183 - Why VCs Suck | 1confirmation's Nick Tomaino & Richard Chen

Today on the Pod, we're discussing Why VCs Suck. And who better to answer that question than VCs themselves? We're joined by Nick Tomaino and Richard Chen of 1Confirmation to discuss the role of VCs in crypto, the outlook on the markets, and how retail should prepare for the next cycle. ------ ✨ DEBRIEF | Unpacking the episode: https://www.bankless.com/debrief-1conf https://www.bankless.com/1conf ----- 🏹 Airdrop Hunter is launching TOMORROW https://bankless.cc/HuntersGonnaHunt ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE ⁠https://k.xyz/bankless-pod-q2 ⁠ 🦊METAMASK PORTFOLIO | MANAGE YOUR WEB3 EVERYTHING ⁠https://bankless.cc/MetaMask ⚖️ ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum ⁠ 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle ⁠ 👾POLYGON | VALUE LAYER OF THE INTERNET https://polygon.technology/roadmap 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/Toku ----- Timestamps 0:00 Intro 6:00 Nick and Richard from 1Conf 7:20 The Price Cycle 11:50 The Signal Cycle 15:55 Tourist vs Purist 20:00 Why Do VCs Suck? 28:15 Raising vs Returning 32:40 How Transparency Shapes Crypto 38:30 VC Report Card 43:45 Holding Retail Accountable 48:30 Advice for Retail 51:15 How to Not Be Exit Liquidity 59:00 Should We End VCs? 1:03:10 How 1Conf Works 1:07:40 Crypto Native VCs 1:12:30 Looking to the Next Cycle 1:17:08 Prediction Markets 1:20:00 Crypto is Ready 1:24:00 Actually Using Crypto 1:28:20 L2s vs Alt L1s ----- Resources Nick Tomaino https://twitter.com/NTmoney?s=20 Richard Chen https://twitter.com/richardchen39?s=20 1confirmation https://www.1confirmation.com/ Richard's Article https://showerthoughts.substack.com/p/thoughts-on-the-current-crypto-vc ----- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  In five years, crypto prices are going to be much higher and crypto products are going to be widely used. But we've been in a video game the past five years where you have these NPCs that are trying to suck us in and kill us. And you have SBF who's shilling mainstream crypto narrative, or you have Free Arrows Capital showing alt L1s. You have Doquan shilling stablecoins. You have all of these NPCs. And if you can manage your greed, you can stick to authentic products that are pushing the space forward in new ways. Then you're going to be well positioned and you're going to win the game.

• 0:38Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman and we're here to help you become more bankless. The topic today, why VCs suck with some people who would actually know. We have crypto VCs Nick and Richard from One Confirmation on the episode. And you might ask, why would we have VCs on a podcast and then talk about why VCs suck? My answer would be, who better to tell us the shenanigans behind the scenes than the actual VCs?

• 1:09David Hoffman?

  The people on the inside.

• 1:11Ryan Sean Adams?

  That's right. And I think retail crypto investors and VCs have long had this adversarial relationship. And this episode gets into the why and how to protect yourself from becoming their exit liquidity. In the final parts of the episode, we talk about the coming bull market. What theme are Nick and Richard most excited about? Are we finally going to build a crypto product that gets used by billions of users? This was just a no BS conversation that I thoroughly enjoyed. David, what was the significance of this episode for you?

• 1:38David Hoffman?

  We'll say this in the intro, but we had Nick and Richard from One Confirmation on two and a half years ago. I think it was, they were some of our first VCs on Bankless way back when in early March 2021. And that episode was titled Authenticity in Crypto. And it was about a similar subject matter, like how to pierce through narratives. And Richard really took a front and center seat because he was a very early Doom Boards analytics wizard before Doom really even blew up into the thing that it is today. And so we were trying to unpack how to pierce through. Narratives with data, with on-chain data, which is this new tool that we have to navigate the crypto space. And now the crypto industry is two, three years more mature, has two to three years of experience behind it.

• 2:22David Hoffman?

  And there's also been two to three years of adversarial relationships between VCs and retail investors. And so there's been some shenanigans that have gone on, not just with VCs, but people like hedge funds, like Three O's Capital and traders. And so I think just going and getting a snapshot halfway through 2023 about how and why these incentives are created that separate retail from both founders and VCs, and understanding why, or what are the ingredients that cause this relationship to exist, can help equip you, Bankless listener, to help navigate this bull market and make sure that when you see some VCs on Twitter that have big prowesses and spin a bunch of narratives, that you actually can start to pierce through

• 3:07David Hoffman?

  what they are exactly doing and why they are doing it. So I think this episode will be helpful for that.

• 3:11Ryan Sean Adams?

  Yeah, I can't wait to talk to you more about that during the debrief, which of course is our episode after the episode. Bankless citizens can access that now on the premium feed, David. And I forgot, so Richard reminded me that's that episode. His was one of the first tweets that actually lit the match for the downfall of SBF. And I have that tweet up. I want to talk to you more about that during the debrief because I remember it well. So we're going to get to the guests in a second. But first, we disclose, we had VCs in the podcast. And as with any VC, I think you should expect that they have biases. A project called Polymarket was mentioned, their investors. They also mentioned two projects, one called Pimlico, the other called Friends. Both David and I have exposure to both of these, one as Angels and the other as Bankless Ventures. We're long-term investors, not journalists. We don't do paid content.

• 3:56Ryan Sean Adams?

  A link to all Bankless disclosures is always in the show notes. That's bankless.com/disclosures. All right, guys, we're going to get right to the episode on why VCs suck. But before we do, We want to thank the sponsors that made this episode possible, including our recommended exchange for 2023. Kraken, go set up an account.

• 4:15David Hoffman?

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• 4:58David Hoffman?

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• 5:42David Hoffman?

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• 6:27David Hoffman?

  potential ZK-powered upgrade of Polygon proof of stake. If approved, Polygon proof of stake would become a Layer 2 ZK-EVM, Vilidium. So make your voice heard on this proposal by joining the Polygon Discord today. You have a chance to help the Polygon community give the internet the value layer it deserves.

• 6:43Ryan Sean Adams?

  Bagless Nation, we are excited to introduce you once again to Richard Chen and Nick Tomaino. They are GPs at One Confirmation, a crypto-focused VC fund that's definitely seen a thing or two. If you're a Dune Board connoisseur, you might know Richard from his work on the many Dune Boards that he's created. We use them on the weekly rollups all of the time, and we've had Nick and Richard back on the show. I think the last time was March 2021, during the heat of the bull run, and that was hot. Now we're bringing them back full circle to talk about maybe everything we learned or didn't learn. Richard, Nick, it's great to have you back. How are you doing? I'm great. How are you guys? Yeah. Fantastic. Good. I think I'm good. Actually, I was just talking to David about this recently,

• 7:24Ryan Sean Adams?

  and I feel like we are entering the Goldilocks zone of kind of the cycle. So let me just kind of like define that for you guys and see if it resonates or what you think, what part of the cycle we're in. My favorite part of the cycle is when we get through all of the dumpage and kind of like all of the pain, and we're out on the other side of that and we're heads down building, and you see kind of the fundamentals starting to stack up and kind of no market reaction to those fundamentals. But the builders are building, and it's still quiet. So the market hasn't yet gotten stupid, and the tourists have left, the settlers are here,

• 8:04Ryan Sean Adams?

  and we're in kind of this like quiet phase of growth. And I feel like that's what August of 2023 is for me. And that's just a feeling. What do you guys think? What part of the cycle are we in? Does any of that resonate to you? What do you think, Nick?

• 8:21Speaker 00

  A little bit, yeah. I mean, it's always hard. Timing is always hard for me. I mean, that's part of why we started One Confirmation as a venture fund, because I have a really high degree of conviction that in five years, you know, crypto is going to be broadly used in the world and crypto prices are going to be much higher and crypto products are going to be widely used, but it's hard to time things. So one of the things I've been thinking about, I feel like we are in a, we're playing a video game. I think a lot of crypto people, this may resonate with. It's like,

• 8:59Speaker 00

  we've been in a video game the past, you know, five years where you have these NPCs that are trying to suck us in and kill us, right? And you have SBF who's shilling, you know, mainstream crypto narrative, or you have Free Arrows Capital showing alt L1s, you have Doquan shilling stable coins, you have all of these NPCs that are trying to suck us in and kill us. And if you can manage your greed, you can stick to authentic products that are pushing the space forward in new ways, then you're going to be well positioned and you're going to win the game. So that's more the feeling I have and

• 9:43Speaker 00

  I don't know if all of the NPCs of this cycle are necessarily dead, right? There might be, most of them are gone, right? And have blown up, which is a good thing, but I don't know, there's a, there's a few still out there, so.

• 9:57Ryan Sean Adams?

  You have to wait till they all die, Nick? Or can we just like move on and just realize we're just going to stack some NPCs every cycle?

• 10:05Speaker 00

  No, I mean, I don't, I don't know. It depends how how big of a bad guy they are and sometimes it's hard to know, but, but I do think you're, you're right. You know, a lot of the, you know, these NPCs have been flushed out and there is a lot of great stuff happening and it's not happening on a mainstream level where everyone's paying attention and that does tend to be a good time to lean in, right?

