Welcome back, this week Lucas and Anita dive into the latest mega-fund from venture giant Andreessen Horowitz and some of the… interesting bets that they’re making, including one in disgraced WeWork founder Adam Neumann’s new crypto startup. Lastly, they recap crypto exchange FTX’s big entry into stock trading, which comes just a week after the firm’s young CEO made a massive bet on Robinhood. In their interview this week, Lucas and Anita talk to Grace Isford. Isford is an investor at Lux Capital where she focuses on the infrastructure and security opportunities for blockchain startups. We talk about some of the recent big hacks and whether consumers can feel safe betting on crypto. Subscribe to the Chain Reaction newsletter to dive deeper: https://techcrunch.com/newsletters
Welcome back, this week Lucas and Anita dive into the latest mega-fund from venture giant Andreessen Horowitz and some of the… interesting bets that they’re making, including one in disgraced WeWork founder Adam Neumann’s new crypto startup. Lastly, they recap crypto exchange FTX’s big entry into stock trading, which comes just a week after the firm’s young CEO made a massive bet on Robinhood.
In their interview this week, Lucas and Anita talk to Grace Isford. Isford is an investor at Lux Capital where she focuses on the infrastructure and security opportunities for blockchain startups. We talk about some of the recent big hacks and whether consumers can feel safe betting on crypto.
Subscribe to the Chain Reaction newsletter to dive deeper: https://techcrunch.com/newsletters
Helpful links:
https://techcrunch.com/2022/05/25/amid-crypto-downturn-a16z-debuts-4-5-billion-web3-mega-fund/
https://techcrunch.com/2022/05/19/crypto-exchange-ftx-expands-into-stock-trading-retail-investors/
Anita Ramaswamy 0:01
Hey everyone, it's Anita and Lucas. Welcome to chain reaction, where we unpack and explain the latest in crypto news, drama and trends, breaking things down block by block for the crypto curious.
Lucas Matney 0:16
Today for the second half of the episode we'll be chatting with Grace is fired from Lux capital. But there was actually a lot that went down this week. So let's talk through some of the big news. First off, we're breaking into the biggest crypto venture fund ever. Andreessen Horowitz this week announced $4.5 billion in funding for crypto startups, a third of which 1.5 billion they're reserving exclusively for seed deals in early stage companies. This seems like a fair amount of money.
Anita Ramaswamy 0:42
Yeah, it's a it's a huge fund. And I mean, I know Lucas, we were chatting about this before, and you were talking about sort of how they're thinking around which companies they fund has evolved?
Lucas Matney 0:51
Yeah, I mean, Andreessen Horowitz has, it feels like it's been around forever. But the fund was founded in like 2009, or something. And they've really changed over the past couple years, this has been a big couple years. For them, they're backing a lot more companies than they used to, they're a huge player in the crypto space, they've really doubled down on crypto, a $4.5 billion fund should signal that in some capacity. But they're just backing a ton of startups in the space. And I think in some ways, it's almost like they've seen how Y Combinator has been successful. And they're trying to emulate that in some capacity, where they're just like, hey, maybe we don't have to be as choosy on seed deals as we used to be in this field, we can kind of just make our mark see what kind of progress they make and double down with them in growth stage funding later. So yeah, they're quite prolific in seed stage, it feels like,
Anita Ramaswamy 1:38
yeah, some of their biggest investments in crypto have been Coinbase and open sea. So I think a lot of the narrative was that people were sort of skeptical of, you know, Andreessen, making such big bets in the crypto space. And now they're looking pretty smart considering some of those bets that they have made. But I think what's also interesting here is like, when do you think these funds were raised? Like, what was sort of the time?
Lucas Matney 1:56
Well, yeah, that's the thing, because it's like, you know, the past month, there's been a substantial crash in the crypto markets, as we've talked about on this podcast before. And that crash in the crypto markets has accompanied just a massive pull down in the public equity markets as well. So you know, a company like Coinbase, they're trading lower than probably the last private round that Andreessen did for them or something at this point, they're worth a lot less than they were when they IPO. So I mean, it's kind of funny, because I feel like this is just a testament to Great timing in terms of like big venture funds, always being fundraising, therefore, you can never be out of luck. But yeah, they're announcing this round at a time when there's like a lot of instability and a lot of unpredictability and how the next couple years of the crypto market are going to shake out. So I yeah, I mean, it's it's fascinating timing for sure.
