The Need for Standardization in Crypto Panel with Alexandre Elkrief

hi everyone thanks for having me again uh my name is Alex my background was initially in machine learning with my first company got Acquired and then joined Ledger Prime where I run the the D5 book um so deploy Capital pretty much anywhere on chain and liquid and faced a lot of issues with cross collateralization in general which led us to incubate fractal within the fund initially and uh raise the seed round LED by our friends at hack right here um and uh we're about to launch so what what fractal does is essentially building margin infrastructure to enable cross collateralization between both D5 assets and OTC bilateral agreements hello I'm Adeline Joe I'm at chain link chain link Labs we help provide Oracle services for the various different blockchains basically we allow blockchains to communicate and connect with on and off chain data and then yeah that we work with I think about 75 of all D5 projects so we know the space well hey guys I'm Alex uh I'm the founder and managing partner at hack VC we're an early stage crypto Venture fund before that I helped start the crypto firm dragonfly it's one of the largest firms in Asia and the crypto practice at Bain Capital Ventures and I've been a crypto VC for about nine or ten years now starting in 2014. awesome and then quickly my background so I'm Aya formerly uh part of the founding team of Falcon X and before that uh Pantera Capital um so why don't we just Dive Right In it's been a crazy year in crypto to say the least um why doesn't everyone go around and we can talk about anywhere between one to three key limitations uh that you've seen in the market following uh the FTX debacle as well as Market movements like the Terra Luna crash as well too uh Alex why don't we start with you first sure yeah we uh yeah it's been quite a year um this is probably the third full bull bear Market cycle um that I've been investing through the first one in 2014 when I bought my first Bitcoin it was 800 bucks and there was this like rumor that this Japanese exchange was going to go under and then uh I kind of thought the whole industry would collapse after that and I just left the space and I became a general VC and amazingly it came back in 2016. and so uh yeah I mean I think like the big the big Lessons Learned are uh you know most of the centralized parts of crypto at least for the last few years they've really been operating like Shadow Banks and you know there's there's very little aspects of them that have there's not much decentralized infrastructure underpinning them many of them sort of claim that they did have a lot of incentivized infrastructure but they didn't I went to Coachella last year which was sponsored the hell out of by FTX and I got a nice little FTX nft and uh you know after the bankruptcy it was gone like it's like a 503 error because or whatever it was it was stored on centralized FTX servers it all went down after the bankruptcy so is that really an nft is that really crypto you know what me and all the other attendees at Coachella were introduced to um probably an early version a pretty bastardized version so you know but I do think the one silver lining um to everything that's happened with the blow-ups and centralized finance and centralized infrastructure and FTX is that it sort of proves the importance and necessity of like actually decentralizing as much as you can there was one like amazing anecdote that I saw which was um in the days before the FTX bankruptcy this researcher at coinmetrics this this data company that helped seed years ago he did some launching sleuthing and he found that sometime in September eight billion dollars of ftt tokens were moved on chain yeah yeah this is an epic threat um and it was like the most like I was like a thousand X more than ft if any ftt had ever moved before that and what it was was basically eight billion dollars of ftt tokens moving from Alameda wallets to FDX wallets and at the time like nobody really knew what was going on Sam Actually posted on Twitter like oh guys I'm just heads up just rotating some assets it's all good you know and of course what actually happened and what this researcher um guessed at a few weeks before the bankruptcy and before it all came out was that this was basically the the main like horrible fraudulent transaction this was like you know eight billion of ftt token going from Alameda to FDX and behind the scenes you know about eight billion dollars of customer funds were probably moving from from FTX to Alameda and uh that's a you know that's normally it takes you like a long time to figure that out it could take you months it could take you years you know the Madoff Scandal it's like 30 years before people figured out that that Madoff was running a Ponzi and a fraud right and this was because you know FTX is a crypto company and they're forced to put a lot of transactions on chain so my lesson learned is like the more you can do on chain the better the more transparency the more you could force the companies and protocols you know to to put to put activity on chain like that's the Silver Lining and I think that's the kind of stuff that if if more of it happened in the future you know the the FTX wouldn't be possible and not