• 10:34Ryan Sean Adams?

  Richard, what do you, what do you think about the cycle? I mean, do you resonate? Like, if we're playing a video game, what, what video game are we playing and like, what part of the cycle are we in?

• 10:42Speaker 03

  Well, with the cycle, I'm not a trader myself, so like it's, I really can't time markets and know, know when the next bull market's gonna start, if we've bottomed or anything. I mean, the game I always compare crypto to is like RuneScape. Like this was really like true when, you know, back in 2020, like yield farming started. And, you know, there's like so many parallels between like, item, things you do in RuneScape and things you do in crypto. And there's definitely a strong subculture community in crypto with RuneScape. And of course, you know, you have bad guys that try to, like the,

• 11:24Speaker 03

  I think the long-term in crypto, it's important to be Lindy and just like survive and like, don't fly too close to the sun and feel like you're invincible and like use leverage and blow up. You know, fall for really aggressive marketing and like people who try to play God on Twitter. Just, you know, stay level-headed and don't, don't be too greedy.

• 11:49David Hoffman?

  I think one part of the cycle that you guys might be more tapped into more than like the, the price cycle would be the signal cycle. Like Ryan said, like we're in this, I totally resonate with what Ryan's saying. We're in this like Goldilocks zone, Goldilocks era of crypto where if you were going to leave, you would have left by now. And also the NPCs that Nick was talking about were all like in jail or have fled. And so we're, we're in this like NPC, NPC free zone where all the homies are hanging out on crypto Twitter. And we're all kind of just like in this calm before the storm. And I'm wondering how that relates to how this Goldilocks era of crypto also relates to the signal

• 12:29David Hoffman?

  that you guys are seeing in startups and what they are building on and what they are focusing on. So like Nick, you said like five-year long, five-year time horizons. You start to have a pretty strong confidence and you know, that's what startups are building for. And the noise cycle of startups is also a cycle that, that exists inside the crypto space. Like people are building things in the top of the bull market that are kind of just make no sense, but only make no sense in hindsight. Where would you see, how would you describe maybe the last two years of noise to signal ratio in the startup landscape and how do you, how do you see where we are now? Nick, I'll throw that one to you.

• 13:07Speaker 00

  Well, there's always a lot more noise, and this is not necessarily a bad thing. It's one of the beneficial things about crypto. But, you know, there's more noise in a bull market, of course, which begets more noise, which begets more noise, and things go crazy and get too overextended. And so that's happened now five or so times that I've seen since I've been in crypto, where you have these extreme bull markets. And during those extreme bull markets, I mean, what we see is a lot of builders, right? But a lot of the builders are only there because of the money and because of the attention,

• 13:49Speaker 00

  and they don't really understand crypto deeply. We talk about this idea of, we try to invest in things that are at the intersection of purist and tourist, right? So the purist is the person that's steeped in historical knowledge and context on like the history of the thing, the product. The tourist is someone that doesn't give a shit about all that. They just want to build something that resonates with users. And so in kind of a bull market, you see tourists, and the tourists can look really, especially from a founder perspective, these tourists can look really good on paper, right? They've worked at Facebook or Google or whatever.

• 14:34Speaker 00

  They have really compelling resumes. They talk a really good game, but they don't get the history. They don't get the context. They don't get crypto deeply. So, you know, those came out a lot in the past two years. And what we try to find again is the intersection of purist and tourist. And I think now the builders... You seem more purists, right? And being too purist also isn't great, right? Because you're never going to connect with a mainstream audience. So now I think, you know, we're seeing a lot of purists, which we'd rather, we tend to skew a little purist, maybe too much so in some cases, but,

• 15:18Speaker 00

  but really, you know, in terms of of the signal now, it's a lot of kind of purist founders that really appreciate and understand crypto and are building things for a crypto native audience. And in those times, what we want to do is make sure that those types of founders have a little tourist in them, right? Because again, I think to really win big in crypto, you need to be at the intersection of purist and tourist. And I would argue that's what Ethereum has, that's what Coinbase has, that's what OpenSea has. And those are, those are what we found to be the best investments.

• 15:53Ryan Sean Adams?

  That's a really interesting mental model. So the intersection between tourist and purist and you can have-

• 15:58Speaker 00

  By the way, that wasn't, that wasn't original from me. The creator of this idea is a designer who passed away in the past year and a half. His name's Virgil Abloh, and he's a very famous designer that worked for Louis Vuitton and a bunch of big designer brands. He had a brand named Off-White as well. And he, that was his mental model that he applied to how he designs clothing and furniture and things like that. And I, I got to meet him once and I basically watched all his YouTube content and everything.

• 16:37Speaker 00

  And, and I kind of found that and I was like, wow, that's exactly kind of how we think about crypto investing.

• 16:45Ryan Sean Adams?

  So, so in 2021, you know, kind of peak of the cycle, you saw a lot of tourist types of founders and you, you wish they would maybe skew a bit more purist, right? And now 2023, where we only have kind of the, the tourists have left. So we only have what we call in Big List, the settlers, and these would be sort of the purists. And now you're looking for kind of founders and builders who are purist because they're still here, obviously. Everyone who's still here is probably a purist at some level, but they have a bit of tourist in them in that they're not just building for the existing crypto audience. They're building for like the next cohort that we want to bring into crypto. Is that sort of what you're saying, Nick?

• 17:23Speaker 00

  Exactly. Exactly.

• 17:24Ryan Sean Adams?

  Richard, what would you add to that? What's, you know, what about that mental model speaks to you?

• 17:29Speaker 03

  Yeah, the terminology I like to use is missionary versus mercenary. And I think a lot of mistakes that VCs made during the bull market is they saw a lot of founders who have really polished resumes, like they went to Stanford, worked at Google, Facebook, were like a founding engineer at a startup, and then now there's going to be a great executor in crypto. And what ended up happening is like when crypto prices dropped 90%, I think the people who are the most talented are also the first people to bail and pivot to AI or something else because they have a lot of opportunities.

• 18:08Speaker 03

  So there's nothing that's intrinsically motivating them to stick around in crypto if they could succeed just as well in AI. I think I really saw this a lot with the Solana ecosystem. So I think a lot of VCs made the mistake of like, there's so much talent of developers going to Solana. But from talking to like a lot of these so-called blue chip teams in Solana, it just felt like a lot of mercenary founders that weren't going to stick around when crypto prices crashed. And, you know, fast forward like two years after the L1, like the peak of the L1 cycle, like we're seeing a lot of big name Solana projects like wind down or pivot.

• 18:55Speaker 03

  So I have one other thing to add is like while Silicon Valley archetype founders might be like the worst type of founders to back in bull markets, I think they're probably some of the best type of founders to back in bear markets because this is just kind of speaking in generalization, like Silicon Valley type founders are generally better executors than kind of your random open source indie hacker from like someplace else in the world. So, you know, in a bear market, when there's sort of an emerging category, say like account abstraction, I think the Silicon Valley founders that are, that do have the conviction to build in the bear markets are just going to out execute, you know, all their wallet

• 19:38Speaker 03

  competitors, other projects building in the AI space as one example.

• 19:43David Hoffman?

  So the same founder archetype can provide two totally different signals to you depending on when you meet them in the market cycle.

• 19:51Speaker 03

  Yeah, more or less.

• 19:55Ryan Sean Adams?

  Let's, there's probably more to talk about with respect to kind of investing at this part of the cycle and different founders and teams, but also I'm very interested in themes, right? Because the big question, I think, for crypto right now is, hey, crypto, are you guys going to stay a niche? Or are you actually going to expand to like billions of users? And that has always been sort of the promise. Maybe we'll talk about that later. But before we do, I want to, I want to talk about this thing that Richard was talking about for a minute. It's like mistakes VCs make. Okay, so VCs, it turns out, make mistakes. And I think I've seen you, Nick, be actually, you know, one of the most critical voices of about VCs specifically in crypto that I've seen, which is interesting because

• 20:36Ryan Sean Adams?

  like, obviously, you guys are also VCs, right? So this is VCs talking about why VCs suck. I'll read out a few tweets, all right? Venture Capital is the dumb money in crypto. This from January of this year. That was a Nick tweet. NPC VCs are a vibe. So calling VCs NPCs as well. Good at raising money from hollow institutions and deploying it to hot trends. Never distributed cash to LPs. You go on, but I'll flip to another tweet. Venture Capital is the fakest industry on the, on the planet. In what other industry can you be objectively bad at your job, but create narratives that make you appear great to the outside world for years? All right. So some harsh critiques. And before we get into this discussion of like, maybe why VCs suck, let me, let me frame this because I bet

• 21:19Ryan Sean Adams?

  there are a lot of Bankless listeners out there. And obviously, you know, we don't skew VC. We have VCs that listen to our podcast. But this is basically like, we're all crypto investors on the journey, right? In Bankless. So we're talking to like, what people might call a bunch of retail users, or actually actual crypto users, some of those crypto natives, some of those settlers who stayed. And they were hearing me read those tweets. And they were like, probably, you know, standing up and clapping, like standing ovation, like, go get them, Nick, right? Like, There's this battle or this dichotomy in crypto that I think is unique. It doesn't so much exist in other venture capital, right? Because the markets take longer to go public. It does exist to some extent, but not like crypto where it's sort of like, yeah, the VCs are going to dump on retail.

