Rebuilding Market Structure for the Next Crypto Cycle - TOKEN2049 Singapore 2024

so today as I mentioned we're going to be talking about rebuilding Market structure for the next cycle this year has been an interesting one where everyone's been excited through q1 and then sort of hesitant waiting for some Market Catalyst to come through so today we're joined by some esteemed panelists we got Max from pv1 pv01 um Josh Lim from Abalos and Daryl from uh tangent so I'm going to quickly pass across to our panelists to introduce themselves very quickly max if you want to start Josh and then Daryl a quick intro yeah quick intro if you can yeah please um I start my career at Gman where I was an interest rates Trader uh and I left in 2015 to start B2 C2 which became one of the main uh dealers in in crypto uh and in a year ago I started a new company called pv1 that is in the rwa space and focuses on putting bonds starting with us treasuries on the blockchain hey everyone my name is Joshua Lim uh like Max I started my career at Goldman in traditional Finance um and moved into crypto I've been in a couple of large um trading shops like Galaxy and Genesis and most recently also in the in the last bare Market started a firm called arbalist markets um we're focused on derivatives uh Market making liquidity provision um we trade a lot bilaterally OTC with counterparties and then we um we do a lot of on Exchange block liquidity mostly on um derit Finance okay all right I I think all of us here from a traditional Finance background I also used to come from JP Morgan was on investment banking side of things and then you know hopped over to crypto and joined Defiance uh as they were starting out Defiance Capital which was Asia's first def5 Focus fund uh and again in the last bare Market also started uh my own company called tangent we're now an evergreen crypto prop fund uh where we invest in uh preed and Seed Angel deals uh as well as you know discretionary taking positions on the liquid markets as well awesome thank you guys so moving straight into things if you're thinking about Market cycles and you mentioned the last bare Market we're thinking about the next bull market of course everyone here is is hopeful and excited for 2025 in order to think about the future though we have to think about the past and understand mistakes that were made and and problems that were um exposed in the last downturn and and how do we rebuild those for the future so the first question I've got for you guys is what is something from the last cycle that we should leave behind and what is something that we should take forward with us into the next cycle as we think about building Max do you want to open up the difference between secured and unsecured credit exposures I think people tend to conflate the two and we were used to such high rates even secur grates in crypto on account of Simply the Futures Trading at such a huge premium at some stage you could get a 20% roughly risk-free rate and so people just were used to that and didn't realize that when Celsius came in and was willing to you know borrow at 23% you thought oh yeah I'm getting like a 3% pickup on top of the risk-free strategy but you know the 23% didn't compensate for the extra credit risk you took to Celsius and I think those have everything's been a bit conflated we're in a better space now because Futures trade much more in line to where the risk-free real world interest rates are you know around 5% and so it's a bit of a premium for exchange issues operational RIS that kind of stuff liquidations but it's not that much and I think that now people are really understanding that if you're getting a 50% interest rate 1515 then it's got to be you're taking some additional risk which was a bit it was very blurred in the last cycle yeah so I think pointing out that we've become better at evaluating where counterparty and credit risk sits as we move forward Josh anything to to add what what would what do we want to leave behind and what do we want to te with us yeah I think the most Salient feature of the last cycle was that all the types of risks that different firms were taking whether they were like lending firms or hedge funds or you know even corporates in the space and Foundations everyone had basically just Market exposure in some format and it turned out like if you had a basis trade or if you were lending to counterparties or if you were um running a market making business that whose revenues were largely correlated to like tokens going up right it was all just generally Market beta the lack of transparency around that basically made it such that it was very difficult for many firms in the space to evaluate counterparty risk um and the fact that ultimately the kind of like web of connectivity of different firms in the space all led to every firm having the same risk to the same set of counterparties right so I think for us and what we were trying to do when we started arbis is just start a new form of business model that was based on transparency so allowing counterparties to have some visibility to our balance sheet and um you know sort of our Financial Health in real time and that helps us to sort of win business but also present ourselves as a credible counterparty for bilateral trading activity so yeah I think it's both parties are trying to give everyone the tools they need to evaluate the risks appropriately and right generate yield in the correct ways so that you're not taking risks you're not aware of and there's no contagion to other parties darl when you're looking at companies to invest in and and teams to invest in how important is it to think about these sort of Concepts have they looked