The Future of Crypto Innovation, Investing, and NFTs - TOKEN2049 London 2021

hi everybody have you ever invested in crypto before if not why are you here okay so today we're going to learn how to do it properly from an actual vc who has been investing in the space for a number of years and i'm going to go through a lot of hard questions and the idea is so this is somewhat participatory is for you to be also thinking through as this gentleman here starts talking you through the logic of why our way not to invest in various different types of asset classes this actually might be the most practical session you've had all day because it should be applicable to your own lives if you're here at this conference so let's begin anthony tell us who are you and who is innovating capital awesome yeah so innovating capital is a tech fund we're based out of new york we have three books of business traditional venture platform investing and digital assets which is what i run we launched back in 2016. prior to that i got involved in this space actually from the angle of a developer from the technical side of things originally from san diego but yeah i mean you know we make pretty concentrated bets in the sector across all aspects of the ecosystem um you know from injector protocol to solana to you know pastel a business a business that i've you know since become very involved in yes and we're going to talk a lot more about all of those but let's go break down the overall market right now so crypto market cap is hovering at what two some trillion dollars this doesn't even include the nft market cap which is seems inflated to me but we'll talk about that too um how do you go and look at the market today how do you break it down i mean or do you believe that layer one investing is still the way to go do you think that there's money elsewhere yeah i mean look i guess you know let's just take a quick step back here right it's 2021 public equities are ripping you know privates are ripping crypto's at all-time highs you've had a period of you know monetary and fiscal policy that have really encouraged low interest rate environments and that's really contributed to just an inflow of capital across the board right so you know from our perspective what's important is that the market doesn't get complacent right now right in the sense of it's easy to get capital capital is cheap you have behemoths like the kkrs of the world tiger global right that are starting to pour in capital just this year alone in the blockchain ecosystem you know we've had you know 20 20 billion plus of investment last year it was 2 billion for the full year so we're seeing a 10x just this year through you know year to date right the second quarter had like 6.9 or something billion dollars of capital inflow if you don't even include the block one deal so it's crazy it's staggering just kind of the level of institutional funding and access to capital that you know we've seen just given some of the more bigger markets and so that's flowed into crypto correct higher global which typically invests in either very large private equity or when i say growth stage vc i'm talking about like just before ipo right right it's a near shore bet that's what they do and now they're investing in so they've come around they've come downstream right so they've come downstream like you said public equities ipos pre-ipos you know late stage growth secondaries traditional private equity and they're now seeking some of the alpha and also you know finding opportunities for disruptive innovation in some of these smaller you know more nascent asset classes one of them being you know private blockchain investments so why why would they invest this so again take me i'm tiger global why am i investing in this when i have i'm assuming umpteen opportunities to invest in the space um why are they investing in a rounds right right i mean first and foremost from their perspective a lot of these platforms you know there's a couple angles here right first of all it gives them optionality you know for them writing you know a 10 20 million dollar check is a drop in the bucket but having the optionality to come downstream and to invest in early stages of these projects and then double down triple down quadruple down on the winners as they basically continue to grow has been a tremendous opportunity and you know they've been crushing it in that aspect of things you know second there's a lot of alpha to be generated at that stage of the market you know with that though comes substantial risks and whatnot all right so again because we only have so much time let's talk about when you're thinking through an investment how does it work so let's talk about layer ones for example this is where a lot of the value currently sits in the top 100 coins in coin market cap you guys made early bets on solana walk us through kind of the thinking and how you decide to make a bet on something like solana and kind of like how does the math work or at least what's the logic how does that flow yeah i mean look obviously the layer one space has become very crowded and i think what's important to understand is that broadly speaking a lot of the layer one platforms out there are general purpose built layer one applications right the ethereums the polygons the solana's of the world the general purpose built for smart contract put contract based apps to launch on top of speaking specifically of solana they had a very kind of you know differentiated technical component at the time they were using something called you know vdfs and kind of you know proof of history to develop a single state single shard but you know put that aside they had kind of found a very differentiated factor about how to actually build a blockchain i mean this is back in uh 2018 right and they've executed on on all of that today so you know from our perspective it's finding the technical the technical differentiators to achieve you know obviously lower reduced fees higher transaction throughput but not necessarily just transactions per second but the quality of those transactions what's the intrinsic data associated with those transactions where you're not including things like a handshake protocol or just some sort of you know ipfs pin right um so that's very you know something that's really important for us as well you just just want to make sure i heard that right you use dismiss handshake protocol no not handshake the protocol got it a handshake protocol okay just making sure it's clarifying for for the audience here okay so solana you believe in it's got a hell of an ecosystem right now it seems pretty sticky asking you a serious question can new layer ones enter the space or at this point is it overly saturated from my perspective