• 22:04Ryan Sean Adams?

  They're going to like invest in an asset, take a position early. Well, you know, unaccredited investors don't get access to it. And then they're going to wait for it to release a token and then they're going to dump their bags on you. And this has played out over and over and over again. So I think a lot of Bankless listeners are probably like standing up and cheering you on. And yet I think there's some subtlety here because you guys are obviously VCs. So I imagine you think you're doing the right thing here. But let's talk about this. Why do VCs suck? Why do you, why do you seem to hate VCs, Nick?

• 22:39Speaker 00

  Well, I obviously like some VCs, right? I don't hate all VCs or anything like that. But I do really dislike venture capital culture, particularly in Silicon Valley. And there's a few reasons why. The main one is just the lack of transparency on performance.

• 23:01Speaker 00

  So in, if you're an NBA shooting guard, right? You are objectively measured on your performance, right? Points per game. Well, how many points did you score in a game? If you're a boxer, you're objectively measured on what's your win-loss record. And venture capital doesn't have that.

• 23:22Speaker 00

  You know, there is a metric, right? Which is distributions to paid in capital, right? You take LP money and then you return it. And the job of a VC is to make good investments and generate a high distributions to paid in capital, DPI. But it's not talked about publicly. So that aspect of venture capital culture, and it's not just crypto, it's broad. I think really. I don't like it and I don't I don't think it's it's optimal for people for the masses, right? It's almost more like an industry like politics, right? Where you're competing on

• 24:04Speaker 00

  perception rather than how you're how good you are at your actual job. And so that's what leads to things like, you know, Thread Boys on Twitter, or, you know, these massive

• 24:17Ryan Sean Adams?

  Wait, what's a Thread Boy? Oh, I think it explains itself.

• 24:21Speaker 00

  Yeah.

• 24:22Ryan Sean Adams?

  That somebody there just publishes a bunch of threads like for narrative sake and you're like, it's not, yeah, what's the what's the implication there?

• 24:29Speaker 00

  No, you you know exactly what it is. I'm sure most of your listeners do. But so you have you have people that are competing for perception to be perceived as really smart or to, you know, be perceived as having a lot of money or something like that. When that should doesn't really matter. It's not it's not part of the job. The job is to be a good investor and return funds. So I would really love to see a culture where, just like, again, NBA, where people are talking about DPI and IRR and these metrics that really matter that, you know, behind the scenes, all the LPs in these funds care about and are looking at. But

• 25:12Speaker 00

  that's not what's happening now. And I think that's that's a big part of why, you know, people, I think a lot of people, your listeners and others can sense this and why there is this negative sentiment towards VCs, because it does feel very fake. You have these people, you know, shilling fake narratives and, you know, trying to generate a lot of attention when that's actually not not the name of the game. So that's that's the first thing.

• 25:38Speaker 00

  The second thing is, and this isn't unique to venture, but there's a lot of greed in crypto, right? Everyone is greedy. That's human nature. But I think in crypto VC as well, there's a lot of short-term greed focus. And what I specifically mean by this is

• 26:00Speaker 00

  You guys know this, probably part of your, most of your listeners do also, but as a venture fund, you make money two ways, right? You make it with management fees. And that's just an annual fee that you collect on funds raised and you make it in carry. And that's a fee at the end, when you return the money plus some, you get, you get usually 20% of that, right? So typical, you know, fees for a venture is two and 20.

• 26:28Ryan Sean Adams?

  So Nick, that means if you have a hundred million dollar fund, right? And we're talking management fees of 2%, then $2 million just for having the fund in existence goes to kind of management fees. That's the one part of it.

• 26:40David Hoffman?

  Agnostic of performance.

• 26:41Ryan Sean Adams?

  Agnostic of performance.

• 26:43Speaker 00

  Yep.

• 26:43Ryan Sean Adams?

  And then the 20% is the performance kind of bonus.

• 26:47Speaker 00

  Exactly. And so because of these incentive structures,

• 26:53Speaker 00

  most people are just trying to raise as much money as possible, right? So the example I like to use is you could have a $50 million fund that is 20X at the, at the end of the 10 years, right? That's one of, that'd be one of the best venture funds of all time.

• 27:11Speaker 00

  And in that case, you'll make 200 million, right? You'll make roughly, you know, 190 million, if my math is right, on carry and 10 million on management fees.

• 27:26David Hoffman?

  And your LPs are very happy.

• 27:28Speaker 00

  Exactly. So that's, that's one example. The other example is you could have a billion dollar fund.

• 27:36Speaker 00

  And you're going to make two, and you could lose everything theoretically at the, at the end of the fund, not return anything. And you could still make 200 million. You're, you're collecting a 2% management fee annually. So.

• 27:54Speaker 00

  That's the reason that you see these massive funds, right? Because it's, it's, um, you know, if you're just looking at it from a pure, pure, uh, you know, how much money you're going to make perspective, it's the, the rational thing to do is just to raise as much as possible in a bull market. And so that's why you see so much, you know, capital, um, and so many people that probably have no business raising billion dollar funds that have them.

• 28:21Ryan Sean Adams?

  But doesn't that problem get fixed, Nick? Because if I'm not returning, uh, capital to my LPs and they're not going to give me capital the next go around when I try to raise the next fund.

• 28:30Speaker 00

  But ventures along, that, that'll play out over a 10 year period. So you're not like-

• 28:35David Hoffman?

  Crypto is 13 years old.

• 28:37Speaker 00

  You're, you're 10 years or more, right? So you're not, um, that, you know, there, there's, there's a long feedback cycle for venture to know if you're good or not. Um, so, so that's, that's a problem, right? The reason this is a problem, this explains FTX, right? FTX, you have prestige, brand name funds that are giving FTX hundreds of millions of dollars, right? Why? Well, because they have massive funds, they need to deploy it in what they see as big opportunities and they don't, uh, do their homework and actually look at what's really going on.

• 29:18Speaker 00

  They look at it as a surface level and say, oh, SPF's a great executor, right? He, um, is getting all this media attention. He's, you know, working with regulators. He's, he's such a good executor. That was, that was the narrative from these funds that gave hundreds of millions to, to SPF and it's soulless greed, right? It's, they have these massive funds, they have huge management fees, um, and, and they invest in projects that, that make no sense, that are either, you know, an aptos or a sui or something like that, or an FTX. So, so either it's, you know, one of the worst frauds in history, or it's a, um, you know, a shit token that, um, they then dump on retail to, to your point.

• 30:02Speaker 00

  Um, so that's, I guess, that was long-winded. Uh, Richard probably has other thoughts, but those are two reasons why, um, I take issue with a lot of what I see in, uh, venture capital today.

• 30:17David Hoffman?

  Yeah, Richard, what do you want to add to here?

• 30:19Speaker 03

  Yeah, I guess on the topic of perception of VCs, do you guys remember back in 2021, there was that like spreadsheet floating around on crypto Twitter of ranking all like the VCs by tiers like?

• 30:31David Hoffman?

  Oh, yeah, vaguely. I can't remember what the purpose of that spreadsheet was for though.

• 30:35Speaker 03

  I think it was around the time of the sushi treasury diversification and then like, and like there are all these like VCs like proposing themselves as like, hey, we should buy some sushi tokens at a discount. Like, the funniest thing about the spreadsheet is like, you know, looking back in hindsight, two years later is like on every single ranking, like Alameda, Three Arrows were like always at the top of the list. And like, it's like pretty true that like, there's a very strong inverse relationship between like who's killing it on crypto Twitter and like what their performance, like what's actually going on behind the scenes. And it's almost like, like if you're killing it on Twitter, it's because you have something bad you want to hide.

• 31:18Speaker 03

  So you try to create this narrative that other people think that you're still good when you're trying to mask some shitty stuff that you're doing. So like another thing that happened during the bull market is you had all these trading shops that were starting to invest in like private deals and they probably could like not give two shits about like what the founder is building, but like as soon as the founder mentions the word token, like they're just like in immediately and it's clear because they want to get into the private sale and then dump as soon as the token's live and like, there's no lockup. So like with that said, like, you know, not all VCs are created equal and you know, a lot of founders mistakenly went with these

• 32:00Speaker 03

  trading shops when they were fundraising in the bull market because you know, it was like the easiest money to raise, like you could go to Three Arrows, have a 30 minute call, almost no due diligence as as long as you say the word token and like that's the easiest way to fundraise. But you know, if you're thinking long term, obviously that money comes with strings attached and you know, a lot of those founders have left the space because they learned the hard way of, you know, getting dumped on by their quote unquote VCs.

• 32:29Ryan Sean Adams?

  I know David's gonna jump in with something, but can I just say, I am loving this real talk. All right? This is so refreshing to my soul. Yes, these are the games that are being played, aren't they?

• 32:40David Hoffman?

