Welcome back, this week Lucas and Anita dive into a conversation around Coinbase’s legal woes and the insider trading scandal surrounding an employee at the firm. We also discussed Elon Musk’s bitcoin sale and Minecraft’s ban of NFTs from its platform. In their interview this week, Anita and Lucas interviewed David Nage. Nage is a portfolio manager at Arca where he makes early-stage bets on crypto startups. We talked about finding hot opportunities in seed stage crypto and then broke into a wide-ranging conversation on crypto regulation and what comes next.
Welcome back, this week Lucas and Anita dive into a conversation around Coinbase’s legal woes and the insider trading scandal surrounding an employee at the firm. We also discussed Elon Musk’s bitcoin sale and Minecraft’s ban of NFTs from its platform.
In their interview this week, Anita and Lucas interviewed David Nage. Nage is a portfolio manager at Arca where he makes early-stage bets on crypto startups. We talked about finding hot opportunities in seed stage crypto and then broke into a wide-ranging conversation on crypto regulation and what comes next.
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Helpful links:
https://techcrunch.com/2022/07/25/crypto-valuations-may-sink-until-september-as-vcs-play-a-waiting-game/
https://techcrunch.com/2022/07/20/tesla-dumped-75-of-its-bitcoin-holdings/
https://techcrunch.com/2022/07/20/minecraft-says-no-f-ing-thanks-to-nfts/
Lucas Matney 0:03
Hey everyone, it's Lucas and Anita, 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. Alright, so this was pretty busy week, lots of legal stuff, lots of doom and gloom. But Tim TechCrunch, we had some other stuff that we're working on, what are we up to Anita?
Anita Ramaswamy 0:26
Yeah, we're actually looking forward to this a lot. We're having a one day crypto event on November 17. In Miami, I'm super excited to go and we're gonna be announcing speakers soon. You know, we've been planning for this and putting together some panels, some fireside chats and some other fun stuff for you all. But if you want more information you want to stay updated. Or if you want to snag an early discounted ticket, you can go to the link that we're going to be tossing in our show notes to sign up. We are super excited. And we hope to see you all there.
Lucas Matney 0:51
Yes, this is your opportunity to see a need an AI in action grilling guests on the main stage. But something like that. Yeah. So something something like that. Well, jumping into some of the news this week, there's some some chaos brought about by some sec, DOJ action with Coinbase. What was going on there?
Anita Ramaswamy 1:07
Yeah, we love to hear about some regulatory drama, you know, it's always juicy. But this week's is particularly big. And I think we're gonna have to spend a little time talking about this one, because it's super important for the entire crypto industry. Coinbase is under some legal heat. So last week, Coinbase employee and two other people, one of these people was his brother were actually arrested and they were charged with wire fraud, because they were allegedly front running token trades where they knew what was going to be listed on the platform, this guy was allegedly calling up his brother and his friend and saying, Hey, guys, by by the token. And so that investigation was led by the DOJ, all three were arrested. And what was really interesting about this is afterwards, the three people were also hit with charges that they had committed securities fraud. And that came from the SEC, which essentially means that the SEC was looking at some of the cryptocurrencies that they had been trading as securities, which, as you guys might know, has huge, huge implications. When you're selling something that's a security versus selling something that's not a security, you have to make all these disclosures, you have to be compliant with all of these different laws and rules. So it's really a big deal if they were indeed selling securities without registering them properly. And so we got a little more context on the situation this week, because Bloomberg reported that the SEC had actually already been investigating Coinbase itself, like before, this whole arrest thing happened for allowing securities to trade on its platform. And so this just goes to show, you know, this is a really big moment of scrutiny. And Coinbase, for its part is sort of adamantly insisting, you know, we do not sell securities on the platform. And you know, we vet every single thing that's listed on our platform before it goes on to make sure it's not a security, but he didn't really explain the details as to why they think that are their justification. He just sort of said like, no, no, guys, like trust us. We've checked.
Lucas Matney 2:45
Yeah, and so like the whole listing process, initially, Coinbase was really slow to list new tokens. They had Bitcoin, they had Aetherium, they had a couple others, but it was a huge deal. Every time they listed a new token, for the first few years, the company in the past, like few months, as the Bull Run was going crazy. They were just like getting them out the door as quick as they could got a little loose with standards there. And if you look at what the ones that SEC was calling out, these things don't do anything. They're all useless. And like,
Anita Ramaswamy 3:12
I actually hadn't heard of most of them. It's like amp rally, power ledger. CX,
Lucas Matney 3:18
I went to all the websites of all these and it's hilarious how many clicks I had to go through on every one of their websites have any idea what any of them did. So when, when Coinbase has like we've added these to the highest degree, I'm kinda like, All right, okay.
Anita Ramaswamy 3:32
Right, right. I mean, look, all of them are actually like, built on Ethereum. So there's sort of layer two tokens that are built on the Ethereum network. And like I said, I hadn't heard of any of them. But Coinbase is actually not the only exchange that's being investigated for this. And I think this is why the fact that they're even being investigated by the SEC is such a huge deal. There's other names facing some legal action over this so by Nance is currently under investigation by the SEC for its BNB token that it sold in 2017, which allegedly they think was a security the SEC thinks and ripple, which is another big token issuer has been in this ongoing legal battle with the SEC over its XRP token that's been a very high profile fight, a lot of insistence on both sides. And those are actually the fifth and sixth largest tokens right now by market cap at least as of a couple of weeks ago. And so those are huge, huge exchanges and huge tokens. So it's not just the shake coins being affected. There's also a number of class action lawsuits that people are filing to sort of nail crypto companies on this rule. You know, from what I've read, it seems like the class action lawsuits are less likely to be successful because it's not coming directly from the SEC. But there is a lawsuit against by Nance for selling its Tara token, not its Tara token, but the Terra token that you will have heard of. There's another one against Hugo labs for selling its board ape, NF T's and its ape coin token. So it just goes to show a lot of eyes are on the crypto industry right now. And the definition of what actually is the security is going to be really important.
