"DeFi Investor Panel" - Kartik Talwar, Jesse Walden, & Linda Xie

panel um kartik is going to be moderating a panel with linda g and uh jesse walden linda is from scalar capital jesse is from variant two of the sharpest investors in the space so this should be a good one i'll let you guys take it away thanks ashley and i want to welcome linda and jesse um for uh joining us on this panel so uh we've kind of been doing a lot of these summits uh every friday here and uh a lot of them have been around showcasing a lot of the projects that are uh building cool things in this space uh especially uh today where we get to see a lot of what's happening on default and we really wanted to take a tiny slot here to talk about the other site that's also vetting in the future and that's some of the investors um that are not only just uh in this space and have been in this space for for quite some time but also uh the ones that are also participating in these things from the other side of this market and uh really kind of uh talking about what's interesting to them so what i wanted to do was kind of make this a very sort of casual conversation i have a handful of questions that are like really specific ones but overall i think this is more about just all of us just kind of sharing some of the things that we've noticed in this space uh over the past few months but also over the past few years and uh what i'd like to do is start off by kind of asking um jesse and linda to introduce themselves and just kind of talk about who uh who you are how you got to where you are and a little bit about your fund so let's just see you take it from here okay cool hi everyone um i'm jesse the founder of variant fund which is a new crypto venture fund i started earlier this year um prior to that i got into the space as an entrepreneur i started a project in 2014 called media chain labs which was frankly a little bit too early probably but we were aiming to build a developer platform um that would enable people to compose media legos like people were composing d5 legos today that was the idea um and after uh working on that for about three years the the company was acquired by spotify um and i led blockchain rnd there and shortly thereafter i joined andrews and horowitz um and helped launch the crypto fund there in early 2018. so spent the last two and a half years prior to variant with a16z um ran a16z's crypto startup school fairly recently and and then decided to spin out variant um to focus on early stage investing um so variant is a 22 million dollar fund that's sized for pre-seed and seed stage um hi i'm linda i'm co-founder of a crypto fund called scalar capital uh we invest in both early stage and also late stage but our specific focus is on tokens um i think that's something that's really exciting about the crypto space and having people from all over the world being able to participate in various networks um i first joined the crypto space uh in 2014 when i joined coinbase had a bunch of different roles there uh from working with uh regulators and law enforcement and later was a product manager working on compliance and fraud systems i'm just really passionate about crypto and i've just done a lot of writing in the space as well so um once i got deeper into that i wanted to kind of start a fund and get to explore more of what's happening in crypto and get to talk to really amazing entrepreneurs so that's awesome so um this is a d5 summit so i do have a lot of stuff um that i want to talk about with d5 but actually before that what i want to do is uh maybe just uh kick it off with a question around just how things have evolved from your perspective so linda you started scale capital uh nearly three years ago if i'm not mistaken uh and jesse uh for you variant was uh a fairly recent as in this year and uh kind of having sort of seen a lot of cycles in crypto from your perspective linda i'm actually curious if you're able to share some of your insights on like what the experience was like raising a fund uh back then and three years ago when people were just still getting used to what crypto is and kind of how that evolved moving forward and then and then maybe jesse you can sort of compare and contrast like what this was like earlier this year and we'll kind of go to the d5 questions after yeah yeah so when i was raising in 2017 this was pretty fresh off like the whole ico craze so i think there was a lot of people who were skeptical about crypto back then and rightly so um but i think a lot of my conversations within silicon valley were really positive and people understood the um innovation and just like long-term potential of crypto and so i found those conversations really fun and um and really engaging uh i spent a lot of time also talking to kind of more traditional finance folks uh like pension funds and endowments and that kind of crowd and the conversations were a lot more difficult um and so i i like over time was iterating all my conversations there and mostly like at one point was just like yeah bitcoin is digital gold and you know this is like that was like my main focus and one part that they did find really interesting was um there was a lot of conversation about price volatility during that time a lot of the traditional financial folks were just really concerned about how volatile things like bitcoin were and whether that was a good digital gold and uh so i would talk about the concept of like a decentralized stable coin and i would explain what dye was to them and a lot of them found it really fascinating like that was one thing that really stuck with them and i think that that was kind of their like ex exposure into like learning more about defined um that was kind of my trojan horse into having those conversations so yeah very different worlds and it's improved a lot since then but back then there was a lot of skepticism yeah i guess my experience has been pretty varied i i would i would sort of rewind the