  And I want to try and unpack why crypto is conducive to these games. Like, there are some ingredients, really to understand the dynamics about why these things are the way that they are, why the incentive structures are the way that they are, why there's this negative relationship between VC and retail. Because I think we can, the more that we diagnose this stuff, the more we can actually be like navigate it and understand it. And so I think we're doing a great job and I want to, I want to continue it because I think there's a one more part of this conversation. Nick, you alluded to it with your Threadboy comment. So much of crypto lives in the future because so much of it is like, is perceived. It's like we can imagine a crypto future.

• 33:25David Hoffman?

  We can all like, think about what this might be like in the future, but a lot of crypto is left to be built. And so that leaves a void there for imaginative Threadboys, perhaps, to fill it with something. And I think that's another component as to like, why there is this weird, toxic relationship between VCs, who are quote unquote, getting in early at cheap discounts, and then the actual manifestation of things in market reality, which is the public markets, which is where retail plays in. So Nick, maybe you can kind of like, carry this conversation forward. What are the void of reality in crypto? Why is it so strong? Like, why does crypto allow for some of this stuff to manifest?

• 34:09Speaker 00

  Well, it's part of what makes it so fun, right? And what makes us all love it and, you know, live it every day. It's like, everything is happening in the open. You know, everything's open source. The culture of crypto does tend to be very transparent, where, you know, people are talking about stuff online. People are seeing things on chain.

• 34:33Speaker 00

  And that's why there's a kind of a culture clash, right? You have like venture capital, which lacks a lot of transparency. And you have crypto, which actually does tend to be very transparent, right? And I always, I always think like, The reason, you know, it was not regulators, it was not the media that took down FTX, right? It was crypto. It was the crypto community. It was actually Richard's tweet on October 13th was one of the things that really kicked it off. It was a whole bunch of other people as well, obviously, but-

• 35:08Ryan Sean Adams?

  Richard, Richard, what did you tweet?

• 35:09Speaker 03

  Oh, it's about the DCCPA bill. Basically, SBF was lobbying behind the scenes to get the DCCPA bill passed.

• 35:17Ryan Sean Adams?

  Oh, I saw that. Oh, my God. That's what happened. I'm recalling. Okay, so I saw that tweet.

• 35:24Speaker 00

  Someone talks about this, by the way.

• 35:24Ryan Sean Adams?

  Oh, my God. You know why? It's because that whole period of time is a blur. David, that's the tweet I actually saw. It was Richard.

• 35:33Speaker 03

  I think you actually, yeah, you messaged me asking for my-

• 35:34Ryan Sean Adams?

  And I messaged you about it, Richard, and I was like, are you serious? So the bill was called DCCPA, right?

• 35:41Speaker 03

  The Digital Commodities Currency Protection Act or something like that.

• 35:45Ryan Sean Adams?

  Yes.

• 35:45David Hoffman?

  This is what led us to invite SBF and Eric Voorhees on the show.

• 35:51Ryan Sean Adams?

  So Richard shot out this flare, a whole bunch of people across crypto Twitter, and as far as I knew, were saying that, hey, this bill is okay for crypto. Yeah, it's got some compromises, but like, it's all gonna be okay. And then you shot out this flare and you said, this is not okay. They're talking about banning DeFi front-ends in the United States, requiring like AML KYC type of rules, money transmitter laws, to apply to DeFi front-ends. That's not okay. And you said something to the effect of like, an SBF is behind this. So I was like, what? That's not squaring with what I'm hearing. And then there was some debate. I think I participated in one of the tweet threads with SBF where he was kind of defending, we were attacking that.

• 36:31Ryan Sean Adams?

  That led to a conversation with SBF and Eric Voorhees on the Bankless Podcast, a whole debate about this. And it kind of blew up from there. I've forgotten that you were the source of that, Richard.

• 36:42Speaker 00

  Oh, yeah, it's pretty cool. And again, that's what's great about crypto is like, just, you know, some random dude can tweet something, get it out in the open, and the community reacts, and it leads to, a month later, FTX was dead. It's really crazy. And I think-

• 37:02Speaker 00

  You know, if in an industry, in a different industry that wasn't as transparent and open, you know, FTX would have gone on to be the JP Morgan of the industry, right? And we don't know the true history of like how JP Morgan got to be that. But my guess is there's some shady shit there that the public doesn't know about, right? So to answer your question, this is kind of a tangent, David, I guess. But I mean, the reason why you have so much wild shit happening in crypto and anyone can, you know, tweet anything and it's a really cool, fun thing as well because it's the culture of crypto is very, very open and transparent.

• 37:45Speaker 00

  But the problem is, you know, everyone has their own bias. There's extreme greed, there's extreme bias. And, you know, what I always say is I don't think it's a problem to be biased if you're biased and right, right? But the problem is there's a lot of people that are biased and badly wrong and loud about it. And that's where, you know, problems can arise from. But, but yeah, the kind of open nature of crypto culture, which you guys are obviously very well aware of and also have, you know, contributed a great deal to is one of the the best things about it.

• 38:25David Hoffman?

  If you had to give a sweeping grade to crypto VCs as a whole, good ones lumped in with the bad ones and the mid ones in there too, how would you, how would you audit crypto VCs?

• 38:38Speaker 00

  Hmm.

• 38:41Speaker 00

  Maybe like a C.

• 38:43David Hoffman?

  Oof, okay.

• 38:46David Hoffman?

  All right. Why, what's, what's the main mark? What's the main curse that crypto VCs have brought?

• 38:53Speaker 00

  I just think, I think what I've talked about, I think it's greed. And I think particularly when it comes to like hurting retail, right?

• 39:02Speaker 00

  Like you have a lot of these coins that give 50% plus of their allocation to team investors and then dump on retail. And this is something that I can't believe it's not more talked about, right? But like, The token distribution is something that everyone investing in a token should be well aware of. Right? So like, what's Bitcoin? What percentage of the coin of the coin did Satoshi give to team and investors?

• 39:35David Hoffman?

  Zero, of course.

• 39:36Speaker 00

  Zero. What was Ethereum? Do you guys know Ethereum's? Twelve and a half? I think it was not, that's close. I think it was like 9.9% in terms of team, investors, early developers. Do you know Solana's?

• 39:50David Hoffman?

  It's like 50.

• 39:53Speaker 00

  62.

• 39:54David Hoffman?

  Ooh, not great. Not great.

• 39:57Speaker 00

  And you.

• 39:58David Hoffman?

  It gets worse than that, I'm sure. Yeah.

• 40:00Speaker 00

  I mean, you know.

• 40:02David Hoffman?

  Isn't this also partly a founder project issue as well as in the founders create a deal that is highly conducive to VCs? And the founders, VCs have like, okay, you build this project and you give me a large share in it. I'll promote it and then we'll dump on retail, which in like a perfect harmony world, it would be a three-way partnership between project VC and retail where everyone feels good at the end of it. But there's like founders can also be severely culpable about this too.

• 40:36Speaker 00

  100%. And again, this speaks to the culture clash between venture, Silicon Valley venture capital and crypto. Right? Because in traditional Silicon Valley venture capital, founders see the VCs as like the kingmakers. Right? And so famously like, you know, there's, there's massive products that, you know, people believe were kingmade because the VC gave one of them 100 million and not the other or something like that. And so I think a lot of the traditional Silicon Valley founders see these VCs as kingmakers. And that's why they're willing to do these deals when the truth in crypto is that's.

• 41:16Speaker 00

  Not the case at all. VCs aren't kingmakers, right? Look at the the top three cryptocurrencies, right, um, which makes up about 70% of the total market cap of cryptocurrencies. Uh, Bitcoin, ETH, and Tether, they didn't raise venture capital, right? You there's the the idea that VCs are kingmakers um in crypto, I think, is uh not accurate. And so that, I think, is um it but that's the reason that a lot of these founders, I think, do these deals.

• 41:48David Hoffman?

  Would you say it's accurate that um retail never had a voice in Silicon Valley, web two startup founder VC relationships because they were stuck behind the walls of public listings on this on the NASDAQ and stock exchanges? And and so now there's this conflict because for the first time in crypto, retail actually does have a voice and all these players that, you know, founders and VCs that existed before crypto are now having to deal with this new variable, which are the voices of retail, who are ultimately the buyers of these tokens. And that's where a source of the conflict comes from. For the first time in crypto, retail actually has a voice and it can make demands and produce market pressures. Would you say that's a conclusion of this?

• 42:29Speaker 00

  Yeah, not not just a voice, but I mean, retail is a direct competitor with the VCs, right? Um, so certainly, um, there's the users of these products are owners and have a loud voice and also are are direct competitors. So I think, you know, I gave I gave a C grade.

• 42:52Speaker 00

  I'm obviously biased because we're doing as well because we're doing things a certain way. But we the way we, uh, you know, run a venture fund is to really act like users first and foremost. And to be aligned with, um, you know, the users um of of products because we are users ourselves. And so we generally aren't participating in any of these big, um, you know, pre-sales. And, you know, we we have made exceptions, um, which I'm sure people will call out. Um, like WorldCoin is the one that people like to call out the most. Um, but so we do make exceptions, but I mean, even WorldCoin, uh, do you know how much WorldCoin obviously gets a ton of shit? Do you know the supply?

