like a 3 to 5 times or even like between a 5 to 10 times return is actually good enough for us to underwrite the risk. Um, so we are a lot more focused on these return sectors where we get like a 5 to 10x within a 1 to 2 year time frame. Those kind of opportunity I think is a lot more available in the market right now. And in that sense, uh, right now I think there's the two sectors that we think that will continue to surprise to the upside. One is Web3 gaming. The second one is DPIN, Decentralized Physical Infrastructure Network. Gaming because it's still controversial. I think that there was a lot of information asymmetry, a lot of misunderstanding, but it also has been proven to be the sector that can generate one of the most cash flow and also are able to bring some of the best onboarding tools for masses into crypto. But I think the game that takes off probably will not be what we have imagined in the past. I'm leaning more and more toward that you cannot be skeuomorphic in your product design principle in crypto. You can't just— because I think that that historically have worked very well in the Web2 world. Like, okay, whatever works in the West, in Silicon Valley, you copy paste it, put it into India, put it into China, it all works, right? They all make tons of money. But in crypto, a lot of very bright people have attempted that. And somehow most of them actually, it doesn't work. I mean, just to give an example, no finger pointing or whatever. But I think that we have seen actually at least 5 extremely high-profile, successful Web2 entrepreneur trying to do a Web3 startup, crypto startup in a skeuomorphic way, and it doesn't work. And, you know, it ends up being a disappointment. Like, for example, one of the pretty high-profile Solana NFT marketplace, I shall not name it, I don't think anyone is talking about them anymore. And it was, the co-founder was one very famous Web2 entrepreneur that exited a billion-dollar startup. And obviously that's not the only example. You also have Moonbird. I don't want to go into the details as well. Accenture, right? There's so many of them. So I am getting more and more bullish on Web3 gaming that is non-skeuomorphic in terms of the design, like something like a Pump Bot Fun, Fantasy Talk, this kind of thing that's really applied to the small group of extremely enthusiastic players and users and expand from there. I think that is something that will create more success in the medium term. But most of these are still in the private market side. We are not seeing enough of that in the public market. But on the public market side, we see some games that have, I think, have proper traction, are actually playing out exactly like what we have described in our Web3 gaming thesis described 2 years ago. I think Pixel is actually doing very well. I'm not sure why market is not paying enough attention to them. They have consistent 700,000 to 800,000 daily active users. There's some incentive component, but it's not like Axie last cycle. You can't really make a living out of just playing the game. And I've known a lot of the non-crypto native people playing the game just for the sake of playing the game as well. Yeah, so These are the sectors we continue to be excited on. And I think this is something from a non-US perspective that is a huge push factor in Asia right now to Asian gaming entrepreneurs to build on crypto. Because, for example, the China side is ultra-competitive. They are restricting from publishing a lot of the games for various reasons. They cannot get the license or the content censorship, et cetera. So to them, coming into Web3 where such restriction doesn't exist might actually be a better area for them to focus on. And actually, this is like a thesis of Folius Ventures, a very good friend of mine, Jason Yanowitz. That is most of his thesis. Bright Asian entrepreneurs are going to build something in Web3 because they can't do it in Web2 space. I think this is something that a US-centric guy usually wouldn't observe because you don't really have that issue there. Another side I think Deepin is, I think when it comes down to first principle, this is actually what crypto economic incentives are best fitted at, to bootstrap a network that would otherwise not exist because of the existing incentive structure or market structure. Like what Helium does, I think it's been well popularized. You use a decentralized peer-to-peer network to bootstrap an infrastructure that would otherwise be too expensive for many centralized single party to bootstrap. But you use token where everyone can participate in the upside. So most of the DPNs are using the same principle to bootstrap a certain network that would otherwise not exist just because the incentive structure doesn't make sense. But obviously we are going to see a lot of failure there, but I think some of the winner there are going to bring like a $100 billion outcome. Yeah.

Arthur, I have a game pitch for you. Here's the game I want to see built, which is I like, like old games, like chess and like I'm not a big player of like Call of Duty or anything like that. I like, like, you know, Tetris and chess and games like that. What I want to do is be— what I want to do is be able to wait to play a friend online. Like, I want to be like Sean, like, I'm challenging you to chess and be able to bet like I bet one of my pudgy penguins, he bets one of his pudgy penguins, and then you let everyone on crypto Twitter watch that game and the crypto Twitter crowd can bet on us. They're like, they can bet on like me winning the chess game. They can bet on Sean winning the chess game. Whoever wins that game wins the NFT. That's my, that's my pitch for you. I honestly, if anyone's listening and wants to go build that, I would probably fund that. I really like that idea.

So it fits in. It's not skeuomorphic, Arthur. I think that's quite, quite novel.

Yeah, I know. I think that actually, um, instead of betting, just create a meme coin. Because meme— why, why meme coin take off is you have limited downside. You lose all your money, but you have unlimited upsides. They're actually better than account, like a, like a street card betting game when your payoff is actually limited. So meme coin take off because there's no limit to the upside.

Yeah. All right guys, I gotta jump. This has been awesome. This is, uh, I feel like there's a lot that we didn't I wanted to talk about, didn't get to talk about, so we'll have to have you guys back on for round 2. But this has been awesome. Arthur, Sean, appreciate the time.

Thanks for having us.

Yeah, cool.

Nice. Yeah, I know.

Everyone, Jason here. Thank you so much for watching today's episode. Wanted to take a quick second to thank today's title sponsor, Arbitrum. We know you are tired of on-chain experiences that have unaffordable fees and frustrating transaction speeds, and that's why we partnered with Arbitrum. You can experience frictionless trades, lightning speed, and lag-free transactions, all for pennies per transaction. Explore Arbitrum's expanding ecosystem at portal.arbitrum.io. That's portal.arbitrum.io. See you for the next episode.