even FTX but like Naaman wouldn't be possible and MF Global all these things right um anyway I'll let you guys speak now too but that's my one little fun anecdote to start that I found to be interesting at least yeah I'm in on our end uh after FTX happened all of a sudden you saw people talking about proof of reserves and proof reserves it you know it's like proving on chain that you actually have the Reserves backing whatever you know stable coin or currency that you have and at chain link we've actually had this product for a long time and you know been knocking on doors we're like hey you might want to proof of your serves you know your C5 project and before none of them cared but after that like all these inbound calls started coming in be like actually yes we need to prove to our users that we are not you know taking their money and using it multiple times or you know putting in different leverages that you know aren't uh you know good for the user so I think for us that was really good because now slowly more C5 projects are realizing that they need to be a bit more transparent with where user funds are we saw Finance at least sort of go in that direction and it's interesting like some projects still don't want to do it and some are like fully embracing it and so you kind of see right you're like hey you know wonder why you're not using proof of resource is there something else behind the scenes and so if you are trying to put your money in you know different types of C5 exchanges you know take a look at that to see are they actually legitimately you know embracing this transparency that could be on chain uh what I'd say is I think echoing Alex's point most of the C5 players today are effectively traditional Finance venues that are somehow trading an asset that happens to be crypto could be silver it could be gold it could be stocks it could be Tomatoes like nothing like nothing in their operation actually uh is crypto specific aside from the fact that they have to send crypto transfers back and forth um and so that's one problem we haven't really achieved anything on the C5 side of things in terms of actually using the blockchain as a settlement layer and the back-end system that it it should be um one thing though is that we we still do have to give credit to FTX for building the best portfolio margining system that was available today Capital efficiency is very important for institutions and fully collateralizing everything is just impossible and so the problem and where they took it too far was that you had Alameda on the other side and Alameda had very specific permissions they were the only ones who could actually print trade on the order book OTC large block trades on the eurobook and then I only know the tip of the icebergs of the other privileges that they had and so one lesson for me is that the only way that we move forward is by Building A system that doesn't rely on people's uh good behavior for to function properly it just has to be built into the system and that relies on having incredibly neutral clearing and risk engine in the middle that doesn't have an incentive and better pricing and it's just acting as the effective Clearinghouse on chain we need to solve for under collateralization but it needs to be an independent what does the Clearinghouse for crypto look like today that's an open question that's something that we're trying to build and it's something that's going to take a lot of time but the first step to get there is hence the the title of this talk is we need to standardize the way assets are encoded and erc4626 is is a first step there in terms of how assets interface with one another and can be cross-colateralized yeah I think one lesson I learned is there's a dichotomy between like the primary Market evaluation and the second Market evaluation since 2020 there's a lot of hard money in the space with micro stimulus a lot of institutional guys moving into the market in 2020 one alone there are 30 crypto companies Market over 1 billion valuation and at one point FTS over almost have market cap more even bigger than coinbase at the one point so that's how crazy it is and with the FTX at the time there are over like 25 different hedge funds course Equity you try to buy for that market what I want to point out was I think because the market is super is people sometimes Overlook the risk similar for institutional investors as well how we're actually properly understand and evaluate the company and it was the right value issue framework what's your exit pass is an Awakening moment for us after the FTX moment the second thing I want to point out is it's not just one company they fail but actually the implication for industry touch every single corner across their private Market portfolio all the collateral they're holding it has a massive impact almost a systematic impact to a lot of players in the market so moving forward is more like we talk about standardization in the space it's also how across industry how we were systematic Instinct about it's like risk factor and Collective achieve establish the system better yeah absolutely I know we touched on a number of different types of standardization um Switching gears to just quickly focus on on Trends obviously we have defy and yield is a big aspect of