Anita Ramaswamy 2:44
Yeah. And given that they're such a big player. I'm curious, like, who else is competing with them? Who holds a candle to Andreessen and crypto investing,
Lucas Matney 2:51
right? I mean, right now, for years and years, it's kind of been companies like firms like Sequoia and you know, you've got insight the last couple years, they've really been competing with hedge funds. But on the crypto side of things like there are a lot of crypto native crypto specific firms that have raised mega funds, just to back startups in the crypto space. So firms like paradigm, which had a $2.4 billion fund, which was a little bit more than Andreessen, his last crypto Fund, which was 2.2 billion paradigm has been doing really well, they've made a big name for themselves, just because they have this big research team, a lot of people on it, who have done some kind of like fundamental projects in the crypto space, just building them out. There's electric capital, they've raised more than a billion in funds in their most recent bout and Han ventures who is actually Katie Han was the CO lead of the last crypto fund. And now she has her own fund, that's a billion and a half capital, and she's a solo GP of it. So it's a huge fund for just such a small team. So there are a lot of smaller players, but ultimately, Andreessen still probably sitting on top this amount of funding that they've closed at this point, you know, it's gonna leave them in a pretty good position to get discounts in a field that they think is something that's long term viable, ultimately, probably good for them that they're deploying this capital at a time when like, valuations are kind of taking big haircuts. Yeah,
Anita Ramaswamy 4:09
that's actually something I was going to ask you. You mentioned that it was good timing. And I'm just curious about like, do you think they're gonna have any trouble deploying this much capital at a time when, you know, maybe activity in the crypto sector is gonna cool down? Yeah. I
Lucas Matney 4:19
mean, that's, that's a big question. Because like, you know, you can't just put $4.5 billion into startups if there are no new startups being started. But that's one of the advantages. So like, they underwent as a firm this like kind of infrastructural change, and became a registered investment advisor. I don't know if this was a couple years ago or something. And as a result, they can put a substantial amount of their holdings into tokens, so they don't have to have $4.5 billion sitting on their balance sheet or sitting in this fund in cash. They could put all of this into Ethereum today, and then just kind of convert as they wanted to invest into startups. So I'm sure there's going to be that's the reason that a fund that has one GP like Khan ventures can deploy ROI, a billion and a half and capital because they can put it into these liquid token markets. They don't have to wait to get deal flow for startups, because that's a little bit more complicated,
Anita Ramaswamy 5:09
right. And that's really interesting, because it's possible that you know, things like Bitcoin and Aetherium might be viewed as a bit safer and sort of a place to park the capital until they can find startups that are worthy of fun, definitely.
Lucas Matney 5:18
And they still, they still manage to find startups that they think are worth funding. This week, you wrote about a particularly interesting startup that they chose to fund. Which one was that?
Anita Ramaswamy 5:28
Yeah. So I wrote this week about Andreessen and their crypto team, taking an investment and flow carbon flow carbon is a crypto startup started by someone we know very well and actually got a little bit more familiar with this month, at least I did personally, it's Adam Newman, and his spouse and co founder Rebecca Newman, they co founded this crypto startup along with I think a couple of people from their family office, who were managing their money for them. And fluorocarbon. What it does is it basically takes carbon credits, and it makes them tradable on the blockchain. So just to take a step back and kind of unpack what that means for a second, a carbon credit is basically its token, it represents a certain amount of carbon emissions, and companies generally buy them because they want to offset their own carbon emissions. So if you've got a credit, it's that you're doing something good for the environment, it's like planting a certain number of trees, which would offset x amount of carbon that a company has emitted. So companies who want to say we're carbon neutral, we're not zero, like those sorts of pledges. How do they achieve that? Well, it's actually by purchasing carbon credits. So every time that carbon credit is actually created, then the simplest example is like a certain number of trees are planted. And that ends up being a neutral effect, or at least that's what these companies say. So the reason for putting them on the blockchain, at least according to flow carbon, and I know there's some other startups in the space doing this is that it makes it easier to trade these credits, it makes it lower costs for companies. So that encourages more activity encourages more companies to actually buy these credits and trade them. And it just makes the market more liquid. Because before you know, it wasn't that easy to to buy and sell carbon credits. So that's what flow carbon is trying to do. And that's what they say their stated mission is they say that they're actually creating the first open protocol for tokenizing, these carbon credits from different projects across the globe.
Lucas Matney 7:12
Yeah, so I mean, there are a bunch of things happening here. So a lot of people who were like more environmental academics or experts took this as an opportunity to just criticize, you know, the carbon credit system and like the potential flaws with that, like, this isn't like a silver bullet that can handle the contributions corporations are making to global warming, then there are people are like, Okay, this system, it's got its problems, fine, whatever. But why is it on the blockchain? So then there are those people, then there are people they're like, Wait, what the hell this is Adam knew when we work infamy. Why is he getting $70 million from like, a respected venture firm, to launch something that, you know, sounds a little outlandish?