tape further back now so not just fundraising for variant but fundraising as an entrepreneur um trying to build a sort of a blockchain startup in 2014 um was incredibly difficult um there was literally at that time there were there were no dedicated crypto funds that's for sure and um for the most part there were no traditional venture firms touching the space um with the exception of the usv and andreessen horowitz and both of them actually ended up investing in my company media chain labs that's how i came to sort of know that the team at a16z um but i remember like back then um the the way i started that fundraising process was just jumping into the comments on usb's blog because they were talking about um dark web marketplaces and how it was so interesting that when one would get shut down a new one would pop up the next day and all of the sellers were there with their identity and reputation intact and that of course was because identity and reputation was tied to public keys as opposed to centralized identity and so i got in the comments i was like wouldn't it be cool if you could do that um that same thing but instead of for you know guns and drugs you could do it for like any piece of media on the internet so make creators discoverable through their work anywhere it was distributed and anyway that got us a meeting and got us um got a got a seat funding so that was sort of very serendipitous but trying to convince other investors at the time that that was you know that that was going to be the future we would all live in was was extremely difficult um and then i guess fast forward to variant today and um well i started fundraising sort of right um on the back of crypto startup school and that was in march and april which was also when covet hit so you can imagine trying to fundraise at that time was also very difficult um but i think um you know the the the fact that crypto bounced back pretty resiliently from um you know black black thursday uh actually ended up being tailwinds for the fundraise and so what started as a very slow fundraising process ended up um picking up a lot of momentum as people saw that yeah crypto really is resilient so i think linda to your point that you know you are having to convince people in 2017 that you know bitcoin is a reasonable store of value and that crypto's going to be around and stable coins are going to be a thing i think that's what pretty well understood now and was just reinforced by um by how things bounce back that's great i'll kind of do a quick follow-up to uh to linda's comment and i want to see if you uh both have any different uh opinions on it from your experience but scalar capital is set up as a hedge fund where you are in a way a bit more heavy on the liquid investing side uh but both of you are and jesse your front structure is a venture capital fund or vc fund and uh you are able to do equity and tokens as well but uh different priorities so i guess as you talk to uh your potential investors do you sort of see any uh themes or sort of different preferences where like they really don't want to stay too tied to like tokens because volatility or whatever reason but they are still interested in crypto because they're betting on companies in this space like how does like the long term versus uh trading sort of differ for each of you uh yeah for the hedge fund side i think when people hear the word hedge fund they have these like impressions of that it's maybe more trading focused um and maybe there's more hedging involved so i think that like having conversations as a hedge fund with a long-term focus doing really early stage investing and liquid coins as well i think that was a little confusing for some people at first to like really understand the concept behind that um and especially among the more traditional financial folks they wanted um the liquidity of a hedge fund so being able to like come in and out of the fund whereas when we were presenting them with these like quite long lock-ups and withdrawal periods i think they were really like thrown thrown off by that so that was like a more difficult conversation but in silicon valley like people kind of treated it pretty normal uh because at the time uh polychain was like one of the main examples and they were structured as a hedge fund so it was like pretty common to just be like oh yeah okay so it's a crypto hedge fund um but nowadays um i think that as long as you have the right structure and terms in place and you're attracting the right lps you can really be long-term focused with either structure but definitely like pros and cons to both yeah i think the reason so varian is structured as a venture fund but it does also invest directly in tokens um and and all the lps in the fund are on board for that and the expectation is that many most most all of the equity deals that we do usually done with a warrant for tokens um so you know the assumption is that and the thesis for the fund is that many crypto startups will plan to exit to their community of users and that is likely best accomplished through a token um so the expectation is many of the equity investments will become tokens over time um and so while the portfolio may start more equity heavy it will it will almost certainly end uh very token heavy and inves all the investors um committed to variant are locked up for 10 years minimum um and so by default like it self selects for uh for lps that are long term oriented and sort of doing this um as a a game that's going to take a long time to play out no that that that's uh extremely insightful so it's going to actually suck uh segways right into uh the question i had for both which was uh we are clearly seeing a a trend in ownership distribution uh like people exiting to their communities people wanting to get their communities involved uh and it's taken multiple forms uh kind of just token sales in general like dows we've had just protocol switch into these types of models jesse