Lucas Matney 4:54
Yeah, there have been so many years of time for this lawsuit to come through. I think the fact that it's coming through Now, when there have been all these high profile like lending entities failing, like a lot of retail investors, anyone who held through the last couple of years is probably down bad. Like, it's a pretty popular time to be like pushing some hefty regulator to because you're salty. Like, none of the retail investors and Coinbase are like feeling too good about themselves. The stock is, as we've said, every week down, down, down, down, down. So yeah, it's an interesting time. But like, as you said, deciding what a security is, isn't the most straightforward thing.
Anita Ramaswamy 5:33
Yeah. So I took a look into this. And I was just interested to see, you know, what is the argument one way or another, and there's this test called the Howey. Test, it's a four part test that the Supreme Court basically came up with to decide whether something is a security or not. So I'll read you the four parts really quick. A transaction qualifies as an offering of securities, if it involves one, an investment of money, two and a common enterprise three with a reasonable expectation of profit. And this is the key one for to be derived by the efforts of others. So essentially, the implications of this definition means that any crypto that is acting like a substitute for fiat currency is safe, it's okay, it doesn't really meet that test. So it's not classified as a security. So that's why we haven't seen any action against like, you know, Bitcoin, or Aetherium itself, because you're just using that to transact. But a lot of the tokens that were actually listed in the SEC lawsuit, the nine tokens, they do a lot more than, or they claim to do a lot more than just be mechanisms for a transaction like Fiat. One of them is rally, they describe themselves on their website as your own social token that enables transactions access and more creative solutions for your economy. They're geared towards creators. Now, I don't really know what that means. But I will say it sounds like they're trying to do a lot more than just be a medium of exchange,
Lucas Matney 6:44
we've definitely covered rally before on TechCrunch. And I think that like, yeah, it's kind of one of those things where a lot of the value is derived from the platform itself, which is kind of the fundamental problem with a lot of these things is like fulfilling that last note of the Howey Test, which is to be derived from the efforts of others, if it's clearly all coming from the centralized entity that like created the token, you know, that's the issue. I also love the Howey Test, because the Howey Test is from like, 1930s, and originates from some guy who was selling plots of land in an orange grove in Florida. Like this is what we're basing all of the like, our understandings around that are what we're basing the future of the crypto economy in America on, which I know that's how it works with all of the laws, but it's still fun. Yeah,
Anita Ramaswamy 7:29
definitely need need some updates to laws in the US, but I don't know, I think we're also making the updates that we don't need. But that's a that's a separate issue. Yeah, but no, this is this is gonna be huge for crypto. And I think every single exchange is probably very scared right now as to exactly what the SEC is going to do, because they want to be classified as commodities. You know, we've talked about this on prior shows with the new bill. It's not as new anymore, but the bill going through Congress right now, that would regulate cryptocurrencies and they want to make the CFTC, the main regulator, but I think in the meantime, you know, before that takes effect, the SEC is sort of swooping in seizing the day and trying to get their wins while they can.
Lucas Matney 8:04
This is kind of wild, because I mean, like at the end of the day, the last couple years, it's been a very populist platform for any politician to have to be pro crypto. So as a result, it's like fairly bipartisan. There are a lot of Democrats and Republicans who like fundamentally say good things about crypto in the crypto industry for the most part, it's been Elizabeth Warren who has had some harsh words to say on defy and Stable coins and stuff like that. And Gary Gensler, who is very positioned to like screw over these guys hardcore, so they're kind of unlucky in that capacity, I suppose. But if anyone was gonna be pissed about it, I suppose it be the Securities and Exchange Commission, right? It's
Anita Ramaswamy 8:39
kind of their job, but um, I guess yes, it's definitely been a tough time for crypto and I think that takes us nicely into our next topic that we have here.
Lucas Matney 8:50
Yes, so Elon Musk keuro an enemy of the crypto industry at various times depending on who you ask. At the beginning of 2021 Tesla made this huge Bitcoin buy they bought a billion and a half dollars worth of bitcoin at the time I think average price was around like somewhere between 25 and 30 grams so they got in you know before the highest highs, they bought all this Bitcoin and they also announced that you would soon be able to buy Tesla's with Bitcoin. So this like sent Bitcoin through the roof and really started like a very sustained Bull Run to the moon, if you will, yeah, to the moon. And it was it was like, at this point, he like became a crypto God. He already had significant overlap between Tesla fanboys and crypto fanboys, but this really cemented it. Then, a few months later, he has this Mia culpa, where he goes in and says, you know, actually, Bitcoin energy usage is kind of bad and doesn't jive with the mission of Tesla. So we're not going to allow Bitcoin sales for Tesla's anymore, but he was also like, we're still holding on to the Bitcoin. We haven't sold any. We'll make decisions on that later. yatta yatta yatta several quarters later, Bitcoin goes up and down. Tesla stock goes up and down this past quarter. They just released their quarterly earnings this past week, and they noted that in the previous quarter, they sold 75% of their Bitcoin holdings which they sold for about a billion dollars, but what was the price they sold out? Lucas? Well, so it's a little unclear but they didn't sell at the low so they theoretically like reportedly they had around 40,000 Something Bitcoins. So I think like, conservatively judging that they sold 30,000, which I think is like pretty much what people think if they sold 30,000 And they netted 960 million. Yeah, 960 million, then they were somewhere above 30k. So it's not like they sell the absolute depth. Exactly. And if they sold it 30 It doesn't seem like they lost a ton of money, theoretically. So who knows? Yeah, they didn't disclose exact purchase prices. Everyone was kind of always guessing on their average price, but they sold others Bitcoin. The Crypto community responded negatively. They felt it was a very traitorous move by all musky. They didn't enjoy it too much. And they said we should start shorting Tesla some of these people on crypto Twitter where it's time for revenge, basically. So wait a couple hours then on the Tesla quarterly earnings call. Tesla CFO says that they did this because China had these super intense COVID lockdowns this past quarter. And they were kind of unclear when they were going to end and they were in a cash crunch. Because you know, the China market is important to their overall revenue.