at those things as well uh it's pretty different I think at the pre stage we're not really that advanced into most of these onchain transactions yet um but I will say that uh I think something that definitely needed to go was the lack of due diligence that under catalized lending desks did uh with their clients I mean you know there was that famous uh three arrows uh sort of balance sheet uh that was circulated around back in 2022 where you know one of the the co-founders basically just signed off and said you know he had like x billion dollar worth of um worth of capital or collateral and then he just said yes I have it and then they they took it at face value and just lend him the money right I think that obviously has changed quite a bit um you know us as a firm when we've on boarded with you know different lending desks as well now the due diligence is significantly uh more complicated or more sophisticated which is I think is a good thing um so you know at least you don't have these kind of you know sort of traps that are laying out when you know markets are are in freefall I think I think one thing that I do wish that we bring back is the FTX type of cross collateral uh that allowed a lot of traders to use different sorts of assets as uh collateral for their positions now um I don't think you get as much flexibility I know binance offers some of that but you know most of it is still either USD t uh collateralized or BDC or eth um and and I think one of the perks of trading on FTX in the last cycle was really having that ease of fluidity between collateral types that you could just use uh and you know just Contin continuously keep trading yeah so that's that's interesting because you've essentially identified that standards have raised like the due diligence process is higher as it should be increases friction cross collateralization harder to do so you can trade less or less efficiently so I guess that's part of the rebuilding process right we we have to identify the problem raise the standards and then work out ways that we can be more efficient with it and I guess that leads me to sort of question too as we move into the building blocks for the future how important is new capital or liquidity coming into the system this has been a year where we've talked a lot about institutional Capital flow from ETF approvals how important is it to have that new money in the system to I guess keep things flush and moving when when frictions can be because of better standards Josh do you want to do you want to start with that one yeah I mean I think we all realize like we're in crypto because we believe this asset class can be much bigger than it is today right um and even though cryp Bitcoin in particular feels like it's you know near near all-time highs from a dollar perspective and also from like a Bitcoin dominance perspective it does feel in many ways like a bare market for most people in the space so like what why is that happening right so I think one of the big um answers to that is that the market structures changed dramatically where New Capital comes into these ETF products and it's largely institutional Capital that stays locked into these products and doesn't really recirculate or recycle into like higher risk assets within the ecosystem um and you know last cycle obviously a lot of that rotation happened and it created this like hot ball of money that would circulate and kind of prop up as you know allcoin prices and things like that so I mean that's like one very fundamental change that's happened in in Market structure this cycle versus last last cycle um I think the way we deal with that is like we basically construct the same set of um Financial infrastructure that people demand in other asset classes like Commodities like for instance like gold markets or oil markets like basically other markets that require derivatives trading and uh clearing and settlements all these pipes that you need to attract more institutional participation because that's actually where all the money is going it's less focused on retail trading and Leverage and you know that sort of thing so unfortunately that's kind of like the trend of the market today maybe not unfortunately maybe that's just a sign of a maturing asset class but um yeah that's that's how we're thinking about it yeah cool and I think we're between a rock and a hard place because traditional Capital doesn't really want those crypto because it's RIS They Don't Really control right or understand and then there's lots of Capal in crypto but it's also Capital that doesn't really understand how to do things the right way and there's some concept that come naturally to Josh and I but things like asset liability management no one has got any clue in crypto how that's supposed to be done and so you end up with people who let's say there's a ton of Bitcoin capital in the market and people are willing to lend it and do stuff with it the thing is that if you understand how to run a financial firm properly you've got no use for that Bitcoin Capital that's not what you need right and so there's too much Bitcoin Capital that no one needs there's not enough Fiat type stable coin type capital in the market um and that would naturally come from trafi but trafi is just not as interested and so we really need to find some sort of fit there do you sorry to interrupt do you think they're not interested or do you think that the pipes that Josh mentioned haven't been built yet to to let them in I think I think even if the the pipes existed completely first of all crypto would need to adopt them and we found that to be quite difficult I can't count how many startups have failed who try to do you know uh