since you're uh this is sort of one of the primary thesis behind the fund i'd love to kind of get your take on what this means to you and sort of how do you think this kind of rolls out to a larger scale over the next few years and and i'll have linda join in for any any additional comments sure so yeah i think um what's happened in the last uh i guess six months or so in in d5 world is you know you've seen a bunch of projects that have established some early signs of project product market fit um launch tokens and effectively give those tokens to people who actually use the product and that is um what i call sort of progressive decentralization um i think yeah compound was probably the first to sort of execute that this playbook um earlier this year and now many others have fallen too but i think if you zoom out and look at sort of the bigger picture of crypto as a whole like this same pattern has been playing out for for some time where um you know bitcoin and ethereum were the first examples of projects that were built um you know and and now are operated by a community of users that are rewarded for doing so and by you know by having a direct ownership stake in the network that was either earned or bought um but you know that incentive alignment i think is a very powerful new tool that that cryptos sort of exposed um and we're now starting to see that um that economic model applied to um more you know more verticals starting with d5 but i expect over time you know this the same model is going to become manifest in other kinds of marketplaces that are perhaps like more consumer-facing um and so i'm really excited to see to see that happen yeah i completely agree really excited about that um i think one thing though that i would like to see more teams iterate on is looking at the past examples of ownership distribution and really seeing how effective they were and trying to improve from there so i think like um you're starting to see the start of that where like people are adding more um like vesting on on the rewards like giving like past user distribution so you can't just have only speculators so i would love to see just like more people experimenting there and taking lessons learned from that and then one thing because i talked to a lot of teams where they are like oh yeah like our plan is to just um add liquidity mining or our plan is to just like distribute these tokens and i think my only like thing there is just to make sure that this um is something that would actually really be good for your product because once you like exit to the community as jessie says like you can't really undo that that easily because now you have everyone owning your product and so making sure that it's the right time and it's also the right reason you're doing this uh i think it's really important to think through as well yeah nicely strong agree with both of the points i think i think like one thing to just add is like each iteration of um uh or each time a team has done this in the last six months there's been a lot of iteration on the design and so i'd say like um where we are right now maybe by analogy is sort of like i don't know in the early 2000s like the web is just you know starting to become a mainstream thing and um there's no best practices around like growing network effects but paypal stumbles on this thing which is like hey if we give twenty dollars um to each of our users um for signing up and then we do this referral program we can grow the network really quickly um and then that sort of becomes like a best practice and many other you know other startups sort of follow suit and riff on that model i feel like we're in a similar spot right now where um we're starting to see the best practices emerge but we like we haven't really um sussed out exactly what what they should look like yet but that's that's so that's like both of the challenge and a really exciting opportunity that i think we're we're going to figure out in the next couple years no for sure um so so maybe like uh this is something that uh i guess i i'm not i hate to be on the spot but i feel like this is worth digging into but it's one of those things where do you kind of foresee this as a way for us to now represent what we already know works in in the web 2 side or like just how people think about customer acquisitions if you're running a sas business or any other website the paypal example you gave and just porting those exact models to crypto do you think this also enables a lot more unique kind of either impossible or unheard of ideas back then because of the lack of technology that are just not uniquely enabled with crypto or tokens like how do you feel like that sort of converges uh and and if you think it's it's gonna be something new like do you kind of have any ideas on what that may look like i definitely think it's gonna be something new because um i i i sort of see you know tokens i see them as like packets for value right like so you know packets are standard way of moving data and tokens are a standard way of moving value instantly to anyone anywhere in the world so i think um you know paypal uh enabled electronic value transfers but it's sort of constrained by the legacy financial system and so it was impossible and it's still impossible today for web two companies to easily distribute ownership value of their their product or services to users like you can't pay for equity contracts for people all over the world at internet scale but you can move tokens in that way so i think that technology unlock will lead to sort of organizational business model unlocks as well yeah i completely agree i i'm really excited and part of why i i'm joining crypto is because uh i'm really excited about all the unique use cases and ways of ownership that happen only with something like having a token where anyone in the world can actually own and participate in it so i'm hoping that it's going to be completely new absolutely i think one