Anita Ramaswamy 11:17
They sold the Bitcoin they didn't sell it. They sold the bit they had the audacity to sell the Bitcoin
Lucas Matney 11:22
I know I know, is his Wow, they could have done anything. But they had to attack the crypto bro specifically. Yeah, so they they do this. And you know what, whatever that this is obviously like, who knows what the real reason is? Or if this was I don't trust, but that's my problem. So they say this and then Elon butts into the CFO and says, Yeah, but we haven't sold any of our Dogecoin Oh, and it hadn't been disclosed that they own Dogecoin they've been accepting purchases on the Tesla website in Dogecoin. But like,
Anita Ramaswamy 11:51
I really want to know if anyone's actually done that, like, even like,
Lucas Matney 11:54
ritual, I'm sure some people but it's got to be like 1000s of dollars, but I looked at it. So they actually they didn't disclose how much they own. But they disclosed how much digital assets which was kind of assumed to be cryptocurrency that they own, which they own, they currently own $218 million worth of cryptocurrency. So if they measured that at the end of the last quarter, which is probably when they would have based on some of the loose math on how many bitcoins they have, they probably have around 200 million 210 million worth of bitcoin that's made up of that. So they're still holding on to potentially millions of dollars worth of Dogecoin, which is like something, right? And like, ultimately, like if you got 5 million and you're gonna piss off a bunch of Dogecoin holders, I don't think anyone you might as well hold on to it. I guess it's not like it's a billion dollars. Yeah. And Elon
Anita Ramaswamy 12:47
Musk and Dogecoin do have a long history. And I know he's being sued. Right? We talked about that earlier on. One of our episodes by
Lucas Matney 12:54
some disgruntled dish clean investor is suing him for like $268 million dollars or billion for having influence over the price of a billion. It's 268 billion. Yeah. It's a lot of money.
Anita Ramaswamy 13:07
Yeah, I mean, the most absurd thing about this, to me is just like Elon Musk has been in the news for so much crazy stuff. In the past couple of weeks. I feels like every single day I wake up and I get like a push notification telling me who else Elon Musk has a kid with? And I'm like, Oh, wow. Okay. But But no, like, none of that really mattered to the crypto community. This is what was the last straw for them. Like this was the thing was him selling Bitcoin that really pissed him off. So
Lucas Matney 13:30
it's been some bad PR times. I mean, like, frankly, the Twitter deal probably pissed off some of his community a little bit if they were like, you know, they bought in right away, because they're like, Oh, now we believe in Twitter. And then all of a sudden, they watched the stock price slide because he pulled out of the deal, right? Like, Oh, can we not trust you?
Anita Ramaswamy 13:45
Well, and to be clear, when I say crypto community, I mean, like the Elon Musk stands like the hardcore one. Yeah,
Lucas Matney 13:49
it's tough times for richest man in the world. Right? Well, let's thoughts and prayers for Elon this week,
Anita Ramaswamy 13:55
sending thoughts and prayers for sure. On the note of crypto getting a little rekt this week, as it has been, we did look into the story that our colleague Amanda wrote about Minecraft banning NF TS from their platform. What's up with that?
Lucas Matney 14:12
Yes, so Minecraft. It's this game that has a ton of people on it. It's always monetized itself by people actually having to pay for the full game which is interesting. Like all these other companies have done free to play. They've done battle passes, they've done loot boxes, Minecraft still has like their own little in game currency and stuff. But like for the most part, they've monetized themselves in a pretty like web, you know, 1.5 kind of way it feels like So this week, they announced that they were banning NF T's from the platform. There were a couple little like community platforms that were basically building on top of Minecraft and like introducing token gated communities and having tokens on them. And Minecraft basically said we don't want that on our platform anymore. And that's it like fairly harsh words,
Anita Ramaswamy 14:55
right. So the entity that develops Minecraft wrote NF T's are not inclusive Above all our community and create a scenario of the haves and have nots. The speculative pricing and investment mentality around NF T's takes the focus away from playing the game and encourages profiteering, which we think is inconsistent with the long term joy and success of our players. I like that they're thinking about that. I think that's really important. It's really nice. You know, as a former Neopets playa, I remember being pretty pissed off when they decided that you have to pay money to get neopoints, you know, that ruined my life as a 10 year old. And so I'm here for, you know, not taking the joy out of games by making profits off of them. But at the same time, it sounds like Minecraft is already sort of doing that.