that we also have uh with interest rates increasing uh this year a lot of focus on real world assets and real applications on chain because of the need to find real yield uh that maybe D5 doesn't necessarily have today um and so from the beginning of the year uh Jan uh D5 TBL itself alone is up 30 percent uh with real world assets you're seeing a number of both treasuries uh Tebow is getting brought on chain what are you seeing uh today in defy or even just Trends around real world assets that excite you and what you're looking forward to through the rest of 2023 and Adeline why don't we start with you and then we'll Bounce Around yeah I think you uh summarized it well because they're the yield in Dubai right now like is low and we need to look at tivo's that are trading at five percent it's like hey let's just put t-bells on the blockchain and trade those like if you get our automatically five percent and so I think our thing like actually dozens of projects coming out in the you know rwa uh space that's you know t-bills are what a lot of them are starting with first and then they're saying hey I'm gonna you know tokenize uh you know um receivable loans I've heard of tokenizing uh real estate tokenizing almost like supply chain you know invoicing basically anything you have it they're all kind of uh trying to move those on chain I think the one thing though to think about is how especially with t-bills and stuff like that what kind of regulatory uh restrictions you know they'll have especially as you target those it really literally becomes a security and so uh as we see with regulation coming how that affects it era um I think one's interesting metric to look at it nowadays as in TBR is not the right correct metric to evaluate the likeness of a D5 protocol anymore right nowadays after the 80 depreciation with the market last year there's a lot of different measures you're focus on what's the actual transaction volume where they do the user acquisition like what's the active wallet there's a lot of different methods to actually understand the adoption of that D5 platform because today you know if I look at infrastructure blog space is no longer a scarcity every single corner there's another AMA there's another divide Landing platform right how you compete how you differentiate it really focus on go to market and that's where I think we start to focus a lot more what's your actual use Case utility introduction that's interesting matter a lot more moving forward yeah I mean it's ironic because I think it's pretty clear that like of all the use cases of crypto outside I guess like the Bitcoin one defy has by far the farthest product Market fit right it's uh and also it's the most stable in many ways like even during the FTX crash and through AC and all the credit blow up to the last of the last year uh defense defy kept spinning like the none of the chains like went under collateralized or maker down and go you know which was actually different and in March 2020 the last cycle like several key defy protocols actually like sort of broke fundamentally like maker down had a big issue where a bunch of the collateral was like accidentally sold like each was sold for like a dollar it was crazy um so in many ways it's the most mature and if you think about what standardization means in crypto it's it's basically about standardizing to like let's use defy and you know ethereum and maybe other layer ones too as a settlement layer and as like these sort of shared protocols that like the whole financial system can be built upon but yeah we do have a little bit of a you know the central irony is we do have a bit of a product Market fit problem which is that the yields are lower than T bills which is pretty insane because it's hard to believe that like lending on Ave is actually uh like a more risk-free thing than just like lending against the US government like maybe if you're sort of very ideological or I don't know you can't access t-bills it's the whole thing right uh you're Justin's son and some other whatever you know um but yeah so I think the the process forward is we just have to move as many of these real world assets and real world yields on chain as possible and I love the whole like the the idea behind like stake teeth as a sort of collateral asset is so cool it's like okay instead of each being the collateral and when you do take loans you get additional yield on top of each you could get yield on top of stake teeth right and you could just stack these things up and up but of course in in C5 the stacking is is bad like you don't know what's underneath and you have these you know mortgage-backed Securities that are like tranched all the way through and you don't know what's going on underneath it but in crypto you know every every layer it's all transparent right so if we get to the world where like mortgages or t-bills or whatever are like uh since uh you can like tokenize them in synthetic formats and have those be the main collateral between behind like Ave and other protocols and what fractal is doing that is quite cool I mean I'm looking forward to that happening in the next few months yeah on our side I think what's been interesting to see is that really for the past two years no real New Primitives were invented in D5 you