Anita Ramaswamy 7:50
Yeah. And I don't know, if you watched, we crashed. Like, I know, it was definitely dramatized to some extent. But after watching that, it's like, how do you give this guy money? Like, how do you think that's a good idea? Yeah,
Lucas Matney 7:59
I watched an episode of that. I will say, I feel like it was kind of a funny time, because there was like, there was that there was the Elizabeth Holmes show on Hulu. And then there was the battle for Uber show with
Anita Ramaswamy 8:10
just a lot of good startup content. But a lot
Lucas Matney 8:13
of people are familiar with Newman's story now is the point. And they saw this and they're just like, Okay, this is nice to see that they're giving the right guy a second chance.
Anita Ramaswamy 8:22
Right, right. So I guess like moving back to the round itself, like this was an interesting round, because it was structured in a way that's sort of different. So it was $70 million, in total led by Andreessen Horowitz. And that involved two components. Part of it was traditional VC funding of about 32 million. And the rest came from a private presale of the company's token. And their token is called the goddess nature token, G and T, that's the ticker, if you'd like to look it up, they are actually going to be launching a public sale, which I think you can sign up for the waitlist on their site, if you are so inclined. And the goddess nature token, it's like, I wonder who came up with that?
Lucas Matney 8:57
Crypto and Adam Newman, alright, natural pairing, because Neumann famously like had all these like phony metrics that he was using, when we work was going public, people were digging into the s one. And they were like, What the hell are community adjusted earnings? And like, all these things, and that's par for the course in crypto where like, if you want to frame something in a certain way, you can probably find a way to especially when you're not beholden by those pesky securities laws, depending on how you structure your investments. Yeah, this got a good reaction on Twitter, just because I feel like everyone saw this, it was just like, What the hell? Yeah, like that
Anita Ramaswamy 9:33
guy. I mean, just one thing that was so weird is that he like walked through the streets of New York barefoot. I mean, I don't know that I would trust someone like that with billions of dollars. I think that's really strange, to be honest, but, you know, there's other reasons to be critical to just have carbon credits in general, there's been a lot of talk about how you can actually enforce them and hold them accountable in the sense that like, if a project is saying, Hey, we planted this many trees, like how do you know that they actually did that? And, you know, what are some of those accountability mechanisms? So there's a lot of work being done And then that space and some of the other startups doing this are to Can I know moss is another one? I know, Lucas, you chatted with them a little while back, right?
Lucas Matney 10:06
Yeah. I mean, there are people. There's this basic idea that there's so much rampant speculation in the crypto market. What if we could push some of that speculation into something with positive externalities? So there are a few companies in you know what's called regenerative finances like the refund? Yeah, exactly. Like that's like, kind of the general idea around it. This company moss they're doing like NFT is tied to acres of the Amazon. And if you buy them, they go to a land trust, where they manage them and ensure that they can't be like, cut down by whatever tree cutter downers don't know what that? Yeah, but they're all of these environmental plays. And it's interesting because the crypto space has so much baggage tied up in the ecological impact, because Bitcoin and Aetherium are both on these Proof of Work chains that use massive amounts of energy for each transaction. So when people think of like a blockchain company, they automatically think they're all bad for the environment, which isn't necessarily true. Like they all use energy. And if you think these things are completely useless, you're probably not listening this podcast. But you also might think that it's all the waste of energy regardless because these things serve no purpose in your mind. So if that's where you're starting, it's hard to put you in a different direction. But generally like Bitcoin network and Aetherium network use multitudes upon multitudes more energy than like your average proof of stake blockchain or something like that.
Anita Ramaswamy 11:29
Right. And one thing and Adam Newman's defense, not too, not that I'm jumping to defend this individual, but um, they are with flow carbon, they're using the cielo blockchain. And that's a proof of stake blockchain. So it's a lot more energy efficient. It's definitely not nearly as bad for the environment as something like Bitcoin or Aetherium. In its current state. Yeah. So there's that.
Lucas Matney 11:49
And Seelos. Another Andreessen investment, so yeah, wow. It's like it their companies all working together over time. And like, maybe that's part of like the reason that they made this bet, because he's, I don't know, I'm not going to try to justify this for them. I am curious, though, I was I was looking through that cap table. I was trying to see if Jared Leto was on it, because he makes a fair amount of startup investments. But I don't know if Adam Newman wanted his person who plays them on the TV show to come into the deal.
Anita Ramaswamy 12:12
Yeah, I don't know if Jared made him look too good. But yeah, this was this was just absolutely wild news. So we had to talk about it. I mean, even if carbon credits are a good thing, you know, even if you sort of suspend your skepticism about them it like is Adam Newman really the right founder that you're going to back to execute on that vision?
Lucas Matney 12:29
It does seem like it's a it's an entertaining question to ask. But I think as we talk more about the public markets, I wanted to go into some other big news that happened this week, which was FTX. Launching stock trading on their platform. Can you give us a little bit more detail on that?