thing we haven't seen uh i guess effectively in what two yet is uh community operating uh a project at scale um co-ops have existed for for centuries and uh we've seen social networks exist but they kind of just tend to uh become smaller groups that kind of exist in their own universe but i i guess do you do you know that or do you know if it's like how do you kind of think about measuring like when a community is ready um to uh sort of take ownership or be more active do you think it just ends up becoming a hierarchy again by default where you kind of trust some people to uh kind of own something or do you think we can actually get to a world where like hundreds of millions or thousands of people are just kind of contributing to make a decision or making something better uh so so for myself i i feel like um there are definitely decisions that are really crucial to the protocol that i think should have a really high quorum for actually um getting changed through this process so i wouldn't necessarily say like um like yeah those kind of decisions should be made very quickly by a community but i think that there are like smaller like decisions maybe day-to-day or treasury management at a smaller scale that i think would be awesome to have the community involved it's really hard to say when they're ready but i i think generally like going through phases and being able to prove some concept would actually be really valuable so like doing some um votes where the ramifications of it are quite small if something goes wrong and then seeing how that goes with the community and then kind of increasing the um the thing at stake uh over time and and just kind of gradually decentralizing the project yeah i think i always like to uh sort of reference the sort of organizational model of successful open source projects where generally there's like there's a core maintainer or group of core maintainers who like are responsible for a lot of the heavy lifting and then there's sort of a longer tail of contributors that sort of add um value on the margins but like you know don't you commit changes that like you know drastically change the code base so um i think it's it's probably likely that that's where um community-owned and operated networks end up too so so i think like there will be um like or i would go so far as to say like i think protocols that have um sort of strong leadership will be sort of most effective at like making impactful decisions um but the the key difference between a community-owned network that that has that kind of leadership and and say like a web 2 platform that has leadership through a ceo and a board is that um the users actually have recourse in a community owned network like so if the if the leadership starts to work against the will of the community there's something that that users can do um beyond just stopping use of the product they can actually you know remove those leaders and put in new folks so i think that's sort of the model that we'll likely get to and right now some of the challenges around that are figuring out how to incentivize um the the leadership to do the work because it is work to you know to have an informed opinion about how these protocols should evolve um and it may not be enough to simply say that you know well you own tokens you should you should um you know participate in a vote every tuesday like people may need to pay for that just like ceos and and uh you know people on boards get paid for their uh expertise absolutely uh no these are some super interesting perspectives and i think this is kind of the first time we get to see these things uh get executed at scale so uh that definitely excites me at least um so switching grace to d5 so um kind of taking from the investor perspective um like how do you each think about investing in this space uh as as investors uh like is it more about you kind of looking at what people are excited about and then seeing what's kind of the best thing in that space and sort of investing those companies or do you maintain an active list of problems that you'd like to see solved like uh independent of those answers like what's kind of exciting for you that you're either thinking about or would like to see more of in this space in defy so personally i i what i would say is i definitely look i definitely look to entrepreneurs um to like tell me what the opportunities are i don't um i don't try to forecast sort of what you know where the market need is so i'm i'm definitely looking for people who understand that um where the opportunity is and have a clear idea of how to capture it um the i guess um in terms of what i'm interested in um i think like one thing that's i was just talking about uh earlier today with someone was you know it's it's it is pretty remarkable how um everyone's still using metamask um and so this is not d5 specific this sort of applies all to all crypto and it's like metamask is great it's been around for a long time but it really hasn't changed all that much there's a few new cool features like swapping and it's been pretty um pretty much you know we're a lot mostly reliable and and status quo for a while now um but meanwhile like d5 has changed so much um and so i feel like there's a huge opportunity there um to sort of you know like move with the times and make d5 more accessible so that's something i'm i'm excited about um and i think others are too um yeah i i similarly i don't have like a hard list of things that these are the only things i'll invest and i think that especially in crypto if you if you do something like that you're going to miss out on a lot of the really creative innovations that would never be on a list and so uh yeah i have a broad sense and that like yeah i do think that like pretty much every um product within traditional finance is going to be ported over to d5 in a more non-custodial decentralized way um but then there's going to be a lot of things that get created that we have never