i definitely think there's opportunity but i find that opportunity to be in what i would view as purpose-built specific layer one block chains so not necessarily another general purpose smart contract blaze based blockchain but something that's coming in and solving a very specific problem and layer one purpose built blockchain for the sole use case of you know say nfts something that has you know permissionless on-chain storage that can actually have you know application-specific features associated with it and you know granted there are trade-offs for that right you might not necessarily get the tps of a solana but you got probably you know more redundant storage better uh you know better storage solutions and some of those features that are intrinsically uh what i would say very decoupled from a lot of the l1s out there okay so there's a diff totally differentiated not only feature set but niche and therefore ecosystem it might be going after and value could potentially accrue to the token behind that ecosystem exactly okay exactly so another there's basically two ways where tons of money has essentially come into the space um and grown over the last couple years nfts we're going to talk about in a minute but yield farming slash d5 these things are relatively interrelated can you walk you walk us through kind of how you look at a defy overall and be your stance on yield farming and should people in this audience should they be doing it should they be doing it i mean look that's that's a loaded question i uh you know obviously you know can't sure either way i personally am not in the business of of you know yield farming there's a lot that goes behind it you know that and that's not to necessarily be saying that staking or you know delegating is wrong per se but the way yield farming kind of is now in its nascent stages is you know basically i you know i pull x token you know for y token and i get part of you know this lp token back and then i go restake that somebody else and you know now i'm just basically susceptible to impermanent loss and spot rate risk across the board you know it's harder for me to actually understand what the actual financial visibility is of those future cash flows and yields that come through so you're saying it's hard to model the the actual returns like the risk-adjusted yields exactly exactly you have the implied yield at the time that you actually you know make the transaction itself but that changes you know secondly every single minute right and then you have the spot rate risk associated with that so if i'm basically pulling x and y to get z and then i'm repooling z to get whatever a b c it you know the the modeling run it just it's it's unpredictable right okay and there's enough risk already involved in this hyper volatile asset class right okay right so um d5 are you just overall up down and what do you see is the growth area within d5 uh you're very very bullish on d5 in general right i think d5 to me at least it's one of the what i would view as most significant applications of you know why blockchain exists to begin with um for the first time we have basically the ability for peer-to-peer transactions in a way that you know we never had before somebody sitting here can decide hey you know what instead of basically loaning out 100 bucks to or having a hundred bucks at my wells fargo account or put in some cd where i get you know 10 25 50 bips and they collect the spread for you know one and a half two percent i can do that myself now i actually have the ability to take you know maybe not inconsequential amount of money but a negligible amount and pull that stake that you know loan that out for the first time and actually you know start to see you know great returns so how are you last question on d5 then with nfts how are you more or less pricing or discounting d5 projects like i i would be worried about the integrity or security of a smart contract for instance it's it's a new type of counterparty risk how are you again as a vc who's active in the space how are you discounting these types or creating premiums where security actually is right so i mean i think what's important to understand too is you know every project is unique very very distinct the security risks associated with that are you know all very much must be modeled independently of one another right so for the most part though i think that you do get a certain kind of you know risk-adjusted premium in terms of what you're actually getting when you're staking in some of these projects right so if i'm if i decide that i want to delegate you know my inj to you know some validator node that's that's running right i'm going to basically clip some sort of incremental ing yield on top of that that i can continue to re redelegate and re-pool and i would say generally speaking a lot of that today it's not perfectly priced but does compensate for some of the underlying spot rate volatility risks some of the opportunity costs the security risks etc and if i'm delegating not even running the note itself i don't even necessarily have the high infrastructure costs anymore right so a lot of these d5 projects that make it so easy to pull i don't necessarily need to go out and spend you know hundreds of you know thousands of dollars on aws equipment to run some sort of specialized node or using one of these uh staking services or node running services out there exactly yeah yeah okay so the point is the cost threshold or the energy threshold to get involved in some of these kind of more complex forms of let's call it d5 participation uh that's that's gone down over time or for some projects it's yeah it's definitely dramatically gone down i mean a couple years ago the only way to stake or validate or run a super node you had to do it yourself or you had to find one of these kind of smaller pools where you had counterparty risk now right um so basically today like real counterparty rights real counterparty rights yeah right um you know today if you buy a token on binance um you can basically you know stick it directly there they're running a validator node as well so you're getting pooled to that specific validator node right and so it's an indirect way to get very very simple easy access you know or you can you know delegate it to binance or choose you know hobie or staked or whatever other validator is running and do it yourself okay well i we can't not talk about nfts so nfts have just been the 2021 story public equities it's been wall street bets in blockchain it's been nfts right where we've just seen enormous interest um almost out of nowhere so first um how long have you been betting on nfts and literally what is your investment strategy do you invest in nfts themselves directly do you invest in