Anita Ramaswamy 12:45
Yeah, so FTX. It's one of the biggest crypto exchanges headed by Sam Backman free who's this notoriously sort of young, quirky blockchain billionaire. I think we talked about him a little bit last week, too. And FTX is, I mean, historically, they've served institutions, mostly right big trading firms, sort of like very technical traders. And now they're trying to expand a bit more into the retail investor market, and serve sort of average everyday investors. So they've launched this equity trading capability. And they also announced by the way, I thought this is a little interesting that users who do trade stocks with them can fund their accounts with Stable coins. Just throwing that out there, not algorithmic ones like Terra, but Stable coins, like USD See,
Lucas Matney 13:24
like a trillion dollars of a trillion Luna tokens or whatever in there to equal
Anita Ramaswamy 13:29
to $1 to invest or something. But anyway, so they're launching this equity trading platform. And what was really notable and sort of interesting about this, as they said, they're going to do this without using payment for order flow. And payment for order flow is this technique that caused a lot of controversy for Robin Hood, because Robin Hood is a big user of this. And it's basically what Robin Hood says enables them to offer its customers free trades. Do you want to tell us a little more about that Lucas, and just sort of explained that the background on it? Yeah. So
Lucas Matney 13:56
I mean, if you're doing zero fee trading on selling people stocks, you have to do it somehow in crypto, you can find a lot of different ways to do it. Because the markets so unregulated, you can just like, okay, maybe Bitcoin cost $40,000 Right now amongst market makers, and we'll sell it to users at $41,000 or something like that. So like, you know, you can find a bunch of different ways to do with crypto, it's very regulated in equities market. So it's not like they can just like invent some fanciful way of doing things. So Robin Hood does payment for order flow, and they route the deals through these like preferred brokerage houses,
Anita Ramaswamy 14:28
basically, middlemen, and middlemen clear the trades for them. So that's what caused a lot of controversy is that is that there's some criticism that if Robin Hood basically routes the trades through a middleman, instead of routing it directly to the exchange, are the users really getting the best price? They're advertising, their product is free. They're saying it's free to use the platform. It's free to make trades. But there is some question as to whether users are actually getting their trades executed at the optimal price for them.
Lucas Matney 14:52
Yeah, and I think the deal with payment for order flow is like people have various opinions on it. The one thing is it feels a little morally murky in some incapacity because it's kind of like you're routing all of retails trades through these institutional powers that then kind of know what's happening in the market. Before, you know, these trades are executed, even if it's for like fractions of a second or something. But ultimately, when you route it through the NASDAQ, they're still giving them to company liquidity providers or whatever. So it ultimately it shakes out in a somewhat similar way. It's not like wholly bad. But it was an interesting choice that they made this because they're going to have to find a different way to make money. And they've already pretty much said that they're not making money, the way they're doing this, they're just out to kind of create a new revenue stream down the road somehow,
Anita Ramaswamy 15:35
right? Because just to be clear, like Robin Hood gets paid by the market makers to route orders their way. So if FTX isn't going to be doing payment for order flow, that means they're sending trades directly to the exchange. So the market makers aren't paying them, right. And customers aren't paying them either. So this could definitely be a loss maker for FTX. But they're such a big company with so many different revenue streams that they can afford to make this kind of move. Whereas for Robin Hood, they actually do make a lot of money getting paid by like the Citadel is of the world.
Lucas Matney 16:01
And I mean, it's interesting timing for them. FTX is a huge company, they're one of the most highly valued private companies in the world. Like they're like 32 billion or something like that. The Crypto markets in a very tough spot, maybe there aren't gonna be as many consumers especially interested in aping into crypto. As a result, they are kind of diversifying into different markets that might have a little bit more staying power in the public markets. And it's kind of it's interesting to weigh this against Robin Hood, which you know, as we talked about last week, Sam bank from free to has a big stake in now. So it's interesting weighed against that, where it's like Robin Hood started in the public markets and then went into crypto and crypto became a big part of its business during the bull run. So they devoted a lot of their product strength to building up the crypto side. But now the crypto market is like in a very tough spot. So they're kind of opposite ends of the consumer investing spectrum that have kind of met in the middle for a second. But Robin Hood is pushing all this energy towards crypto and you know, yeah, exactly. So it's it's fascinating,
Anita Ramaswamy 17:02
right. And actually, some spicy news came up this week from FTX, about their potential acquisition strategy that their US president was at Davos. And he said that there are two reasons that FTX might consider making an acquisition. And the first would be to acquire more users. And the second would be to acquire more licenses to operate in different places and different methods. So earlier this week, I was actually on Monday, when CNBC reported, you know, that sources told them FTX has been in acquisition talks with three different companies. And that's Weibull Apex clearing and public.com, which is a startup that for I guess, since the game stopped short squeeze. They've only been around since 2019. But since then, they transitioned away from payment for order flow as well. So they offer free trades to users, but they don't take payment for order flow. And that's sort of in alignment with what FTX is saying they'll do so it'll be interesting to see if maybe that'll end up becoming an acquisition target for FTX.