seen before and that's the part that like really excites me um and something that i have been really excited by is um the idea of being able to have lending protocols uh be able to uh like lend to people who don't have large amounts of capital so right now like there's just a large collateral requirements for these lending protocols and rightfully so because the assets are normally quite volatile and so to make d5 more accessible to people who aren't just whales um we definitely need like more um like solutions to that so like decentralized identity reputation systems um but we also invested in a project that's doing a web of trust model so like being able to start small and having people like delegate their credit to someone else's is really exciting to me so that's kind of an area i want to see more expansion of and then just also generally really excited by porting over assets uh from like something like bitcoin to d5 and also tokenizing other areas real world items and being able to move that within d5 and be able to exchange it as well so um yeah a lot of really exciting opportunities right now no absolutely um and maybe kind of similar to that then i guess do both of you um agree that uh for d5 to really be successful it has to be in the hands of billions of people or do you think it still is a metric of a need and a problem itself but only for handful people because we maybe measure uh total value in the system or the amount of money being traded in and out or do you think it has to be consumer for this to really kind of be effectively called that this is working in is a bigger need so i'm not sure if mine's like contrarian in the space but um i definitely like separate like what i want to see versus what i think um can happen for it to be successful and i think that um like d5 can actually be very successful uh if it's not reaching the hands of billions of people and is actually just significant improvements to the traditional financial system on a more decentralized way people aren't getting their funds stuck in all these accounts there's a lot more transparency so we don't have another situation where like we have all these cdos and cds is floating everywhere and people have no idea what's going on so i do think that it can be very successful although like the part that excites me is when we get in the hands of people who have been traditionally excluded from the financial system and so i want that to be the case um but i don't think it has to be for this to happen um and it's kind of similar to how i view bitcoin and that um in the early days like i actually joined coinbase um in 2014 because back then it was like oh payments like everyone's gonna be paying uh for their coffee with bitcoin and then over time as that became like less and less feasible people kind of more talked about it as digital gold and now like more of the like kind of large institutions are are using this for their like capital balance sheet and you're seeing less of that like payments use case but i think that that bitcoin is still really successful in this manner it just doesn't necessarily reach what we had initially thought so i yeah i kind of separate those two in my mind yeah i i think about it similarly i think it's very likely the case depot has a ton of room to grow um one just serving as like a speculative casino to potentially getting to um a point where it is like you know servicing um financial professionals with with like you know a better sort of infrastructure but i think where it gets really interesting is when it does touch end users um or consumers and and that's because you know when to the point you made earlier linda i think like there's going to be a bunch of financial instruments that are sort of net new um that you know traditional finance types are not going to be the ones to invent but consumers will invent because they have these new tools that make it 100 times easier to create something like flash loans flash loans or yeah yeah um you know and i think nfts are sort of an early example in this category right like there's you know finance i think exists not in a bubble unto itself but to serve an economy of you know real goods and services that's the point of finance at least initially that was the point and um and you know so so yeah i think um you know traditional finance can move you know onto these new rails um we can you know have a very large casino speculating on crypto and using these new instruments but when there's a real economy of goods and services also running on on the same rails i think that's when d5 will really shine um and so like maybe maybe the to sum it all or tie it all together i would say like i think these are going to be three distinct phases and each of them point to it being bigger and bigger um than the one that came before so i think it's going to be enormous um and it's going to take time but i'm yeah i'm very excited about it also i think i think this is a really good positioning because it's not about a single end goal it's it is a transition into that much bigger opportunity and vision so um thanks for kind of pointing that out uh so we are almost at time so i have uh two quick questions um i'd like to ask before we end this thing um so linda you recently tweeted about uh just kind of all the activity that's happening on the layer two ecosystem uh and i'm curious gonna what are your thoughts on kind of how layer two sort of just gets introduced in the space and and also how that integrates into defy anything you kind of learned from that research and just kind of going through all that material on what's happening in there too uh yeah i'm really excited by what's happening on layer two like i have been using some of the different uh solutions so uh sent tbtc using zk sync it was um it's almost instantaneous it costs only a few cents so it's pretty exciting to see that and then i've been using xdi for playing dark forest so there's there's all kinds of