PVP settlement I mean it's been years that we've talked about that so lots of those things culturally are more difficult for crypto to accept and even if they were accepted tomorrow I think on the trat F side they need to get comfortable that we're actually doing things the right way but things are changing a little bit one of the big problems we had in the previous cycle is that all the lending firms were working with one another but because um we had conglomerates you know FTX was an exchange a market maker CS was a retail business a landing desk they were all in some sense competing with one another and no one wanted to open the kimono to do proper due diligence and I think one thing that we're going to see emerge this cycle and my firm is also trying to do something like that is to have firms that are advisory firms that sit in between the lenders and the borrowers and conduct a type of due diligence that doesn't um seep through the market and that remains private right you can have an underwriter of credit risk that's not one of your competitors and if you do that then you're going to be more you're going to be happier to share your financial and and your operating procedures and your the writer is going to be you know sticking their neck out to vouch for you which is something that you know when alamida was borrowing from Genesis they didn't want to share that kind of St so you're removing that comp competitive like secrecy between the firms by having trusted middlemen intermediaries that act as transparency source of truth fiduciaries it's important that you have that that's I mean that's something that exists in tradire right and if we want to have a new Financial system we've got to take the good parts from tradire and move them into our space and have it have it be there um yeah that's definitely definitely for sure um so moving on if we would assume that we move into the bull market hopefully tonight when the fomc decides to act um if we move into the next cycle and the bull market kicks off what are sort of the ways that you guys are going to navigate that darl do you want to start with sort of how are you going to identify who are going to be the winners in the next phase as you look to invest Capital into seed projects and earlier or even projects you may have invested in yeah no I think it's I think the winners are already slowly showing their hand um in terms of the technological security uh the sort of the depth of the ecosystem that is being built on you know different uh l1s uh salana definitely has really come into light this cycle as the you know most active and most vibrant L1 today I think if uh you know if Capital does come come in and you do get you know Bitcoin alltime highs again uh I think that that trend is very likely going to sustain uh and you probably get you know competitors of salana that attempt to do what they're doing and you know some are touting a couple of names out there likeu apos for example as alternatives to to salana um that definitely is something that we're looking at uh on a venture basis we try and actually stay away from investing in l1s uh going forward I think the time for investing in l1s is is passed already and we're we're looking at you know specific applications uh more so in the uh dpin vertical the uh social F vertical uh and you know select still defi as well uh so you know that's gener but a lot of what we do as well is we adopt a liquid trading strategy to to markets and so uh typically we will be looking at BDC as the main V vehicle um to ride the next bull market uh simply because it has uh greatest uh I guess ease of access for from institutions and I think the most latent bit uh still bids BDC even in this cycle it's it's very clear it's very evident as as a function of BDC dominance I don't think that's going to change um and only when you know we're pretty confident that I guess four more Capital has come uh will we start you know looking out to words you know the lower C Market capitalized coins uh for outsize returns got it and and you you touched a little bit on BTC dominance and most accessible pair probably the most liquid pair in the world Josh how important is liquidity for your business aross you obviously Market make options is is a a large part of what you do how important is it not just that you're able to provide liquidity but there is other Market making liquidity in there for your success well yeah I mean no no Market maker can really exist in a vacuum right kind of we all require like an active ecosystem of Market participants um and users that are using derivatives to hedge their books or take um very you know sort of like nuanced um leverage views on catalysts or you know they're they're sort of like trying to get yield or something like that by selling B so I think that's um there's a lot of different players that we're seeing coming into crypto in this cycle that haven't been active in the last Cycles um a lot of them have to do with like more institutional users right like um firms that are using options to generate yield for Structured Products or um you know corporate balance sheets that are hedging their exposures or getting leverage to crypto in certain ways um and then there's a whole sort of like class of macro hedge funds that started to get active last cycle but I think now they're kind of like more dominating the flows these days relative to the more Crypt native hedge funds out there um but I think like to go back to your previous question just around like investing Theses and narratives like I think it's very clear now in this cycle that there's just like Divergence between Bitcoin as the store of value like hard hard money asset