Lucas Matney 17:53
Yeah, and I mean, just wrapping stuff up here. I mean, sandbank, Winfried has become a very like, notable face in the crypto world. He's like talking a lot. He's he's on a bunch of regulatory committee meetings and stuff like that, you know, we're seeing seeing him around a lot. So it's clear that like, he's got a big presence. FTX is definitely making moves. They're gonna be looking like a different company probably in a couple years than they look like now. And this comes as Coinbase is having a lot of turbulence. They're on the public markets. They're getting hammered. They've had a rough ride all around. So yeah, it'll be interesting to see if things shake out any differently for FTX.
Anita Ramaswamy 18:24
Yeah. And if Sam Beckman freed can really get them through this crypto winter if it if it continues to persist. This week, we chatted with grace as far as firt as an investor at Lux capital focused on pre seed to growth stage companies and web three data infrastructure, AI and ML, prior to joining Lux as furred was at Canvas ventures.
Lucas Matney 18:50
Everybody, great,
Grace Isford 18:52
it's great to have you. Thanks. So excited to be here. Thanks for having me.
Lucas Matney 18:55
I think maybe just kicking things off. How did you get into crypto in the first place? You're an investor, you invest in a lot of non crypto things. How did crypto come about? Yeah,
Grace Isford 19:02
so my background is actually in enterprise infrastructure investing. And I spent a lot of time in the data infrastructure stack. I wanted to invest in ML and realize that you actually had to figure out the data infrastructure in order to run ml at scale. So that led me down a journey, a deep thesis there ultimately invested in a data sharing company called vendita. It's actually a serverless blockchain company, which enables data sharing at scale, cross cloud cross geo really awesome company founded by Tim Wagner, the founder of AWS lambda and truthy Rao used to lead Amazon managed blockchain was also an early bitcoin miner in India. So actually through a data infrastructure investment, I learned the opportunity to share data immutably at scale and kind of the power you know, there could be hundreds of companies built a top decentralized data systems and and kind of smart contracts or the invidious case the scalable ledger they built and so that led me down the rabbit hole. And then I ended up investing myself personally got into yield farming coincided also the move to New York are many of my friends are also in the crypto and VC ecosystem. And now you know, I'm at Lux full time leading up a lot of our crypto and web three investing efforts.
Lucas Matney 20:09
As someone who's gotten a good look at the space so far. I'm just curious, how would you frame some of the biggest challenges facing crypto right now, just from an infrastructure standpoint,
Grace Isford 20:18
totally three major things, one, reliability, there's only two nines of reliability right now, for nodes as a service providers. So you know, that's your Alchemy. And if you're, you know, Metamask was down last week, there's not high reliability, especially if you compare it to the web two world and the enterprise systems there to security, right, there seems to be a new security hack reported every week from you know, wormhole to XE. And so, you know, how do you you manage risks of smart contracts and hacks there? And then three, you know, fraud and risk. So how do you deploy effective KYC? At scale? How do you know, you know, actors are who they say they are? And how do you ultimately manage downside risk, which I think is really keeping a lot of folks out of the crypto world right now afraid of losing all their money if they venture too deeply into crypto.
Anita Ramaswamy 21:00
So on that first point about reliability, I'm just curious, like, what do you think needs to be done for that to be sort of flushed out? Like, why are there so few players in the space right now?
Grace Isford 21:08
So there actually are a fair number of players trying to get right. And so I'm actually confident with the number of smart people and the number of inflows of capital, right, like, I think the craziest funding year ever for blockchain funding that, you know, we're have a lot of good signs of building, you know, more reliable solutions, I think it's a combination of things. One, just that the tech is still quite nascent, the market is still early, we haven't built those systems out yet to is, you know, we just haven't built a lot of the developer tools and data infrastructure monitoring, storage, you know, affliction networks at scale. And so I think we just need more of the foundational developer infrastructure should be built to both enable more people to build in this space, and then ultimately enable these platforms to kind of grow over time.
Anita Ramaswamy 21:49
Got it. And I'm also wondering about sort of applying your prior experience to the web three world, what are some of the lessons learned in terms of how like web to developed and all these parameters that you're talking about?