infrastructure do you invest in tooling how do you go and invest in this market right right i guess a lot to uh unpack there yeah i mean look you know from my perspective we're from you know from a fund perspective we're only investing at the infrastructure level we're not necessarily going out and speculating on any underlying nft collection you know not to say that that is you know not a yield generative activity as well but from our standpoint you know this is the best aspect to be in the market right you know we believe nfps are here to say uh we've we've seen tremendous growth you know they might not necessarily just be the form of digital collectibles right you could have nfts that are tied to you know credit markets financials real estate you know anything that's kind of supposed to be stale immutable you know you name it right and so there's such a massive use case for adoption in nft ecosystem but there's an inherent number of flaws and issues you know network congestion storage constraints rug pulls scams we've seen it so you know finding some of the layer one infrastructure aspects that can actually build on top of that solve some of these problems that it really gives you a you know more diversified bet on the broader ecosystem itself so you're taking almost a sniper rifle shotgun approach i don't know how you hybrid those things but to basically investing the entire asset class without investing in like a set protocol version of nfts exactly exactly i mean look there's so much that's happening in the market right from uh from dallas from you know sharding dow which you know from fractionalization right um to be able to actually go out and basically pull money together and you know go collect a cyberpunk whatever it is right crypto puck right so it's it's pretty exciting to see the amount of innovation already in the space that just is continuing to grow every single day so you invest in a ton of companies why are you actively involved in pastel of those i mean you decided to spend not only your money but your time on this why yeah i mean look the going back in time you know we started to invest in pastel back in 2018 when it was initially coming off the ground um and it really began with the team the team being you know at the time you had so many individuals in the space who were looking to just come in and make a quick buck these guys could care less about that right they're in it to basically actually build develop innovate and build highly disruptive technology that's here to stand the test of time so what exactly are you talking about right so what pastel is uh you know at its core is a fully purpose-built layer one blockchain you know for the sole use case of nfts uh we have basically a series of what i would view preeminent protocol standards that really are tailored towards the nft ecosystem uh you know one of them is our on-chain fully dedicated permanent you know lossless storage system another one is you know basically sense which is our new duplicate nft detection protocol both of these things are just incredible pieces of technology and what's great is you don't necessarily have to you know necessarily just be on top of pastel or run it you could be an existing layer to marketplace on ethereum you can tap into these protocols by you know using our mint functions um you could be another layer one blockchain and basically have a series of marketplaces built on top and still be able to have you know a degree of interoperability with pastel so you know the generally speaking over time when i when we first got involved in pastel it was very early in the space you had you know cryptokitties rare pepes etc you had a lot of marketplaces that were coming out but there wasn't necessarily the technology backbone and it was very clear you know that network congestion high transaction fees the lack of permanent storage the inability to have some of these custom purpose book features was going to be a problem that needed to be solved and it still is i mean it's amazing actually that for instance storage for nfts is still a problem it's it's can you actually describe it to the audience exactly what we mean by that like how much can be lost because storage isn't actually decentralized or permanent right so it go it really goes back to the smart contract standard itself so if i buy a nft on openc uh that you know leverages kind of one of the open zeppelin nft standards right um what am i really acquiring right i'm acquiring a smart contract with some sort of token uri and effectively you know i'm relying upon another third party in terms of the storage of that asset itself right and so that's there's a loose it's very loosely coupled in terms of the actual token and the pure underlying data that i think i'm acquiring so we've seen rug pulls scams you know most recently i guess that wasn't as related to storage itself but we've seen just a ton of involved apes yeah yeah okay yeah we've seen a ton of scams prevalent in the space and just honestly even just kind of erroneous issues right oh i forgot to pay for the ipfs bill and you know now basically you know my link is dead et cetera um you know so for us it was important to have something that tightly coupled the core intrinsic data of the underlying nft itself with a token okay and so like again as an investor why does value accrue to this network is it because usage of this network how does it work fundamentally um so effectively just in terms of like the token yeah so the way it works is any single time you know the the network itself is powered by just general nodes who are running the ledger um they obviously provide consensus to the protocol etc but a layer above that are you know what we call super nodes um they stake a certain amount of psl and they run you know high-powered clients right with sufficient amount of storage and compute right and so effectively any single time that there's any sort of transaction you know i want to mint an nft i want to basically run the duplicate detection protocol i want to store the nft right i'm transacting in psl itself part of that psl flows back to super node operators and part of that uses a mechanism called proof of burn which actually takes the psl out of supply so it's kind of like a shared buyback model if that makes sense yep okay so it's semi-deflationary in that so there's a yes there's a deflationary mechanic built into it as well as obviously the yielding mechanic to the supernode operators yep sounds a little bit like dash with their master nodes except very purpose-built right specific for nfts yeah exactly very interesting okay um so going forwards um you know you're you see nfts as a growing marketplace i've got to ask do you think that they are overpriced today it seems like