versus other things in crypto and I think that trend is going to continue um I think eth has sort of like not lost its way but it's sort of been diluted as this asset that has um some hard money properties because of just A diversity of like layer tws and other uh applications that have tokens on it like governance tokens and it just sort of like effectively dilutes um eth right it becomes effectively inflationary even though you could argue it's deflationary with post merge but um yeah I think Bitcoin kind of takes the um the crown on that and it's like very hard to Dethrone it and I think that's why you have all this inflow into the Bitcoin ETF for instance and like much less enthusiasm for youth right um yeah now for an answer to that question the the winners and the losers I think what we need this cycle is as us as before incremental improvements solving little problems that we face just your proper OG you remember we had Bitcoin back in the day multi Bitcoin that was solved then we used that ethereum came around and then boom multis on ethereum is completely different then we're stuck with multi system for Bitcoin and not having that on ethereum then what happened fire blocks came out with MPC completely solved the problem of multisig irrespective of the chain you're looking at that was a game Cher so that was great incremental Innovation you take other businesses that have tried to fix too big of a problem end up being over-engineered look at rwa on the private credit side you know you're taking assets from The Real World not us treasuries more complex stuff think the um one of the projects was doing Landing in Africa you bring that to the blockchain people buy into that stuff because the rates look good but in reality you're suffering from the adverse selection of the bad stuff that doesn't get finan in try coming into onto the blockchain so yeah it's that that chasing the yield problem you don't know the risks you're actually taking you just see the headline figure and exactly chase the yield bringing treasuries on chain totally necessary great bringing private credit on chain I'm not convinced yet and in fact if we don't have enough capital in our ecosystem we don't want it to go to private outside of crypto for sure I think I think uh to expand on your point it's like basically Mo all of defi is like asking retail users to price like be marginal price Setters on risk that they don't fully understand right sort of like and that's that's destined to cause problems again and again and when we talk about rebuilding Market structure we cannot do it the same way that we did before because you have to learn the lessons and as you say iterate improve bring certain things on chain or into crypto and leave other things out for now at least until we can come up with innovative solutions that will make it safe and priceable by retail or at least understandable by the participants of the market um so I did promise everyone we were going to keep this short so you can go have a drink afterwards coming up in the last sort of last section we talked about where we made mistakes where we think we need to improve um we've talked about sort of navigating what a bull market would look like and where we think the winners and losers might be I guess the sort of last thing I wanted to touch on is where do you guys see the Catalyst to kick this off I before the FMC tonight but if it's not tonight then maybe it's later in the year or early next year darl do you want to start and let us know what your most hopeful about for the catalysts for the next Bull Run yeah I think the the two North Stars or the North Star we look at that dictates how aggressive we are positioned uh at least on a very high time frame it's obviously number one the elections um you know Trump wins very likely defi regulation eases to somewhat you know you stop getting you know Wells notices being sent everywhere uh hopefully G caner goes away you know you put in place someone else that is a bit more warm towards uh crypto and defi uh I think that is pretty straightforward um I think it's a lot more I I wouldn't say that it's an absolute doomsday scenario if Kamala gets elected but I think things become significantly murkier uh in terms of the time timelines of when uh if or when you know uh regul regulatory pressures ease uh from at least from the US uh the second thing that we look at is obviously easing liquidity um and you know as we said you know tonight it's going to be a pretty important night for that um and I think in the next you know 6 to 12 months we're going to see whether the FED has you know been too late in terms of cutting rates or or on time and historically I I think when it will only be obvious in hindsight and so you kind of have to take a forward stance in terms of estimating If the Fed is too early or Not by you know by making judgment calls earlier uh right now we are looking for tonight it's really the first signal to see what happens for the next 6 to 12 months um but yeah it's really a coin toss right now I think Max I have a spicy take um 7 Minutes you've only got 7 minutes for this spy it's going to be very short you also remember around 2015 one of the big Catalyst for Bitcoin adoption was Chinese one outflows yeah Capital controls whether we like it or not was a big Catalyst if you go back even before that we have yet other stuff that was a catalyst for crypto adoption I think one contributor to the next wave of adoption might be in the developed world there's lots of countries that have real balance sheet problems real Public Finance problems and I think we're going to look at the way of abod potentially on the back of tax avoidance because it's much