Lucas Matney 15:31
Well. It's like, it's kind of Metaverse, whatever vibes, but it's the vibes of like, we don't like the people are profiteering off our gamers, that's our job is to read this in some capacity, where it's just like, alright, let's not get all high and mighty, you're still looking at your bottom line and being like, Okay, well, they're spending money with these third party developers. Maybe this is less money that they're putting into mine coins or something like that. So like, you know, I'm not gonna like game publishers all act in their best interest if they could introduce NF T seamlessly. And they feel like they wouldn't get rekt they would have I don't trust them. But they made a stance and is it the most daring time to make a stance when crypto has crashed? And if T sales are down, and we're at the front end of a bear market? I don't think so. But they made the choice to do it. Regardless,
Anita Ramaswamy 16:17
they might change their mind, which I thought was interesting. It sounds like a lot of the games that are built on top of Minecraft, including this one called NFT worlds, which is built on Polygon. They've built some Plater and games on top of the Minecraft open source code, and they're trying to fight this decision. So it'll be interesting to see if Minecraft reverses or changes course if prices go back up. Again. Some point,
Lucas Matney 16:34
man, this is such a, there's some times when like a over arching platform makes a decision that affects like a third party developer, and you're just like, Hmm, I wonder how they're gonna work their way out of this one. This is one of those situations where I'm like, damn, NFT world sounds screwed, like, what are they going to do? And they proposed a couple platforms, but they just sound incredibly like nearly impossible to pull off.
Anita Ramaswamy 16:55
Yeah. And crypto gaming in general is kind of taking a hit this month. And it's been taking a hit just like all the other sectors of crypto, some news that I saw earlier this week was that immutable games, let 6% of its staff go. They didn't have a huge staff. It was a couple of 100 people, but um, they are still planning to hire, which is interesting. They got a $2.5 billion valuation after raising 200 million and their funding round in March. So it sounds like it's not just pure layoffs. But it's more of a pivot and strategy. And I think you know, my take on this is just there are a lot of crypto gaming companies that are coming to the sort of moment where they're realizing their games actually have to be fun to play. And it can't just be about monetization, you know, it can't just be about like earning money. Like we all do that at work every day. It's not really like what I'm looking for out of a video game.
Lucas Matney 17:36
It's funny also, because I feel like a lot of hardcore crypto believers ultimately believe it's like, are people going to get into crypto because of Defy? That's a very small subset? I think most people think that like the Trojan horse of crypto mainstream adoption will be gaming. And you can already like bet on the fake stock market and Grand Theft Auto was doing a Neopets to Yes, exactly, yes,
Anita Ramaswamy 17:58
right came up. Yeah,
Lucas Matney 18:00
they're just you know, you can do any of these things. But like, I feel like even in a bear market, people have some faith that like crypto gaming could still catch on just because it's so obfuscated from the rest of the market. And you're not looking at Coinbase to track the token prices or something like this still could take off. But like for the time being, none of these games were fun. So they're all failing now. And that's just like a necessary part of the lifecycle. Like you have to build a fun game. It's a game.
Anita Ramaswamy 18:26
No kidding. This week, we talked to David neige Naisha, the Portfolio Manager at Arca a digital asset management firm where he invests in early stage blockchain startups.
Lucas Matney 18:42
David, it's great to have you on it's great to be with you. Well, it's been kind of an interesting few months for crypto and your fund is fairly new. I guess. I'm curious. How are you feeling? As you see all this wreckage around? Surely you've been in the space a while but it's a daunting time?
David Nage 18:58
I would say you're absolutely correct with that. I always like to reference historical events that have happened in the past. I'm of an age, thankfully, I've heard that I don't look at but I lived through the.com bubble. I've lived through Lehman and bear crisis. I've seen what have happened, you know, before that, and obviously what happened after that. And what I've seen, especially with digital assets, is I've been around, you know, roughly about six years now. I saw quote unquote, crypto winter in 2018. And I saw how that evolved effectively how that evolved. Just to kind of go back in time, if you will, is Bitcoin was predominantly the only show in town from a kind of a macro landscape, if you will, you know, people started to get drawn into Bitcoin, you know, towards the middle part of 2017. You started to see at the end of 2017 It returns all time high. And then in 2018, the price started to fall and those that had just entered into the space via via Bitcoin didn't really understand What they were allocating to they didn't understand what they were holding. They really hadn't processed a thesis behind it, they hadn't processed a rationale behind it. And this is predominantly retail investors at the time as well. So bitcoins price Fell Precipitously, and all of a sudden you had the proclaimed crypto winter. What happened during crypto winter in 2018, is some of the more formidable businesses in our space today, raise their seed rounds, you had open seat raise their seed round, you had fire blocks raise their seed round. These are now companies that are unicorns that are north of a billion dollar valuations. And they raised during this period of time. And so what we've seen time and time again, visa vie technology, if it's the.com bubble, or it's now in digital assets, that times of price instability or price fluctuation don't really turn innovators off, they actually see that there was a lot of interest. And we've seen that, you know, since crypto winter through this last period of time, over the last few months, that the interest from the developer community has been unparalleled. You've had hundreds and 1000s of developers start to really flock into the world of digital assets and look at the technology stack and try to innovate and build. You know, as a VC, as you alluded to, you know, starting our fund, about nine or so months ago, in October of 2021, what we've seen is just a tremendous amount of talent and experienced talent that has been to the show before that has built something before that has either been at a legacy web point two Oh 2.0 company, they understand the pivots that are needed, they understand the difficulties of building businesses. And so this is a class of founders that we have never seen in this asset class before. I also think that it's a really interesting point in time, because there are now more multibillion dollar funds, earmarking capital to digital assets and early stage digital asset founders than we have ever had in this asset class before the number of goes beyond just hand count, it's, you know, probably well over a dozen, or if not two dozen funds that now have more than a billion dollars marked for, for investment in the space. So you have a founder class that is highly experienced, you have capital that is on the sidelines, they waited over the last two or so months, you know, a lot of the VCs in our space, a lot of our peers have waited see kind of what the quote unquote contagion was going to be. But there's a tremendous amount of capital there to support this new foundation of builders that are ready to build web 3.0.