• 43:37David Hoffman?

  20%.

• 43:39Speaker 00

  Twenty-five.

• 43:40Ryan Sean Adams?

  Twenty-five.

• 43:40Speaker 00

  So it's not close to, you know, some of these others.

• 43:45Ryan Sean Adams?

  Can I, I want to come back to that idea in a little bit because, you know, another mental model unlock, I think for us, you know, the first was like an intersection between purists and tourists. Another is this idea, I've, I've heard you guys talk about the idea of a user capital versus venture capital. And how you want to be more on the kind of the user capital side of things, which is like actually using the tools and being kind of informed at that level. I think that's important, but before we do, still on this topic of like VC sharks versus retail. All right. One second, I don't want to let retail completely off the hook here. Okay. And, and, and here's, here's kind of why. So the, the expected value, the EV game that you're talking about, where like founder and VC conspire in kind of a dark room.

• 44:30Ryan Sean Adams?

  And like, they're going to release this token and they construct a narrative and they, you know, push it out on the world. And they sell it to kind of hapless VC. I, I want to say, yeah, like that's the story here. Except, except that that play has been played so many freaking times. And it seems like retail never learns. And so the reason they keep running the playback is because it works every damn time. And I want it to stop working. I want retail to like, wake up and be like, huh, why am I buying the latest Threadboy shill of this new token? And guess what? They're going to do it again next cycle. And like, we know they're going to do it again next cycle.

• 45:14Ryan Sean Adams?

  And that's why venture capitalists and founders come up with these new tokens and these new pushes where they keep 50% because it works. It's because they see a high expected value return. If it stopped working, then it would no longer be profitable. Do you like, first of all, let me just say, I'm totally, I totally, I know we're slamming to VCs here. And like as well, we should, we should, we're slamming the nerves. What role does retail play in this? And actually like being smart? Can we, should we expect them to be smarter than this? Or is this just like what retail is?

• 45:48Speaker 00

  You're right. I mean, you're a hundred percent right. And I think. You know, the great thing about a free market is that, you know, you can get hurt and then hopefully learn. And I do think as time has gone on, people are getting smarter. But obviously not as smart as quickly as we'd hope. And I think you're absolutely right. It's going to happen again and, you know, more new people will get hurt. But I think that the overall trend is probably a good one in terms of learning and people getting smarter.

• 46:28Speaker 00

  But I do think VCs, you know, the ones that are raising the money, there is a responsibility as well. And the answer, oh, you know, these people retail needs to smarten up.

• 46:44Speaker 00

  It's, it feels like a weak one to me, but that's my, my approach.

• 46:49Speaker 03

  What do you think about this?

• 46:50Speaker 00

  They're free to do what they want.

• 46:51Speaker 03

  What do you think about this, Kav? I mean, like, to be honest, like retail, all they can do is like dollar cost average into ETH. And then like the dirty secret of that is if you were to DCA into ETH, like you would outperform the vast majority of VC funds. Wait, really? This is, this is, yeah, this is like looking at like VC performance data. Oh. And like the cool thing about institutional LPs is like they like survey like 150 so funds. And then they create cohorts of like fund performance data. So it's broken down by vintage. So like if you were started in 2017, 18, 19, so on, so forth. And then you see like the quartile. So like what the return is for the top quartile, the second quartile, third, fourth, and also the top performing fund.

• 47:36Speaker 03

  And it's, it's really fascinating, like going through that data, then benchmarking that to DCA into Bitcoin or ETH. And like, quite honestly, like a lot, a lot of retail, like if you were just disciplined and patient and DCA'd into ETH, you would have done pretty well.

• 47:53Speaker 00

  Yeah, that's a good point. The other thing, Ryan, you, you, you went hard on retail. There's also a lot of smart retail out there that, you know, the SEC deemed not smart enough to invest in a startup. But they participated in the Ethereum ICO, right? And outperformed the best brand name venture funds, right? So there's a lot of smart retail out there too.

• 48:22Speaker 00

  I do think, of course, there's a lot of dumb retail that needs to learn also.

• 48:28Ryan Sean Adams?

  Yeah, I totally agree. And what better, what better way to learn than crypto markets? Ideally, you're learning on a smaller amount and you're learning young. I mean, I'm just trying, trying to get, and I think we have many, you know, smart, getting smarter, retail investors like listening to the Bankless podcast, right? And so certainly, we encourage responsible behavior, dollar cost averaging into like, you know, assets that you have fundamental conviction on. I'm wondering if we could kind of summarize, because you guys see behind the scenes at the, let's call them the VC games, right? The VC shenanigans that are going on. I'm trying to draw out kind of a list of things that retail investors can really look out for or be cautious of.

• 49:13Ryan Sean Adams?

  So one is, you've mentioned it earlier, the Thread Boys, that kind of like the narrative VCs, where I was like, you know, pumping the narrative. And I think we've seen many main characters kind of like be written out of the show in the 2022 cycle, and that's a red flag. And so Bankless listener, I hope you heard that. Watch out for that. Watch out for that kind of token populism out there.

• 49:34Speaker 00

  I just want to add to that. I call it a counter signal.

• 49:37Ryan Sean Adams?

  Okay.

• 49:37Speaker 00

  It's like when, I think the people with the deepest conviction in crypto often aren't loud about their conviction. I think being really loud about your conviction is actually, should be recognized by the public as a counter signal, where you don't actually have that conviction, you're trying to convince others. And especially when you see, when you see projects in crypto that are, you know, consistently trying to get validation from institutions or celebrities. It's like, the thing that comes to mind for me was like the, the FTX Bahamas Conference, right, where we had Bill Clinton and Tom Brady and, you know, people like that. It's like, that's, that's a counter signal.

• 50:21Speaker 00

  That, that actually, to me, signals that a lack of conviction about what you're actually doing. So that, that should be one of the big lessons, and I hope it is, of, you know, the last bull market.

• 50:35Ryan Sean Adams?

  Yeah, marvelously well put. Counter signal, that means run in the other direction. Don't just avoid, it means run in the other direction.

• 50:42David Hoffman?

  Yeah. The archetype of the driver who drives a big, big Hummer, but they've got a small PP.

• 50:47Speaker 00

  Yeah. Yeah, and all of these, I mean, crypto is a microcosm for life, right? I think there's so many lessons within crypto that apply to, you know, everything in life.

• 51:01Ryan Sean Adams?

  Yeah, well, you know, that's the quality content bankless subscribers subscribe to. Thanks for that analogy, David.

• 51:06David Hoffman?

  Psychological projection, man. It's called compensation.

• 51:09Ryan Sean Adams?

  The other piece here is token distribution, right? So you said that that can be a red flag. And so one thing I don't think enough crypto investors look at is like, you know, kind of total market cap, right? So they look at liquid market cap, you know, instead of like total.

• 51:31Speaker 03

  Fully diluted.

• 51:32Ryan Sean Adams?

  Yes, thank you for the words, Richard. Fully diluted market cap, which is what they should be looking at in this market. And, you know, maybe you could say a few more words about distribution. Like, what does a good distribution like look like? Is there a threshold where it's a certain number? And that's like, that should be a red flag for anyone in retail? Or like, what are your further takes on distribution here?

• 51:54Speaker 03

  Oh, yeah, I mean, maybe we could talk about the market structure bill that just passed through the committees in the House, where they kind of specifically outlined like, what's the threshold for a token to be a commodity, not a security? And there's things like no individual or entity can own more than 20% of the fully diluted supply. No one can have more than 20% voting power. There's things about like developers, like having, how much control do developers have over the project?

• 52:31Speaker 03

  So like, the good thing about the bill is like, for the first time, there's like very tangible like metrics for when is a project considered sufficiently decentralized that it's a commodity versus like still seen more as like a insider VC founder type token.

• 52:50Ryan Sean Adams?

  Wow, so I actually, you know, I knew that bill wasn't in progress, but it sounds like you're familiar with kind of the details of it. So could we take a quick side quest here? So like, what is that bill that you're talking about? And you're saying there's some concrete definition of the difference between a commodity and a security? And it goes to actually define, you know, your token supply in the hands of a small group versus, you know, distributed? Give us some more context here.

• 53:14Speaker 03

  Yeah, it's called the FIT Act. It's basically the market structure bill that concretely settles the turf war between the SEC and the CFTC and just defines what's a security, what's a commodity? When can a security become a commodity when the network is decentralized? So it kind of outlines all of this regulatory clarity that we as the industry has been asking for over the last few years.

• 53:44Ryan Sean Adams?

  And by the way, under that bill as written, Richard, I don't know if you've looked at like, besides Bitcoin and Ether and like staple coins, that kind of thing. What other token assets actually fall under the definition of a commodity per that bill?

• 53:59Speaker 03

  I mean, well, I have to look at like different tokens and like see what their current distribution is. But like, you know, quite a lot of tokens.

• 54:09Speaker 03

  I think it's still unclear like whether or not existing tokens will get grandfathered in. I mean, the build is still like very much like a work in progress and like the final draft is may like that goes through the house. Might be very different than like what the text is right now.