easier to move money around when it's in the form of crypto and our traditional Financial EOS system is not as free as it used to be and you remember back in year around 2015 how difficult it was to get banking relationships that stuff has improved a little bit but kind of at the margin in reality but for for um individuals actually it remains difficult as soon as you do something that's outside of the Beaton path if you're a big crypto institution now access to banking is a little bit better but if you're an individual the market of the financial ecosystem has really gotten worse and I take an example not that I'm supportive of their cause or anything like that but back in during covid times in Canada the truckers yeah they got their bank account seized by the government because they disagreed with with their message and this stuff I think is going to leave a mark especially in a context where the state is going to to go after the assets of it CI I mean if you look at why Bitcoin came about it was a reaction to devaluing money by by the fed and everyone else printing cash constantly so what you've clearly identified is if the authorities or the centralized Powers continue to repeat the same things again and again the reaction will be for people to find another way um I do worry though that if if that would have happen does regulation have to grab a tight a hole because tax avoidance is not something that calized Powers really really support not to be confused with tax evasion though no true tax tax reduction I guess you can probably call it um that is a spicy take very interesting Josh yeah I mean I generally agree it's like we're in this part of the cycle where it's like very hard to stay positive about crypto sometimes right and uh like the big picture is always the same right the big picture is like this is a limited Supply you know for better or worse like most people now think of it as a like a currency like people are willing to store value in it so um you have to kind of believe in that long-term thesis otherwise like why are we in the space um but if you do believe in it then like the long-term view is it has to be much bigger than it is today and that that hasn't really changed um the ups and downs like day-to-day whether it's like because you know Harris wins the election or because the FED is you know hiking and tightening or whatever like those will cause Market Cycles in the short run but in the long run it's uh it's just an asset that people want to hold um that's a non-sovereign store value right that's always the the key the key to go back to I mean I think like through this discussion we we've sort of identified that we have done some rebuilding there's been some iteration on bringing certain things on chain there's been improvements mistakes were definitely made in the last cycle and led to some of the the pain that we saw um I certainly have a lot of Hope for 2025 and the end of this year even as you say short-term Catalyst but I think we have the building blocks to move forward um I'm just going to pass it back to you guys is there any any last thoughts you want to share with the audience here or I can give them a 2 three minute early mark for a drink very quickly I think the rwa market has to be 10x the size that it is now it's actually not a good sign that it's only around $2 billion should be 20 that's a problem got a three trillion from the audience here so um Josh Daryl any any final thoughts before we close up yeah I mean I guess we're just talking about things that are interesting like I think um there's a lot more that needs to happen on chain in terms of just um like trading activity different types of trading um venues like derivatives in particular I think we see there's like a reluctance from institutional users to migrate activity on chain because you know there's compliance processes and there's risk management processes that require them to like vet all these marketplaces that probably just launched like a year ago and you know most of the venues they trade on have existed for like 20 years so um yeah I think that's going to happen gradually and over time but I think that um will open up a lot more activity for crypto and more venues like basically you know it'll create more stable coin adoption it'll create more um reason to hold like Crypton native collateral um to to collateralize all these derivative trades um like we see it as a potential growth area for us you know in terms of just growing our um counterparty activities in a way that maybe like Banks and other major trafi institutions aren't going to be able to support day one um so yeah definitely okay darl final thoughts any any closing yeah no I think in I think there's one party or one stakeholder there cycle that still needs to step up and I really think it's actually decentralized exchanges um I don't think they've done well at least with what they've been doing recently I think it raises a lot of eyebrows not in the right way um that um that can imply that a lot of things are are going on behind the scenes which um is not the healthiest look for the industry so I think it's the owners is on them given that they are the most Pro profitable stakeholders in in crypto probably uh where they have the most to gain that they should you know as role models and as the prolong the longevity of the entire ecosystem uh keep things above water fair enough it feels like there's still work to be done but some exciting times ahead um I'd like to take the chance to thank you Max thank you Josh thank you Daryl for sharing your thoughts with everyone and thank you for sticking around till late in the day and I hope everyone has a great evening tonight