Anita Ramaswamy 22:37
So I guess what I'm wondering about is are things really different this time around? It sounds like that's what you're getting up. But then, you know, we saw this huge issue with Tara, we saw Celsius, we saw all of this being linked to three arrows capital, ultimately, and I'm wondering if you know, I've heard a lot of people draw parallels between what's happening in crypto right now to the 2008. Recession? Don't you think this is going to hurt a little more for crypto just based on how intertwined everything is these days?
David Nage 23:01
I think first and foremost. So I have to say that for those participants in Celsius and Voyager and other centralized facilities, it is something that I'm very well aware that many investors retail, especially some institutional, but mostly retail investors have had to deal with harm. Because of this. I unfortunately, think that the actions that have happened over the last few months, while incredibly painful, they are a mark in time in history that will, you know, effectively be used to say, we'll never again, you know, these are the things that cannot happen. These are the things that lead to failures. And we saw that, you know, as you alluded to with Lehman and bear back in 2008, and 2009, that you started to see the mixture of capital between proprietary trading, and between, obviously, sell side shops, you saw a lot of the walling that needed to happen through regulation so that intermixing of capital is basically postponed and suspended. So I think that is really important that while billions, if not, trillions of dollars were obviously eviscerated during 2009. And it was incredibly painful for the investors out there, especially for those that had wreckage in their 401k is this, unfortunately, is a potential parallel to that those investors out there that were using centralized finance, repositories, like see, like, as I said, Celsius, and Voyager and block five, etc, are experiencing that type of pain. I wish that we as a society would not have to learn through failure, but it appears that you know, we really learn to be a failure. And that's the way that we grow and we prosper.
Anita Ramaswamy 24:37
So I guess that leads me to the next question, which is how does crypto lending come back from this? And I mean, a lot of the action in 2008 You know, the aftermath and some of the fixing the problem came from regulators and came from lawmakers who are cracking down on the financial services industry. Do you think that's what needs to happen within crypto or is the solution somewhere else?
David Nage 24:56
I think it's a mixture. I think we've as a firm have always said that reg elation is welcomed by all sensible good regulation that allows innovation to continue on is encouraged share, we want the United States especially to be a leader, not a follower here. And so we've always thought that regulation sensible regulation from those that actually took the time to understand that technology would be warranted and welcomed. I do think that what you're saying is, and this is really interesting for about a year and a half, I was a fairly staunch kind of detractor, if you will, or someone who did not like d phi d phi was amazing back in the early parts of 2020, into April and May, and in June and July of 2020, defi, Summer, quote, unquote. And you started to see a lot of experimentation, you started to see ammc, you started to see indexes, you started to see a lot of the land borrow facilities and real farming strategies, lots of experimentation happened. And then all of a sudden, after the five summer it kind of just died. And everyone just basically went to different l ones, different chains, whether it's, you know, Solana or a VAX or two knee or, and they started to build the same thing again, and again and again, replication, there was no innovation, innovation died and defy what has been really interesting to me over the last two and a half, seven months with a lot of the Sci Fi issues is that defy has held up defy is run by smart contracts. If you have a one bar facility, and it's you know, being deployed strictly by smart contracts, that's it, there's no give or take, it's black or white, you took a lembar facility, you have a smart contract that basically deploys it and is currently watching it with Oracle data coming into it. That's it, it's over, you know that you have a responsibility, and it's going to be automatically algorithmically taken care of, I do think that regulation will definitely be part of the next phase here as we get more clarity for sci fi. But I think what has been really interesting, you know, especially as I said, for me, who was constantly looking as a venture investor for new defy innovation, over the last nine plus months of running my fund, what has been really interesting to me is that defy through this, as I said, last two and a half plus months has held up and has actually done quite well.
Lucas Matney 27:11
I'm curious, and I know, you know, you're not a regulator, and we're deep in the regulation conversation. But I'm curious whether you think that like the time window has passed for Super crypto friendly regulation, the SEC probe they're talking about with Coinbase today, I know there was kind of the the bill working its way through Congress on kind of classifying most Kryptos commodities, but it kind of feels like we're at this point where like, retail investors are getting hit hard by all these lending entities. And now there's the stuff with Coinbase. Are you concerned, as you
David Nage 27:39
alluded to not a regulator not aware say, obviously, we rely on their take on what's happening there. But as a investor, as I said, again, you know, I think what is really useful is a way forward is is a path and as in patterns we saw back few years ago that Hinman During his period of time with you know, the FCC basically said that Ethereum was at one point a security was you know, basically, they did a sale, but through 2000, at the end of 2015, to the time of his opinion paper, that it decentralized, that it became something that was not so that started to carve a way forward for other projects to start to follow through that. They understood that it may be there is actually a period of time. And I think Hester Pierce has also said this too, is that there should be a window of time for about three years give or take where a project accompany starts is more of a centralized entity, and then eventually goes to a decentralized entity through validators. And through the nail extension of operations. I do think that having that type of clarity, and having that type of pattern is really helpful for the hundreds and 1000s of founders out there who are looking to create these types of new models and these new businesses that give more of a distributed and decentralized ownership to those that are participating. Without that clarity, they're still trying to figure it out. And I think this has really been emblematic with the type of the kind of the structure of deals that we've seen from Venture over the last four to five months that I've started to become more of that type of precedent back into those in 21. You saw the predominance of deals that were being done, assess. There were equity deals, obviously for sci fi and for infrastructure, but a lot of the deals were SAS simple agreement for future tokens. What you've seen now, especially with the turbulence in the market, you know, dating back to the middle of December until now is that the majority of deals are now safes plus warrants. And so a lot of these founders understand that a token could provide obviously utility for distributing decentralizing the authority of the company and could provide a lot of positive economic incentive for those that are participating. But without regulatory clarity, they are pushing that off in a warrant for an indefinite period of time. So I again, I think that actually having that clarity could be really useful for the Thau Dozens of founders out there that are looking to innovate in the space.