• 54:25David Hoffman?

  I think just to really nail this point home, what we're really talking about are like a legitimacy threshold for centralized ownership of a token creation event. And so this, well, I think, Richard, why you brought this up is that this bill is actually putting in a number, a ratio of distributed to privately owned, like publicly held versus privately held. That is actually going to give like a legal thumbs up as in like if you give away at least this much of your network, you have, you are legitimate from the eyes of this bill from this nation state that perhaps Congress approves. I don't know if you know what those numbers are, Richard, but Ryan asked you the question like, what are the red flags?

• 55:05David Hoffman?

  And then you bring up this bill who's literally trying to draw a line in the sand as like what's a red flag versus what's not a red flag. Do you know the numbers off the top of your head?

• 55:14Speaker 03

  I think it's like 20%.

• 55:16David Hoffman?

  20%.

• 55:16Speaker 03

  I mean, like.

• 55:17David Hoffman?

  Does that feel right to you?

• 55:19Speaker 03

  Yeah, reasonably so.

• 55:23Speaker 03

  I mean, like, it's still like very much like a draft, a work in progress. So like, all these exact terminologies are still being negotiated. What else?

• 55:33Speaker 00

  I would say, yeah, it's hard to define exactly what the number should be, but to me, like, anything on over 30% should be a major red flag to retail investors. And part of being an investor is, you know, you have rules, but you can break them. And so even that, I would say, you know, you can break that rule if there's a really strong reason to. But generally, I think that's a good rule to have.

• 56:04David Hoffman?

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• 57:28David Hoffman?

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• 58:12David Hoffman?

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• 58:57Ryan Sean Adams?

  All right, so those are some of the ways that retail investors listening right now can avoid becoming VC exit liquidity and becoming victims of that exit liquidity. But let me just ask you this, just kind of your personal thoughts. Should we kill the idea of VCs altogether, or should we kind of restructure it? Like, what even is a VC? I feel like part of this gets into accredited investor laws, and then other parts of this just get into pools of capital that are, you know, like, very informed about founder risk in particular markets and making bets that way. I remember there was a narrative, once upon a time, this is harkening back to like the 20-

• 59:38Ryan Sean Adams?

  2016, 2017 Ethereum ICO days that there's no more need for VCs. Everybody can be a VC. Well, it hasn't quite played out like that. And a lot of people called BS on that from the very beginnings. But what's your take on this? You know, eliminating the idea of VCs. Do we not need it in a fully democratized finance type of world?

• 1:00:03Speaker 00

  No, we obviously don't think that because we are them. I mean, when we launched one confirmation in 2017 as one of the first crypto venture funds, that was kind of, we were able to raise money because we were saying, there's this huge ICO boom happening. We think it's mostly bullshit. We're not really participating. But there are really good founders that are thinking long term about building useful products. And so I think, you know, a good VC in crypto is making non-obvious bets in early-stage products that may not exist otherwise. Like, that's what venture capital, if you look at the, you know,

• 1:00:45Speaker 00

  the history of venture capital, you know, the early VCs were kind of the renegades that were crazy and investing in wild ideas that wouldn't have gotten funded otherwise. And also being a good partner to the founders, you know, after your backing. So, you know, working closely and helping them with whatever they need. And to me, that's what a good VC is. And I think there still is a need for that. Like, you could raise an ICO and get, you know, a thousand people that have a small skin in the game. But then none of them are really helping you. And none of them are really, and really...

• 1:01:30Speaker 00

  You know, if you, this is a totally different direction, but if you look at DAOs, you know, a big problem with DAOs is you have, you know, these DAOs that have a lot of participants, but no one that's really focused on driving the thing. And so I think a good VC is someone that has a large ownership and actually skin in the game and cares about helping. So, and I do think there, you know, founder, there's a need for that still. I think there's way too much capital and a lot of VCs that don't do that. But, but I think there are, you know, a number of them that do that. And that's, that's helpful for crypto. If you can, you know, if a VC can fund a product that goes and brings in, maybe doesn't have a token,

• 1:02:15Speaker 00

  so isn't getting the love on, on crypto Twitter or whatever, but is actually bringing millions of new people to crypto, I think that's a net positive for both crypto and the world. That's what we try to do.

• 1:02:30David Hoffman?

  Yeah, I think that's a pretty clear articulation as to why even in the absence of investor accreditation laws, you will still have venture capitalists because some venture capitalists will, A, like you said, have enough skin in the game and also the skills and means to actually meaningfully move the needle for a startup, move for actually truly help a founder. And if you just have, if you just bought a token on Uniswap and it's, you know, half a percent to 5% of your total portfolio, maybe you just don't feel that same sort of like skin in the game if you're a retail investor with like $1 to $10,000 invested. But, but then Nick, that kind of brings me to what I want to unpack with, with one confirmation. So we've talked about the archetype for like a toxic negative crypto VC.

• 1:03:14David Hoffman?

  But I want to talk, and we've talked about like the game that they play to make their returns, which are perhaps the illegitimate, like I said, toxic games. But what games does one confirmation play? How, how does one conf actually win the deal for VCs for a startup where inside of the startup landscape, you have a litany of other VCs in this space who they could take the, take a checks from? Why, what was your pitch for why they would take one confirmation's check? And like, what, what does one confirmation, what game do you guys play in contrast to all the toxic VCs out there?

• 1:03:46Speaker 03

  Yeah, I'd say one thing that differentiates us from other VCs the most is we make very few concentrated investments. And as a result of having a small portfolio, we're able to spend a lot of time with founders post-investment. And like, say a founder wants to chat about something, like I can hop on a call in five minutes and like have a conversation with them, just kind of walking through like ideas with them. And like, one thing that we do really well is for like new founders that want to work with us, we ask them to like reference check our existing founders and ask them like, rank all the investors on your cap table, like where would you rank one confirmation? And like, not only that for our existing portfolio, but also, this is funny, it's actually,

• 1:04:32Speaker 03

  one founder did this to us recently, where he wanted to chat with projects that like didn't work out, that failed. Because oftentimes when the project is not going well, then the VC founder relationship like truly gets tested. And like even in the cases where the project ended up not working out, like we still had a very good relationship with the founder. And like, those are also good reference checks to have, like not, not just the curated references that like, you know, every VC will provide, but also kind of the spicier ones where the project didn't succeed, but you want to see if the VC behaved badly and did stuff.

• 1:05:12David Hoffman?

  So what does it take for you to be on the good side of one of your guys' startups? Like, what are the things that you think you can really help them with?

• 1:05:22Speaker 03

  I guess for me personally, like building Dune dashboards, that's like, that's a really obvious one. And like founders always like appreciate it when like the product goes live, they deploy their contract on mainnet, and then like a day later, like a Dune dashboard exists, and it's like tracking all their top KPIs. Obviously, you know, making intros to like potential customers.

• 1:05:45Speaker 03

  Um, we're like, both Nick and I were big like users of like all these crypto products. So just like something as simple as using the product and like offering feedback is like, you'd be surprised by the number of VCs who don't do that. Like, like one example that-

• 1:05:59David Hoffman?

  They're busy writing threads.

• 1:06:00Speaker 03

  Yeah, exactly.

• 1:06:03Speaker 03

  Yeah, like one example that comes to mind is like when we invested in SuperRare, like we just like interviewed the top SuperRare artists and collectors, like asked them like, what are your feedback on the product? What are things that could be better? And then like compiled like a Google Docs sheet and then sent it to the SuperRare founders and like, something as simple as that was like super valuable to the founders when maybe they couldn't as candidly ask like their users, um, like their honest opinion of the product.

• 1:06:32David Hoffman?

  That actually sounds like you're doing labor, which is interesting because VC is of course on the labor to capital spectrum is capital. But it sounds like what you're doing is just like, well, we'll actually like do some actual lift work, some labor for our portfolio, uh, portfolio companies.

• 1:06:48Speaker 03

  Yeah, which I think is like back to my original point is like, it's only possible when you have a small concentrated portfolio and like you're making, you know, at most a dozen investments a year, dozen new investments a year.

• 1:07:01Speaker 03

  And like you see VCs, there are a lot of VCs that like spray and pray and will just like write, uh, over a hundred checks, like 0.5% of the fund each, like into each company. Uh, and like, obviously when you have like that big of a portfolio, like, you know, I, I have trouble like managing like, I don't know, 30 different names and like, imagine having to manage like hundred, 200 different like companies and what's going on. So, uh, those, those are kind of the telltale signs that founders could use. If a VC is just like larping about being a value add, or do they actually have the resources for it?

• 1:07:37Ryan Sean Adams?

  One thing I'm continually blown away by is the, um, The amount of VCs who aren't actually crypto users, like DeFi users, right? And this was even worse previously, but it's still kind of bad now. It's just like, they don't, they've never actually run an Ethereum like node, or they don't have custody of some of their own personal assets on an actual bankless wallet. They barely know how to use MetaMask. They don't do much with like Uniswap or any of the kind of the DeFi protocols out there. And yet, these are the VCs that are, you know, deploying cash and like investing these products. That never ceases to amaze me.

• 1:08:22Ryan Sean Adams?