Grace Isford 21:58
Yeah, it's really interesting. I do not think it's apples to apples, right? As much as I would like to, to stack to a web three stack. And I've given a fair amount amount of thought to it. But I do think that there are crucial non negotiables across any data developer stack, whether we're in crypto, or what to write things like reliability, things like latency, things like security, or, you know, in every historical kind of technological trend have been relatively important. Of course, different stakeholders care more about latency, perhaps in the trading world than maybe some other folks do. But as I think about it, right, it's more, you know, what are the biggest fundamental problems to enable these things to work reliably, and with low latency at scale. And so that would be kind of the unifying factor and both kind of the web two stack and the web three stack that this principle I've been trying to use to guide myself,
Lucas Matney 22:47
I think a lot of people look at this space. And you know, maybe they're not very deep into crypto, but they're like, I see a lot more web three companies being hacked than I see web two companies. You know, I can think of some reasons why that would be. But why do you think that that is,
Grace Isford 22:59
there's a lot of money flowing through it right now. And there's a lot of anonymization, right, I actually met this morning, Esteban, founder of TRM, labs, right? That's another company like chainalysis, we're just trying to go after these bad actors. Because, you know, I think TRM analysis, several other companies in this space, have, you know, 10x potential in terms of compliance and monitoring, because you just do not have that yet at scale, in the same way that we've kind of created these sophisticated AML systems on the, you know, financial infrastructure side in the web two world. So I think that's a major thing that needs to develop to kind of get to that level of sophistication.
Lucas Matney 23:33
Yeah, I mean, I think people are just, you know, they look at some of the consumer platforms, and maybe they see these 100 million dollar hacks on things more advanced than the defy world. And then all of a sudden, they're wondering, you know, how safe is their money, which, you know, it's scary,
Grace Isford 23:46
right? And there's FDIC insurance in web two versus web three, right, at a very fundamental level, right. At the same time, I do think there's a way to invest and have a lot of money in crypto in a relatively safe way, right? I'm not I'm not gonna say is your risk. And this is not financial advice. But I think it's about knowing what you're doing. And also, you know, having both, you know, friends, companies and a user experience combined with increased security and safeguards, and you know, being wise about putting your money, for example, in, you know, a slightly lower yield, but maybe safer Anker protocol versus a super high yield, but high risk kind of altcoin Yeah, that those are kind of sorts of things you can do to kind of minimize your risk in this space, where a lot of the folks that were targeted at some of these hacks may have been aware that they had, you know, more money kind of at risk flowing through and really greater risk when you're flowing or moving money between things. Right, versus, you know, just Stable money sitting in a Coinbase or Gemini account.
Lucas Matney 24:39
Well, that's, that's kind of one of my questions. I mean, you mostly invest in infrastructure there. Obviously a lot of crypto VCs out there who are mainly doing consumer plays or like something around NF T's. But I guess when there's so many vulnerabilities out there, like it's like such uncharted territory, is it kind of a little sketchy to be pushing consumers towards all of these products when it's like there's still a lot of very a base level questions that people are unsure about on the security side?
Grace Isford 25:04
It's a good question, I think it comes back to just develop a more mature infrastructure at large. And I think it comes back to the second and third points I mentioned around better security systems and better fraud and risk systems. If you have those things, more institutional money will be in there, you'll see, you know, greater maturity in general, I think crypto is already growing fidelity just offered Bitcoin as part of their retirement savings account offering to consumers. So there's not only, you know, institutional demand from Fidelity, Goldman jpm, etc. But we're also seeing folks want this as like, a way to diversify their portfolio. Right. And so it kind of gets back to your question, it's less about, you know, oh, put all your savings and worth in crypto and more viewing it as this is an interesting kind of new asset class that you might want to, you know, diversify your assets with, and you can see, you know, meaningful incentive and growth over time. But you know, knowing that it is still early from a security risk and fraud perspective.
Anita Ramaswamy 25:58
So I know we talked a lot about security just now. But you know, one thing I've been hearing and paying a lot of attention to is all these different sort of layer one or layer two solutions that are coming out. And they are trying to balance these trade offs. Right. And I think someone told me, you know, about like, there's sort of three considerations you have of security, privacy and scalability. And I'm just curious what you think about how that's going to shake out? Like, do you think that it's always got to be an inherent trade off between those three things? And in terms of sort of what what three should prioritize and development? Where do
Grace Isford 26:25
you fall on that? Great question. The company answer should be all three. I think all three are super important. I think one of the biggest opportunities in in crypto right now is still security, though, right? If you can build more reliable smart contracts at scale, right? I think that reliability piece is crucial. But you know, you can't have a reliable system, if it's not secure, right? And you can't, you know, run a system securely, if you don't, you know, know who's within that system. So, so I think security is probably one of the most important pieces from a prioritization standpoint. And there's a lot of awesome smart contract auditing firms. I've been on the hunt for, you know, really technology first solutions, so that, you know, higher margin less human in the loop or consultative aspect to them, and being able to kind of automate and monitor smart contracts at scale.
Lucas Matney 27:14
Do you think it's gonna scale with these auditing firms being kind of like the primary mechanism for proving reliability? Or like, I think, what would it take for an apple or something to bring smart contracts into their ecosystem? And when I think about it, they would probably have like a set number of smart contracts that do certain things. And these are the standard and you have to use these in order to be in our store, like, Do you think there's that sort of centralization is in the future? Or, you know, what, what do you think there are?