Lucas Matney 30:02
It's fairly interesting at the moment because I like, you know, not to rag on Coinbase too much. But when some of these token drops that they're talking about, and a lot of like the SEC, DOJ filings are around when some of these drops came out, a lot of people in the crypto space were like, is this like Coinbase? Is cash grab, because it was kind of hard to tell what some of these tokens even did. And if you go to the website of some of the tokens that the SEC specifically called out, I had to look for like minutes to even get a vague idea of what they did. So it's, you know, I like, in one hand, it's them kind of finally taking the stance, perhaps. But on the other hand, they're taking a fairly narrow purview, it seems there were plenty of tokens that they didn't classify securities in this drop. So you know, they made this big step, but it's also like, clearly still early innings. Yeah, I would agree with that.
David Nage 30:46
I think what we've seen is the education gap of those that are regulator or those that are policymakers to even fathom senators, writing proposals and policy like Senator Luminance and others that there are Senator Toomey has also been involved. There's a new one that just came out today I see that I think Senator Toomey and others are responsible for that would effectively look to change the taxation of a big point of transaction for anything that was below $50 worth of value to not really have to go through the taxation kind of regimen. To think this time as I stood again, in crypto winter in 2018, to think that senators would be architecting certain policy regarding digital assets is just the leap and bound in kind of your mind just blows. It's amazing.
Lucas Matney 31:32
The senator, we sell ads crew coming up with crypto regulation. Yeah, his sight to be seen.
Anita Ramaswamy 31:38
Yeah, it's pretty wild. But you know, kind of on that topic, you talked a lot about sci fi versus Defy. And I want to dig into that distinction a little bit more, I think a lot of people didn't really necessarily understand and even now are still trying to unpack with a lot of these collapses of different crypto lenders and exchanges, which ones of these are centralized versus not. And so my question is just, it sounds like you, you said, defy has held up and you as a venture investor, believe in that. And so what I'm trying to understand and wrap my head around is as a venture investor in a defy protocol, how is it that it is still decentralized? Because necessarily, if you're taking an investment in that protocol, isn't there some sort of concentration of power? Well, the majority of
David Nage 32:15
those are being the protocol itself. And some of the like the uniswap, obviously, you know, for instance, for us uniswap uniswap, has the uni token. And that is a token that is used for governance, and for the improvements in the future of SIP protocol. And so those protocols are effectively run by smart contracts. And by validators that are effectively approving or obviously not approving those transactions, right,
Anita Ramaswamy 32:40
I guess what I'm saying is someone is holding a majority or, you know, large portions of those tokens, right, that has
David Nage 32:46
been subject to obviously some of the criticism that back in the first cohort of defi, whether it's off a whether that's compound, whether that's, as I said, uniswap, etc, that some of the larger PCs out there have been the larger holders of those. Right. I do think that actually, as a venture investor, this is probably going to be surprising. I agree with that. I think that criticism actually is Meritus. I think, actually that some of these defy platforms need to be further distributed. I think that in the future, there needs to be mechanisms in place where one VC does not control more than x percentage of the actual token allocation. I think that is actually Emeritus, I believe in that. And you know, one of the things that we question when we see a new project, is we constantly look at the token distribution, what is the allocation program here? How much is going into the community, and to those that are actually doing the validation and doing the work of the network? How much is going into investors? And who is on the cap table of the project? How much do those investors potentially hold? I think for the future, I think that that is actually that criticism actually holds up. And I think that that's something that to get defined to get this world even healthier. I think that actually makes a lot of sense.