every single celebrity is dropping a new nft every day and it seems like they're going to be dropping them not just on eth but on solana and then on cardano right um is are there too many is there is there an oversupply of nfts or am i missing it and it's bigger than any of us could have dreamed not to speculate on on price you know i do think that there's an oversupply of nfts in the ecosystem um and i do think that there's been some irrational exuberance in terms of acquisitions i mean you know you can have an nft that is literally you know somebody bought it for the same price without any concern that that same nft exists on solana and what other market does that exist right where you're basically you know you're taking the implied market cap of what it should be and just doubling it right because there's something that's like double counting because they're actually because they're non-fungible tokens so double counting is almost a problem right right almost a problem i would say it's definitely something that's you know pervasive and you know persistent in the industry itself um so i do think again there's a lot of collections out there there's a lot of excitement um do i when i look at basically the implied market cap of nfts in terms of you know what i see today there's no question i think it's going to be larger in the next five 10 15 20 years you know whether or not the value is going to be you know retained to some of these existing nfts is a different question yeah makes sense okay um and just because again we've only got one minute left predictions for end of 2021 i know it's extremely unfair but what do you think is going to happen between now and the end of 2021 that hasn't happened yet that hasn't happened hasn't happened yet i mean look that's that's a tough question there's there's so much got about three months yeah there's so much regulatory noise out there right now obviously um i'm what i'm really excited for and you know again you know not to speculate on price or anything like that i think we've made tremendous progress to date i think we're going to continue to see an inflow of capital from institutions that we haven't before i mean you know kkr literally just invested in and uh terrified capital right i mean that's crazy there's no way in hell that that would have ever happened you know several years ago so the market's really reached a point of of adoption of validation i think that's just going to continue to persist throughout the year okay so far more or further enhanced institutional capitalization of crypto and interestingly enough on what will end here i guess is that they're investing in the vcs who are intelligently deploying capital into the space so it's it's really kind of uh if if they're arming the vcs the vcs are almost forced to deploy that at least some of that into crypto yeah it's a bit of both right it's it's both direct and it's you know through limited partnership interest as well but yeah i mean tiger globe is very active in this space you know obviously we've we've seen investments from sequoia since day one andreessen just raised a new crypto fund so definitely a combination of both all right guys well thanks so much for uh for listening and thank you so much anthony for the master class david and anthony great job well done gents anthony just uh before we let you off how are you dealing with actually scaling your team i mean we've talked so much about counterparty risk and about valuing assets and we've talked about access to crypto but really how is it working internally at the fund and how are you dealing with getting the right hires at the right time are you seeing a real brain drain into the crypto space or are you trying to really find people that understand what you're doing and on our line with your mission um in terms of the fund or pat well i guess i can answer both on on the fun side on the fun side there's just been an influx of what i would say people that maybe a few years ago were a little bit skeptical in the space but very very much smart minded institutional thinking investors who are jumping and getting involved in the space so it's not as difficult as it is to find investment talent but i would say from a port code perspective it's been extremely challenging to find just extremely solid developers whether c plus golang rust whatever it is that's been almost impossible right um the supply is basically just dramatically low and there's just been demand you know beyond belief right you've seen hundreds of projects launching on the likes of solana new projects spinning up every day finding access to high quality developers i'd say is the biggest bottleneck right now yeah do you think that will get solved over time when you when you start to look at downstreaming into different universities and different courses different accelerators different protocols investing into uh coders are you starting to are you would assume in the future that that will level out right in any in any market right when there's a supply demand imbalance it tends to shift over time right economic incentives start to pour one way i think people will start to develop and get into the space because you know they're getting compensated at a premium for that so yeah definitely and david waxman and i've always said you are the uh pr to the crypto stars there's not one company that you don't touch how do you stay relevant because you must see your client base evolve and change and i'd love to see because you're at the cold front of new projects and new protocols have you start to see a mix in your potential clients and how do you stay engaged with you know the potential next five to ten years of a new protocol or a new dev or a new techie that you'll represent on the pr side well the well the companies in the space are 100 getting more sophisticated and not 100 per year it's like tripling or quadrupling per year they need more and more because for instance many of them are going public right now or are near going public and these ecosystems are now worth billions of dollars cardano chain link other organizations that we've helped launch today they have full-on industries in their own ecosystems uh and that requires a totally different level of sophistication of services which we're fortunate to provide well i'm glad that you put on a suit for today someone noticed that your tie was very uptight today but it's got a little bit loose by the time we have a drink later on it might be even around your head we shall see only if you do that to me so we'll we'll find out david it's a pleasure to see you up on stage great questions and also anthony all the very best of luck that was a great presentation and a great fireside chat thank you chance a big round of applause