  And I actually think there's a lesson for our listeners here and for retailers here. Spend less time reading threads and absorbing narratives and spend more time using products. That will already put you ahead of a lot of the VCs deploying capital in the game. And that will help teach you what's real and what's not. What's a narrative? What's a story? And what's an actual product that has some functional utility?

• 1:08:47David Hoffman?

  I thought I gave you some airdrops too.

• 1:08:49Ryan Sean Adams?

  Yeah.

• 1:08:49Speaker 00

  Yeah. Well, and that's a big, that's really the core thesis of what we do, right? We only make, as Richard said, a concentrated number, four to six investments a year, call it. And we're only investing in products that we understand deeply from a user perspective. And that's, that's my crypto journey. I mean, how I got involved in Coinbase, so I was one of the first 100 users of Coinbase. I was trying to, back in 2012, I was trying to buy Bitcoin. I was living in Portland, Maine. And back then, to do that, you had to go to a cash, go to an ATM, take out cash, MoneyGram it over to like Mt. Gox. And it was just a bad UX.

• 1:09:34Speaker 00

  And Coinbase, I saw Brian launched Coinbase on Hacker News. And it just solved a very simple problem for me, like buy Bitcoin with a bank account online. So that's kind of, you know, that's how we invested in OpenSea. We were buying CryptoKitties on the CryptoKitties website. And they were charging 5%. And what's the true value of an NFT, right? It's true ownership and you could, you know, you should be able to trade it on many different, you know, venues for cheaper. And then we used OpenSea early and then we invested. So we're very much product first and really only investing in products that we understand deeply from a user perspective. And that actually allows us to do what I personally feel is like the most important role of a VC.

• 1:10:19Speaker 00

  VCs talk about, you know, all the different value add, you know, whether it's hiring or, you know, whatever it is. And some of them oversell it. Some of them really deliver on that. I mean, Richard like has, has built many different products for actual portfolio founders. So I think we've done a good job there. But at the end of the day, I think the truth is, and I know this from my own personal experience, the, the, the most important thing an investor and, and a founder can do is instill belief in that founder. And that's what I feel like we're now in a, in a positive position to do because we've had success in the past. We've seen a lot. We know what works, what doesn't.

• 1:11:03Speaker 00

  And just being there, you know, as a positive light to a founder and, and help them instill belief can do wonders to, you know, a founder's success. So that's really what, what we try to do as well. And it's kind of this maybe soft, not super tangible thing, but I do really think it's the truth. And again, that I, I know that from my own personal experience. When I got investors in my fund that I really respected and, and that really helped propel me, my belief in, in what I was doing. And I think that is a really kind of important thing that any investor can do.

• 1:11:45Speaker 00

  And I think it's hard to do that if you don't really understand the product and have conviction on like the product in the market. So Okay. That's kind of, that, that's what really, we really focus on. And I've personally focused on more recently as well. It's something you don't really realize early on, at least I did in, in, in starting one confirmation, but. You can, and I've been guilty of this too, you know, project your own insecurities on a founder and bring like negativity to them, which doesn't help at all, right? That's a net negative. And so really doing anything you can

• 1:12:25Speaker 00

  to not do that and be kind of a positive light and project a belief is, I think, really a really important role of an investor.

• 1:12:35Ryan Sean Adams?

  Yeah, it's a, you know, forget the work of, being a founder is very, very, very, very freaking difficult, for sure. And shout out to all the builders and founders out there who are making crypto what it is and what it should be. And you mentioned, Nick, this idea of kind of product first. And I want to broaden this out. So we talked about, you know, like what we did wrong in 2022 and some of the lessons learned. We talked about why VCs suck and how to do it well. I feel like we need to now think about preparing for the next cycle or the next wave of adoption or the next like wave of building, whatever we want to call it. And the truth is crypto still hasn't gotten to a billion people yet, a billion users. Isn't that why we're here? Isn't that the promise of crypto?

• 1:13:19Ryan Sean Adams?

  And so I want to ask you guys what themes that you're looking at, like going into 2023, to onboard the next cohort of crypto users. Like where are you looking for the alpha? Where are the 1 billion users going to actually come from? Nick, I saw a tweet from you that said this crypto native products that will reach 1 billion users in the next 10 years. And you said, prediction markets, DAO tools, on-chain messengers, decentralized social media, decentralized identity. I feel like we haven't really seen much uptick in any of those things yet. And I'm wondering if, is that your answer for like where the next billion comes from? It's one of those categories or you think it's something else? Why don't we start with you, Nick?

• 1:14:04Speaker 00

  I think that's where I have the highest conviction, right? The beautiful thing about crypto is there's, you know, a million different projects being worked on. And we don't really know, it's really hard to predict what is going to really hit, right? I mean, we nailed NFTs. I don't think many did, right? And for a long time, most in crypto, I think we're too big brained for NFTs, right? And they were focused on, you know, the deep tech or the DeFi or something. And really dismissed NFTs, even though there was a small community that was, that was using it.

• 1:14:46Speaker 00

  Uh, you know, the products, they were, you know, dismissed as either degen or stupid or something.

• 1:14:52David Hoffman?

  I just thought they were JPEGs, right? Click save JPEGs at first, honestly.

• 1:14:56Speaker 00

  So that was obviously a surprising one. And NFTs arguably have gone more mainstream than anything so far. Um, so we very much look for products that are serving a small niche of really passionate users that have, you know, mainstream potential. That's what we do as kind of early stage VCs. And yeah, I mean, if I had to pick one right now, I would say prediction markets. I think prediction markets, they capture the essence of crypto, right? Which crypto is all about speculation and memes.

• 1:15:37Speaker 00

  Um, if you had to right now define, and I think it's going to be much more than that. But still in 2023, if you had to define the essence of crypto, I think it's, it's speculation and memes. And I think prediction markets bring speculation and memes to more people. It's not just about shitcoin speculation. It's about speculation on whether the room temperature superconductor paper is real or whether Trump is going to be the Republican nominee or whatever.

• 1:16:13David Hoffman?

  The submarine, the recent story of the submarine, that brought in like a million dollars of volume inside of like two or three days to Polymarket.

• 1:16:21Speaker 00

  Yep. Yep, so I really like prediction markets as a use case. I think it has a lot of the features that really requires a mainstream use case. I mean, one of the things that I think is unappreciated about prediction markets is it could also be a new business model for creators. So I think one of the big reasons NFTs broke out, right, is they made it easy for any creator to make money. And I think soon we're going to see create your own market type products that allow like any influencer to basically create their own market and then make fees off that.

• 1:17:01Speaker 00

  So I think prediction markets, if I were to pick one right now, would be the category that I pick.

• 1:17:09Ryan Sean Adams?

  Can I ask you on that really quick, Nick? Because prediction, so so much about kind of investing is timing, right? And so it's like, you know, eventually the idea of a food delivery service worked, internet food delivery service, but it but it wasn't Webvan back in like, you know, 1999 or 2000 or whenever that was, right? It was it was something later. It was like an Uber manifestation of this. Prediction markets have been a crypto use case for like ever. One of the first Ethereum ICOs was Augur. And I'm sure you guys remember that, right? Which is, what was it? You know, decentralized prediction market. Why now? Like, so why have the the previous attempts of prediction markets and crypto failed? And like, why is the timing right now in your mind?

• 1:17:54Speaker 00

  Yeah. And again, I'm not sure it is, but, you know, we've been watching this space closely from the beginning. I mean, we invested in Augur. We participated in early Augur markets. We were investors in Vale, which was a more centralized version of a prediction market that didn't end up working. And I mean, prediction markets are tough because there's a regulatory component.

• 1:18:26Speaker 00

  That makes it hard, particularly in the US, for centralized companies to operate and offer the service to US consumers. And Augur tried it in a decentralized way, but as you guys know, there's often a trade-off between decentralization and UX. So Augur went decentralized, wasn't able to get a great UX. Vale, you know, went more centralized, couldn't figure out how to operate, you know, a centralized business within the regulatory framework. And, look, I think you need to tip your hat, your cap to Shane and Polymarket because they've

• 1:19:11Speaker 00

  kind of grinded through, dealt with some challenges in terms of regulatory, but have figured out a way to offer a product outside the US and really, you know, gain traction. So, you know, the honest answer is I don't know for sure that the time is right, but it feel, it just feels like the way things are going with, everyone is becoming an investor, the trend, the way that regulation is going, the more people coming online globally, memes going more viral, there's just a lot of indications that it could be a good time to build a prediction

• 1:19:56Speaker 00

  market business.

• 1:19:58David Hoffman?

  One of the takes that I've been giving out recently is that a lot of the underlying infrastructure of crypto is ready. It is effectively done. There's still plenty of domains, part of this deep tech stack that crypto web three is built on that definitely we can improve, but I don't think that there are any applications that are not accessible to the crypto tech stack because of how I feel like finished some of our protocols are. Maybe we're like one to two years out for this really being true. And I'm wondering if that take resonates with you, as in our protocols, data availability, layer two, speed and latency and UX. All of these things like cross-chain composability could definitely get improved, but it's on the horizon.

• 1:20:41David Hoffman?