Anita Ramaswamy 34:00
So I want to ask, from your perspective, as a venture investor, what are the sorts of opportunities you're looking at right now? I know Arca, you've made around 30 investments so far. Are there any spaces other than defy that you mentioned that you're really focused on
David Nage 34:11
a large percentage of our time for the first half of the funds life has been spent on the infrastructure of NF t's not specifically the NF T's cells, but the infrastructure behind NF T's and gaming. I've thought very hard about gaming as a gamer myself, I also have kids at play games every single day. Gaming is something that for the last 50 years, you know, people have said is gaming recession proof. It's not in my opinion, recession proof but it is resilient. Why is it resilient because gaming is supposed to be enjoyable. It's supposed to be a kind of removal from the the day to day grind that you have and so it's supposed to be a way to kind of get outside of your mind get outside of the troubles that you may be having in life and to kind of just have some fun for a little while. And so gaming has gone from Pong, you know? 1970 to two So the time that we have now with fortnight and Call of Duty and everything else that we have, we have over 3 billion gamers in the world. It's been, you know, our thesis that while we've seen the evolution of quote unquote blockchain gaming from the early days of 2011, and 12, with things like gambit to the early days of crypto kitties in 2017, to the introduction of Axiom Trinity 2018, we've seen through and throughout that there has been evolutions there has been failures. And again, unfortunately, failures lead to learnings and learnings lead to further innovation gaming, for us is still something that we're very interested in something that we're really positive on. So we're gonna continue to do that we're continuing to look at that as a resource and a place where we're going to make allocations NFT infrastructure is also really interesting. One of the with the most recent investments that we made was, effectively the Canva of NFT is basically this idea of NFT is whether it's gaming assets or other there has not been a platform really out there that allows the Creator to effectively create their and FTS be able to purchase them for specific blockchains. Interoperability is a very big part of the story of what NFT is, can be in the future, whether it's a gaming asset, going from a Solana based game, to an Aetherium based game to an avalanche based game, that interoperability feature has been remiss hasn't really been there yet. So we think that as the future of gaming evolves, with this new infrastructure that we see in place, we think that this interoperability feature is going to be really important. And this company is actually producing that platform to do that. Beyond gaming and NFV infrastructure. We also think that the world of quote unquote, web three is very vast and immense and a lot of opportunity there, one of the things that we've noticed is that the user experience or web three has really been forgotten about for the last year and a half or two years, some of the recent investments that we've made a pivot and focus on things as simple as off ramp, and there's been a few big companies Moon pay and ramp, for instance, that have focused on the on ramp experience getting new users into digital assets into the ecosystems, the web three, but what happens is, well, if I want to offer and potentially, yes, I want to use the assets that I've now put into this platform and use them for other purposes, that experience has been arduous. It's been typically a 1012 13 step process. And for those that are more crypto native, that's fine. But for those that are not as crypto native, that's not a great experience. In our day and age. I've said this for years, in our day and age, we are the on demand society, it has to be one or two clicks. And
Anita Ramaswamy 37:28
that's it. Yeah, I don't have time for 10 on ramps here, right?
David Nage 37:31
No, no, you know, this has been a big part of us, what we've looked at, we've made two investments here that effectively was in two steps, you're off, you can do what you want with it. And then we think that that's actually a really important part of the user experience is making it easy and frictionless and enjoyable. The other thing that we recently looked at in terms of web three is for those projects that are obviously using tokens as part of their infrastructure, when founders and projects distributed those tokens having visibility on the investors that actually hold them, what are they doing with them? Are they immediately in this is a terminology we use and the space? Are they nuking them? When there's a token generation event? Meaning are they getting their their initial allocation, which is sometime five or 10%? And are they immediately selling them to market to make a profit? That is really, in my opinion, and pardon my language, crappy behavior, and we really are
Lucas Matney 38:26
on our show, we allow that one.
David Nage 38:29
That's crappy behavior. And it's something that we are ardent, really just don't believe in. And so what we've recently invested in what we're defining, again, using web two kind of parallels the Carta of web three, a solution that kind of interoperate with smart contracts and with wallets so that the founder has the ability to really in real time see the kind of activities that the holders are used are doing, are they immediately selling down? are they holding on? And for the investor? What is my vesting schedule look like? What is my portfolio look like? These are simple things that don't sound overly sexy and exciting I can get. But I've been really thinking about what is needed for the next phase of growth. And I've spent a lot of time again, looking at the history of innovation and looking at the history of growth of sectors. And two things came up to me right away. As a former resident of New York City, the subway system is something that you use day in, day out, you take it from home to work back and forth, and you're hopefully without obviously interruption. You're there within a few minutes back in 1904. Though, in the early 1900s. That whole system wasn't even around they had to basically create it from scratch. They didn't know how to you know, necessarily dig ditches under buildings and pipes and all the infrastructure that was there. They had to do it basically from scratch. So without the subway system today, New York City would probably not be operating the way it does. The other thing that's interesting, too, is for transatlantic communication. The transatlantic cable system tried several times was about three or four or five times, actually. And it failed, and it broke and it had issues. But eventually they got it right. And then we were able to start to communicate between the continents seamlessly. And quickly. These were just two innovations that happen through a lot of, as I said, not a lot of sexiness to it, not a lot of hype to it. But these two things made communication and transport immensely easy for all of us to take advantage of. Well,
Lucas Matney 40:24
cutting into that a little bit. I mean, there's been this big conversation about like funding public goods, Tara can get $40 billion into its ecosystem, but maybe something that's like for the good of the Ethereum network that all these projects are based around can raise like a $5 million seed round with the Ethereum foundation contributing the bulk to it. Do you feel like VCs need to be allocating more of their funds to actually things that maybe aren't purely return generating, but are just kind of for the good of the network? That's a tough question. I know it runs counter to the LP model, but it's, it's what like SBF was talking about in that recent interview where he's like, you know, I don't have to worry about like, is it going to make me a lot of money? But is it going to lose me a lot of money?
David Nage 41:03
Right? I would say that as for us, and we know talking to a lot of our peers right now, many of our peers are becoming much more focused on revenue generation, how do you actually potentially make some money from this how to potentially become more cashflow positive? How do you ensure that you have enough runway for the next few years, depending how long this lasts, public goods definitely serve a purpose, whether it's donations, whether it's things that might not have a revenue generating proposal at the moment in time right now, that is obviously up to the VC themselves. When you come up with a portfolio targeting strategy and allocation schema, that could be a part of it. One of the things that we're currently looking for within some of the allocations that we're looking for is that we're looking for more sustainability that may be more of a public good, there may not be quote, unquote, revenue generation from it, but to support new ones or L twos that are using more sustainable bottles that are creating ways that are more gratified, that can be very interesting. But again, that could be also denoted with potentially as a public good. So we are looking for some of that. But I would say the majority of what we're looking for what other VCs are looking for right now, are really companies and projects that can become more revenue generative, and more independent in the near future.