Grace Isford 27:37
A few things? Well, first of all, like the lines, even get an audit is crazy, you know, most of these companies, you have to pay exorbitant amounts to even get to the top of the list. And it takes a long time. So there's massive demand for it, too. There's an entry incentive structure thing, right? So how are you, you know, aligning the incentives of, for example, the hackers who are helping, you know, audit and kind of test battle test your smart contract, and, and how do you properly compensate them to get the best results possible? And then three? I mean, this question on standards, most, you know, it depends on what realm you're working in. But most companies today do require like an audited project, right. And so like, if you're working with, you know, maybe a UNISAW. For someone else, you they may require, like just part of your partnership that you are audited by, you know, search IQ or quant stamp, or Nate, take your pick. So I think we're starting to see that emerge, I think we need more of it. And I think we need more efficient ways of doing it, that more people can do it at scale and at the most robust and secure way possible.
Anita Ramaswamy 28:34
So I know we've we've talked a lot about, you know, some big high level sort of themes that you're looking at, but as an investor, I'm just curious, what are some of the particular niche spaces that you're really seeing a lot of opportunity right now,
Grace Isford 28:45
a few things, I don't think enough people are taking advantage of kind of the nuances of the data dev stack. So once we think is really interesting is indexing. So most companies interacting with Blockchain data needs to do indexing in some way. Most people know of a company called the graph, which is a decentralized kind of data. indexer, mostly on Ethereum indexing is is tricky to do in house. You know, I think companies like dune and others have actually tried to build it in house with teams with 60 engineers, you know, as a VC, when I hear that, I think that's a company opportunity, if you have a six to eight headcount of building something that many people could use, huge opportunity. And so you think like the graph is there's kind of a interesting incentive structure and their their token omics are kind of quite interesting. And so there's a lot of G for maybe more centralized indexers, or indexers as a service offering, you know, ways to ingest data off the blockchain as an API. So that's the one area that will under explored another is is kind of in the front end IPFS stack. How are you storing data in a decentralized way? There's some cool companies building in that space, like ceramic network, you know, protocol labs, obviously kind of a pioneer in that area. And I think the whole space or the developer stack above and below the notice of service providers, so you know, things that theoretically you know, an Alchemy if you're a quick note, a block team and could offer But maybe hadn't built yet or haven't specialized in, I don't think enough people are kind of recognizing the opportunity to multibillion dollar companies just in that, you know, stack of a crypto developer tooling around node as a service.
Anita Ramaswamy 30:09
I do want to go back really quickly, just to the indexing piece and ask you sort of why do you think that's so important,
Grace Isford 30:16
you have to index data. If you're like working with the blog, I guess it's a problem that you don't have in web two, right? Because you don't have your blockchain data to index and you don't have to go block by block or kind of like in order to really understand what's going on. But in many cases, these companies are working with Blockchain data, and they need to have like a more detailed account of kind of what's going on under the hood in order to you know, deploy smart contracts at scale, or, you know, it could really range across a variety of functions. And also every chain is different, right? So so on indexing versus Ethereum indexing. So it's a key need if you're leveraging blockchain data in any way, and you can't just import data, you know, from a data warehouse, right? In the same way you can have in web two. So it's almost it's like a new step that's added.
Lucas Matney 31:00
I know that for a lot of these infrastructure companies, like you're betting on things that are specific to a single blockchain, perhaps I guess, like for the audience, maybe they're lightly familiar with a cerium. Maybe they know some of the other layer one chains, but they see Aetherium, they see something that doesn't do that many transactions, it's, you know, very high fees. I guess balancing privacy and scalability is one thing, but do you think that we're still seeing some layer ones that have a lot of potential to become dominant chains? Or do you feel like Aetherium is kind of going to be a big sticking point?
Grace Isford 31:30
Never say never? Right? I think I like to invest in things that are contrarian and kind of inventing the future. Right. And I think, you know, a lot of people thought when hearing came out, they will be the only chain that would really work at scale for development. And then Solana came along. And developers loves a lot. And you know, it's even lower latency. And now you're seeing a lot of attention with Tara and Avalanche. And so I think there's still growth in the layer one space, I think there are some layer ones that have, you know, a bit of a TVL, like lead or just a market lead in general. And there's also kind of been the emergence of layer ones for more specific functions like privacy. So maybe like an iron fish or an Aztec, right. And so, where I think most of the growth will come from, at least in the next, you know, 1218 months, maybe from some layer ones, but also these layer ones that are doing more specific use cases, and are kind of working together in a different way I kind of this multi chain cross chain world that I believe in, and I think a lot of folks believe in are more open to having more chains that lasts, it's more a matter of which ones can kind of develop an ecosystem and focus on a use case to get that flywheel of initial adoption to work at scale.