  And I'm just wondering about your take about this take, Nick and Richard. Like, I think that the full spectrum of user applications is going to be available to crypto, to web three. Like, basically now-ish, one to two years, like where our protocols are ready to support whatever app that we can develop. And I'm wondering if that resonates with you. Richard, how do you feel about that?

• 1:21:03Speaker 03

  Yeah, I mean, I agree with that. I actually have a pretty similar hot take. We're recording this August 2023. So like, right now, at least in the VC world, like, there's just so much money that's being poured into new infra projects. And I think the reason is because there aren't really net new users in crypto. And like, people just want to bury their head in the sand and like punt the question of like, how are we going to get users in adoption down the road? So meanwhile- No one wants to do the hard thing. No one wants to do the hard thing about getting users. So meanwhile, just build infra and then kind of punt that question later. But the problem is then you become one of 50 different infra providers that an application can build on.

• 1:21:45Speaker 03

  So like, we as a fund, we generally skew more like consumer application heavy. Because like, I think in the next bull run or two, like, that's where the next million, billion users are going to come from, some killer app. Nick talks about prediction markets. One thing I've been thinking a lot about is web three messaging. So, you know, historically, like wallets have been the gatekeeper, the front end to crypto. It's like, whenever you want to do some crypto interaction, you have to go through a wallet first. But like, if you think about it, like, if you look at like your transaction history on EtherScan, like, almost all of those were probably triggered because a friend told you to go mint this NFT or like, go do this action.

• 1:22:30Speaker 03

  So like, what if you have messaging, like the social layer as the product? And the wallet becomes the feature, not the product?

• 1:22:39Speaker 03

  I think that is like one potential area where the next- A wave of crypto users that onboard won't have the bias of like existing like wallet products, but onboard through a messaging app that just has like the wallet built in as a feature, not the product.

• 1:22:56Ryan Sean Adams?

  Do you think part of the reason for that prediction is that like we're making progress on account abstraction and like, you know, layer twos, you know, gasless or very low fee block space, that kind of thing? Is that why? Or like, why now?

• 1:23:12Speaker 03

  Yeah, I think AA is like a big unlocker. You know, like account abstraction is an idea we've been really bullish on for a long time. We actually invested in one of the first AA wallets called Ethereum back in 2019, which they ended up pivoting to HOP protocol. But I think with like 4337 going live, the entry point contract going live on mainnet March of this year, I think that's 4337, the spec is specifically what makes the timing now different and better for account abstraction. And we've actually made a bet, we invested in a founder, his name is Kristoff. He's one of the, actually one of the co-authors

• 1:23:52Speaker 03

  of 4337, which is really cool. And he went from co-authoring the spec to now building Pimlico, which is the company that's building out the bundlers and paymasters for account abstraction.

• 1:24:06David Hoffman?

  So, since you guys are users first, what do you guys do? When you guys are gonna go do and make a transaction on Ethereum or Layer 2, what kind of activities do you guys like to do? What's your, not maybe not the DGEN activity, but if you guys are users, how often do you see yourself, or what activities do you guys see yourself doing the most inside of crypto?

• 1:24:27Speaker 03

  I guess for me is like minting NFTs. Like, for example, with the base L2 launch yesterday, like I minted like DK Motion's NFT and it was cool. I mean, I'm a big fan of DK Motion's art, so it's cool that it was one of the first NFTs on base.

• 1:24:47Ryan Sean Adams?

  Nick, what about you?

• 1:24:49Speaker 00

  Lately, I'm more, I'm increasingly excited by non-financial activities. So, Farcaster is one. I use Farcaster quite a bit. I really like the community they have. And they recently added a ENS, which I thought was cool. So I, you know, added my ENS name and, you know, made some posts on Farcaster. Messaging is another one. I mean, I'm increasingly using crypto, like on-chain messengers. So, Converse is one that I use pretty regularly. Have you guys used any on-chain messaging products?

• 1:25:35Speaker 00

  So XMTP- I've used like EtherScan Chat. The EtherScan Chat, yeah. XMTP is a, is a protocol that is pretty cool. And by the way, we're actually not investors in that one. So we're not just showing our, our bags. But they built kind of an on-chain messaging protocol that a bunch of products have used. And so one of the cool things about like Converse and Coinbase Wallet has it as well, is you can write a message, you can connect your wallet, write a message to someone. Say you, you know, someone owns an ENS name that you want. You could message them and the message persists across, you know,

• 1:26:17Speaker 00

  the different messaging applications, which is kind of like a crypto-native behavior that I think is pretty cool. We all know, you know, juggling Telegram and- Discord and email. WhatsApp and everything else is, so, and so that's, you know, an example. Another one is, we recently invested in a messenger called Friends, which is taking a different approach. But that's an area that I'm increasingly excited about. Like, I do think it's likely that a speculation-related application is going to be the next breakout, something like prediction markets.

• 1:26:57Speaker 00

  But we're also closer than ever to kind of these non-speculation-related use cases.

• 1:27:03Ryan Sean Adams?

  Nick, the non-speculation stuff, is that Web 3? Is that what we're talking about? I haven't heard you guys say the term Web 3 this entire episode.

• 1:27:12Speaker 00

  Web three is like a made up Silicon Valley.

• 1:27:15Speaker 03

  Silicon Valley VCs love using the term like web three and then like crypto natives just use crypto.

• 1:27:24Ryan Sean Adams?

  But, but I mean, we're effectively talking about some of that, right? Decentralized social networks.

• 1:27:29Speaker 00

  Yeah, but I mean, yeah, truthfully, it's like web three was a made up term to appeal to people in Silicon Valley that looked at crypto and said, oh, that's scammy, that's degen or something. So it was basically, I don't, I don't, I don't love the term.

• 1:27:46Speaker 03

  Digital assets versus cryptocurrencies.

• 1:27:49Ryan Sean Adams?

  Yeah, yeah. No, I.

• 1:27:50David Hoffman?

  I will say there was a conversation I, I had with my father sometime in like 2019 where he was like crypto, y'all really need a rebrand. Cause crypto is such a, he's a dad's a boomer, of course, like crypto is such, just such a negative connotation word. And then as soon as web three came around, I was like, oh, okay, great. We did it. And then we kind of ruined it.

• 1:28:12Ryan Sean Adams?

  Well, guys, this has been a lot of fun. So thank you for your guidance to the world. I think bankless listeners should come away with this with a, with a lot of lessons. I guess, I guess one last question I have to ask you. So L twos, let's talk about this. L twos versus alternative layer ones. What's, you guys have any hot takes? I know that's not the app layer. This is infrastructure, but you know, what are you betting on?

• 1:28:37Speaker 00

  I, I would say my on-chain, again, we let products guide us and L twos have been really hot from a narrative perspective. And I've tried a bunch of them, I, you know, to try them and stuff like that, but most of my, the vast majority of my activity is still on Ethereum.

• 1:29:00David Hoffman?

  Layer one.

• 1:29:01Speaker 00

  Layer one, exactly. And. So we haven't done a ton in the L2 space. I mean, there are a lot of them. Or again, these kind of big VC rounds that we generally don't participate in. It's a super hot narrative that I generally like it, right? Because it's it's good for Ethereum overall. We're, you know, our largest position as a fund is still ETH. But in terms of just activity, like I'm still mostly on mainnet and we haven't done a ton. We've done some, right? Like HOP, I think is a great product that bridges

• 1:29:47Speaker 00

  assets from mainnet to L2s. But just from, and I've used HOP quite a bit, again, just to experiment, but there's no product yet on an L2 that I'm using consistently. I'm curious. What about you guys?

• 1:30:02Ryan Sean Adams?

  Well, on layer twos.

• 1:30:03David Hoffman?

  NFT minting is the main activity. Really cheap NFT minting. Yeah. And then there are some layer two native DeFi apps, which I've touched maybe a few times.

• 1:30:13Ryan Sean Adams?

  Yeah, I think both Dave and I probably skip pretty bullish on layer twos overall. How about you, Richard?

• 1:30:19Speaker 03

  I have one hot take I have for L2s. I think a lot of projects will launch their own roll up on the OP stack. Because

• 1:30:29Speaker 03

  there is a better argument for having a token. Rather than kind of this pseudo equity governance fee token is like you're building your own chain and you have a token that secures the sequencer and

• 1:30:44Speaker 03

  kind of manages the L2. So I think we'll probably see a lot of app specific rollups in the next year or two.

• 1:30:52David Hoffman?

  That is a thesis that you and I share, Richard. And if I said anything more bullish about the OP stack, it would be like the fifth time this week.

• 1:31:01Ryan Sean Adams?

  Well, guys, thank you so much for joining us on Bankless. It's been a lot of fun.

• 1:31:06Speaker 00

  Yeah, great to see you guys. Thanks guys.

• 1:31:08Ryan Sean Adams?

  Bankless Nation, hope you enjoyed that episode. One action item for you today. Richard actually wrote a fantastic post on the current VC landscape. We'll include that in the show notes. We're not done slamming VCs, of course. Go read up on that some more. Rist and disclaimers, got to end with this. As always, crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us in the bankless journey. Thanks a lot.