Lucas Matney 42:19
I know he breached a lot of topics in crypto world, and I appreciate you diving into some of the stuff. I mean, your fund is relatively new. And I guess wrapping things up. There's never been more fresh powder on the table in terms of VCs have huge funds. Right now, we haven't noticed as many deals kind of coming through the pipeline, it seems like a lot of people are in a little bit of a wait and see period. How do you think the next few months shake out? And when do you think things pick up a little bit? Again,
Anita Ramaswamy 42:42
when will VC start actually investing kind of the question?
David Nage 42:45
I think that's a great question. We decided as a team after some of the issues that happen, as you alluded to with Luna and then obviously, some of the cascading issues. We thought it was appropriate to to take some time just to see what was the effects, the second order effects and third order effects. I don't want to necessarily be a pilot of a ship in the Atlantic when there's a calcify cat five hurricane coming right at me, I want to make sure that we do the right thing. And I think a majority of the other VCs out there, especially digital assets that the same, however, I have to say that over the last two weeks, we've already invested in funded two projects out there. We've heard candidly, I think we talked about this with Jacqueline that we've heard that there could be some sort of a waiting period for September that some PCs, we're going to start to have more motivation and more more kind of focus in September going into the end of the year. What we've seen candidly from the investment landscape is that rounds seed rounds, specifically this time last year, were pricing around 35 to 45 million free if not higher, we're seeing the same type of founder and as I said, higher or even a better caliber founder who has more experience now that is raising the same seed round at sub 20 million pray, we have seen a significant change in that what we have seen in terms of kind of this wait and see we have seen deals getting done. They are slower, as you alluded to the duration back during q4 of last year in q1 of this year, was typically about two weeks, it was breakneck speed, it was basically you find an opportunity immediately you obviously do your diligence, you write your investment memo, you take it to the IC and you pray to God that you don't miss the window to potentially get into it. Right now, you know, we're seeing an elongation of I'd say instead of two weeks, we're seeing four to five weeks is the timeframe. I've heard candidly, I've seen other articles and other reporting out there that VCs are doing more diligence these days. And I think I said this to Jacqueline, I'll say this year, I think that's BS, they should have been doing diligence before anyway, they should
Lucas Matney 44:46
know. That's why 20 Right.
David Nage 44:50
Yeah, you know, we've seen some other memos out there that are fairly miniscule. You know, we typically do a very good body of work and our investment committee is basically contentious consensus is what I call it. It's basically a war of this is my idea. This is the project that we like. And then you'll basically I have four or five people that are beating my brain to make sure that I still actually believe in this thing. And this thing actually holds water and I haven't gotten sane. So I think that's really we haven't changed. That's been our focus. That's been the way that we do things in the prior. The other thing that we did early on was we started to do things more on personality traits, the way that a deal or a project gets into our investment funnel for potential investment, is we look at the personality the founder, the founders, do they have obviously past experience assign? But if they don't, that's, that's equally as fine as well. But what point gauge from their ability to actually deal with difficult these are difficult markets right now? Do we get a sense that they are more introverted or extroverted? Have they been able to already bring people around the table with them that are really fantastic engineers and developers? Have they been able to raise a little bit of money already? So are they completely dependent on us? Or have they been able to do that already
Anita Ramaswamy 46:00
is looking at personality, something you think differentiates you? Or do you think, you know, kind of across the board VCs are looking at personality, because I know, early stage, it's hard, you maybe you don't have as much metrics as in personality, sort of a focus anyway,
David Nage 46:11
um, I've heard some of our peers have been surprised that we do that. So I'd say, you know, I don't know if it is, or it's something that is happening with every other VC out there. We thought it was really important because at the end of the day, as you alluded to, it's early, it's early stage, there's only so much that you can do in terms of cost in terms of relative value in terms of kind of the proverbial DCF in terms of looking at the future cash flows in terms of projections, a lot of it is dependent on okay, this founder has these characteristics, these abilities, we've had multiple calls with them. And we've gotten to a point where we believe that they actually can succeed because of XY and Z. I think John Doerr was infamous for this back in the day where he would be able to go into a room. And basically I think he picked out Bezos, for instance, and basically was able to see that he just was the type of leader, what we're looking for today. This is actually the wording of my friend, Carlos from big craft, who runs another found out there is we're looking for wartime CEOs, we're looking for those that really have the ability to weather very difficult markets, because the macro tailwinds are definitely there. We have an administration that is trying to redefine what the term recession means, because obviously, some of the financial data is not looking too good here. These are These are difficult times. And so we need wartime CEOs out there who have the stomach and the wherewithal to really do that. So yeah, I think personality is a very large part of what we look at and evaluate.
Anita Ramaswamy 47:36
Yeah, well, we'll see if the investors actually do have more diligence. I guess we won't really know the long term effects until a couple of years from now. It's all of that, but yeah, exactly. But it was great having you on. David, thank you so much for sharing your insights and your thoughts. And yeah, hope to chat with you again soon.
David Nage 47:51
It was my honor as a pleasure. Thank you guys. Thanks, David. Take care.
Lucas Matney 47:58
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. You can also follow us at chain underscore reaction on Twitter for the occasional Twitter space about breaking crypto news. 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 manages TechCrunch is audio products. Thanks for listening