Lucas Matney 32:31
I think there are a lot of crypto native funds out there, lux capital has a lot of investments in a lot of different industries and areas, I guess, how do you compete with someone whose sole focus is just on crypto ton of partners? Research, everything like that?
Grace Isford 32:45
Totally. We talked about this on the panel yesterday, I think a lot about circle of competence, right? And where can I be competitive versus others. And there's certain areas where, you know, you should totally have a crypto native fund involved. But there are certain areas where you know, you benefit a lot from someone who's, you know, enterprise SAS model and or seen our web two systems run at scale from our reliability, security and fraud risk perspective, or think of our investment in Anchorage, right? Do go I think has benefited a lot from some of our relationships in kind of the regulatory and financial infrastructure, landscape and understanding there. So I think there's a lot of actually synergistic opportunities for generalist funds to be in crypto, but you have to just like any asset class in the web two world, you have to know where you're strong and where you're weak. For example, you know, NFT investing is quite different than defy investing, which is quite different than crypto data infrastructure investing. And I would argue, you know, any person who says they invest in web three shouldn't invest in all of that they should probably choose their sweet spot in their core competency. For me, I think microbiome z is the enterprise and fintech infrastructure, benefiting from past experience of the web to data infrastructure stack and the FinTech infrastructure stack. And seeing, you know, how do you pored over from web to to web three and bridge that gap, and I think we're gonna be a lot more translation between web two and web three, to kind of get to an end solution or an end world in which there's 100 million users in web three, instead of, you know, building in silos and crypto native things only. So I think there's, you know, opportunity for many, many funds to build in this space. And it's no surprise when there's foundational problems to be built. And a lot of smart people in this space that we've seen, so many VC dollars attracted to this space, as well.
Anita Ramaswamy 34:17
So Grace, you got at this a little bit just now when talking about specialization, and like knowing your core competencies, but I'm curious, given that you just spoke on this panel, what were some of the key takeaways that you were offering in terms of how VCs should actually increase allocations to the asset class
Grace Isford 34:31
back to what I just said, a lot of smart people building this base where there's foundational platforms being all go back again, reliability, security and progress that have yet to be built. And so I think there's a genuine excitement there. You know, many of my smartest friends are in crypto now and they were a year or two ago. So that kind of unbelievable opportunity is extremely exciting electric. I think not enough folks are understanding kind of their differentiation and sweet spot. And so I think more you can think about, you know, your superpower or how your web two skills map to M three It is critically important, combined with the sequencing and timing of the industry we were talking about a bit about this yesterday is we are still quite early, but it's almost like this new like emerging technology. So thinking about maybe the more immediate use cases for institutional financial infrastructure versus, you know, Dell financial infrastructure versus energy infrastructure, there's almost like different timelines and kind of return profiles to each of them. And then third thing, you know, I beat from hash brought this up, which I thought was a great point was a lot of people aren't honest about what they don't know, or maybe are afraid to. And so it's something we talked about, you know, if you are an institution or your individual or company that wants to learn more about crypto or doesn't understand crypto rather than kind of being afraid of what you don't know, I encourage you to try it and actually invest and try to inform me and try defy and and kind of see what happens. And I think that's the really the best way to learn. And so it's how do you kind of incentivize folks, or we call it incentive engineering, to really want to partake in this system and learn, I think that is almost like the biggest friction point. And maybe one of the reasons why you've seen this little bit of divide between web two and kind of crypto native because not everyone is willing to kind of take that leap or spend a week or two diving into crypto and setting up their Metamask or whatnot. Yeah,
Anita Ramaswamy 36:11
I feel like that's great advice, not just for investors. But just for anyone who's curious about web three and looking to learn about it. Thanks so much for sharing all that grace. It was really great having you on and we covered a lot of ground today. So
Lucas Matney 36:21
enjoy the Bahamas.
Grace Isford 36:23
Thanks so much for having me, guys. Appreciate it.
Lucas Matney 36:28
Thanks for listening. We'll be back every week with the top crypto news and interviews with experts in the space. You can catch us on Spotify, Apple Music or your favorite podcast platform and subscribe to our companion newsletter also called Chain reaction@techcrunch.com. Forward slash newsletters. Check out the links in our show notes for some of TechCrunch is crypto coverage this week, and you can follow us on chain underscore reaction on Twitter. We'll see you next week. Chain Reaction is hosted by myself. Lucas Matney along with my co host and eat around Swami we are produced by Yashad Kulkarni and our associate producer is Maggie Stamets with editing by Cal Keller Bryce Durbin is our Illustrator Alyssa stringer leads audience development and Henry pic of IT managers TechCrunch is audio products. Thanks for listening