had a lot of forks and a lot of other a members that launched on chain number six seven eight nine ten Etc another compound four you know they have a fork Etc um and it's actually been nice to see some Innovation coming back at the Primitive level so they're starting to be some Innovation again in order book style Autobook style exchanges derivative protocols fixed rate lending and then so that's in the pure you know defy native world and obviously it's been touched on before but as the risk free rate in off chain is higher than the risk-free rate on chain there's an incentive that the market is doing its thing of bringing bringing that risk free rate on train as well and so for us that are hoping to sit at the intersection and being able to cross collateralize across all these assets it's been refreshing to see that obviously there's very little capacity in those products for now but and most of the demand is for the the blue chips that you you all know but um starting to see some new Financial Primitives that we are able to integrate and make make things a lot more interesting for us and lastly I know we have to wrap this up and so why don't we go around we're obviously at East Denver um so why don't we go around maybe a word or two around some of the key themes that you've taken from this week um that you're most excited for whether it's for q1 2023 or what's being done and built for the rest of the year we'll start with the other stuff sure um yeah I mean the thing that we've been harping on in Defy is great obviously fractal portfolio companies you guys are building like quite a cool primitive to build like under cloudrise lending on chain in a way that isn't totally like opaque and you could like see everything that's happening um that's amazing I would say like a little bit longer out uh is the concept of like private decentralized applications and private defy and this is like if you've been in crypto long enough like everything that's old is new and it you know like six years ago we were talking about Monero and Z cash and private transactions but the thing that is really exciting isn't just private transactions it's like private like entire Financial operations of a business or something so if you're able to participate in D5 protocols as an Enterprise or run your entire business as a dow uh you know if you want to do that you basically can't do it where like there will be no business that would work where their entire p l and their income statement and their balance sheet is like totally on chain for anybody to see right like you need to have an ability to obfuscate this it's not even privacy for like ideological purposes or you know human rights or whatever the stuff we were talking about 10 years ago it's it's privacy for like Enterprise adoption right so layering that on like sort of private apps I think that'll probably be possible by the end of the year we'll see you know give or take a few months but that should be quite cool too I think on my end uh I'm excited about a lot of the staking stuff that's happening and the distributed data Technologies ebts I think there's just a lot coming you know once uh ethereum State can be unlocked and so I see a lot happening there so I'm looking for there and then the real assets I think just continue to see where that goes and some of the derivative stuff that you've mentioned in the D5 space and then also more on the institutional what if you guys are doing at fractal too it's like hey how do we bring more institutions into our space I think those are some of the trends that I'm very excited about on my side first I was pretty surprised by the positive energy of this conference I expected it to be a lot more Bleak after the past few months that we've had so that's been a good surprise um and beyond that I'm I think D5 is a little bit of a misnomer because decentralization is a spectrum I'm I'm interested about on-chain finance and getting getting people to use the blockchain as the back end as the more efficient back end without having 16 intermediaries when you put on a transaction or you pay with your credit cards and you have to go through intermediaries one to 16 and everybody takes a cut in the middle and so you know some of some of those protocols will have to be kyc some of those protocols will be centralized but operate on a permissionless blockchain that acts as a censorship resistant um back-end system and so if we can just achieve that before full censorship and full decentralization that'll already be a good outcome yeah that's Mark here for another Resurgence of infrastructure building with the modular blockchain right with the roller with the CK roll up coming up also yesterday with the whole entire share security Paradigm and so message to create Paradigm brought up to space we're looking into a new wave of like velocity plastic coming online with a new web application being built out of whether it's L2 or like a master security platform so I want to highlight there is the momentum is coming right now and I think demary is really a great start to begin this year and very exciting I think by the end of last year we'll see a new Renaissance awesome with that thank you so much for having us and thank you to our panelists thank you thanks everyone thanks [Applause]