solutions out there and for me it's like you really only need like one or a few to actually be successful and work to have scaling and d5 so i'm very excited by a lot of different solutions and i mean it seems like with optimistic and zk rollups like that kind of is at the forefront right now they both have their pros and cons and i think that both will be used for different use cases and what the entrepreneur prefers so i'm just happy to see there's so many options and there's not just like oh this is the only thing we have um yeah same same here i think uh uh i i i like using analogies so apologies for if that they're imperfect but the the early web was a layer of protocols um or you know layer cake of protocols right then there was a time mark andreessen recalls that where uh people were saying http was going to expand and take on all this functionality and and sort of like scale up throughput and and all these new you know privacy and all this stuff but that's of course not how it happened like there's http and imap and pop and ssl and and all that and all the rest so i think like yeah to your point linda i think there's a bunch of you know different solutions each of them are probably um you know best suited to certain kinds of applications that require those features like if you're optimizing for privacy you probably want zero knowledge proofs um and optimistic roll-ups you know uh you know preserve are more composable at layer two so i think um yeah different trade-offs for different applications and likely you know all of them will play a role um and right now it's it's you know a fascinating time just to see what will happen and and sort of where the different projects land i don't i don't try to take a view on uh one of these winning out over the next i think um i'm excited to just see sort of the best teams compete to you know on their feature set obviously i think in uh in some of these cases um most of them are actually complementary and uh adjacent to each other too and that's one of those things where we realize what actual features you get to add on as part of being connected to more than one of these systems and uh uh not also a perfect analogy here but i i think that the thing that we're seeing crypto right now is sort of a uh amplification of the unix velocity and just doing one thing really well um and getting that out as a product and then uh it being composable enough that we get to integrate and pipe things into different things so kind of like the early internet where protocols were just really low level interfaces this is a low level full experience and that's super exciting so last question uh before we uh kind of end this panel um any advice you'd like to give to the founders that are starting companies in d5 um i'll just leave that very open-ended um yeah i i okay so i'm i'm gonna run with the progressive decentralization playbook um you know i think over the last six months there's been like a lot of um uh i don't know confusion or or um questions about like how and when to launch a token decentralized community i think i i stand by my original post on on the subject which is it's it's really really hard um to make decisions by committee especially decisions to do with finding product market fit like you need to be able to iterate fast um and i think that's best achieved by like being as flexible as possible and so um i would encourage founders to really map out a path to product market fit first before um launching a token and so like it you know that's that's why i've started a very early stage venture capital fund to help founders um you know get there and and thereafter think about the best way to exit to the community yeah i i mean i think that's a fantastic post that you wrote and i sent it to a bunch of entrepreneurs so i really think like if you haven't read it it's definitely worth reading um yeah just to add on to that um i think that um there has there have been so many projects and kind of waves within crypto that we really should look at past um kind of projects and what they did well what they didn't do well and iterate from there i feel like sometimes i do see a lot of teams like kind of build and complete silos without looking at like this is how it went for another project it did almost the exact same thing so i think just making sure to look more at just preview experiences obviously have your own originality and and do it yourself in the way that you think is best but really take some lessons learned and then the other thing that's just um there's also just a lot of capital in the space that kind of still wants to get rich quick so when you are raising from investors if you do decide to raise from investors just making sure that they are very long-term aligned with you i i do see like some entrepreneurs fall into the trap of just like quick money and um and subsequently those investors might just sell off the tokens immediately so just being really careful about who you bring into your community and making sure they're long-term aligned absolutely no thank you so much for that i think uh just even if uh whether you're an investor or a founder um like your reputation is your biggest assets so um it doesn't matter how you think about it actively because that's something you can't uh just change quickly or flip so whether it's progressive decentralization or being uh short term um in your decision making is just not going to be helpful to the rest of the community and just everybody else that you are building things for so um great advice with that i'd like to thank both of you linda and jesse for being part of our panel today i think we still have a handful of questions that are coming in the chats if you have time i'll encourage you to kind of join live.eduonline.org and just kind of reply to some of the people but uh with that we'll we'll move on to our next talk and i want to thank you again for giving us your time so yes yeah thanks for having us yeah