Ben Forman – Unlocking Blockchain's Potential (EP.441)

Ben Forman is the Founder and Managing Partner of ParaFi Capital, a $1.5 billion manager of financial applications of blockchain technology and digital assets across long, arbitrage, venture, and GP seeding strategies. Ben last came on the show in 2022 as part of our Crypto for Institutions mini-series, and that conversation is replayed in the feed. Our conversation dives into the evolution of blockchain over the past few years, including the industry's "Lehman moment" and subsequent recovery. We discuss Bitcoin, memecoins, the rise of stablecoins as blockchain's killer app, tokenized assets, prediction markets, credit, and the intersection of AI and blockchain technologies. Ben also shares insights into ParaFi's approach to investing and his long-term vision for building a business in this dynamic industry. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com https://thepodcastconsultant.com/)

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

• 0:01Ted Seides?

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• 3:32Ted Seides?

  Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.

• 4:18Ted Seides?

  My guest on today's show is Ben Forman, the founder and managing partner of ParaFi Capital, a $1.5 billion manager of financial applications of blockchain technology and digital assets across long arbitrage, venture and GP seeding strategies. Ben last came on the show in 2022 as part of our Crypto for Institutions mini-series, and that conversation is replayed in the feed. Our conversation this time around dives into the evolution of blockchain over the last few years, including the industry's Lehman moment and subsequent recovery. We discuss Bitcoin, meme coins, the rise of stablecoins as blockchain's

• 5:00Ted Seides?

  killer app, tokenized assets, prediction markets, credit, and the intersection of AI and blockchain technologies. Ben also shares insights into ParaFi's approach to investing and his long-term vision for building a business in this dynamic industry.

• 5:18Speaker 02

  Before we get to the interview, allocators, listen up. It's the last dance for Capital Allocators University. I don't think Netflix will make a Last Dance sequel, but you never know. The seventh cohort of CAU for allocators is coming up on July 7 in New York City and is likely to be our last in person. We'll dive into decision-making and interviewing techniques for investors, host peer discussions, and feature a can't-miss Q and A with the dynamic duo of Kim Liu and Meredith Jenkins. We're also cooking up something exciting, broadening accessibility online and bringing together our CAU alumni in person. More to come there. If you want in or you'd like your teams to participate,

• 6:02Speaker 02

  head to capitalallocators.com/university. Spots won't last, seats will fill up quick, and this might be your last shot to join in person.

• 6:12Ted Seides?

  Please enjoy my conversation with Ben Forman.

• 6:17Speaker 02

  Ben, great to see you.

• 6:18Speaker 03

  Ted, great to be back on.

• 6:20Ted Seides?

  It's been three years since we did this. I know. Lots change in the crypto and blockchain world. So I would love to get just your sense of the landscape.

• 6:28Speaker 03

  We often joke internally that crypto moves in dog years because of the amount of activity that's compressed into short periods of time. In some ways, it's true because crypto trades 24/7. So you have 168 hours of trading per week versus 32 and a half hours for traditional markets. You literally have five times the amount of trading activity. But on top of that, you have a global market and an open source market. And as a result of that, you just get very fast feedback loops, a lot of trial and error, a lot of creative destruction. And what's happened in the last three years, there's been a tremendous amount that's transpired.

• 7:07Speaker 03

  We had last spoken in Q2 of 2022, and this was really right at the beginning of a distress cycle in crypto. The industry had its Lehman and Enron moment, beginning with Luna, followed by BlockFi, followed by FTX, and then Genesis. These were 11-figure bankruptcies. Part of it was a classic deleveraging, but the other part of it was just a material reset for the entire industry. That was 2022. But on the back of that, in 2023 and 2024, you really saw builders continue to build and make advancements at the infrastructure layer in the space. Using blockchains has become more scalable, more efficient, the UX has improved.

• 7:52Speaker 03

  And then at the same time, you've seen this pretty material, what I would describe as a Cambrian explosion of institutional interest in the space. And this is around areas like stablecoins, tokenization. You've seen BlackRock tokenize treasuries. You've seen Fidelity announce that they're going to launch a stablecoin. So you've seen all these different institutions, both on the financial side, but also on the corporate side, really start using blockchains in their day-to-day business functions. That's been exciting to see. We've always felt that many people look at the blockchain space as this isolated part of capital markets. Blockchains are $3 trillion asset class. Total assets globally are 600 trillion, so it's 50 bips of global assets.

• 8:36Speaker 03

  Some people think about it as largely isolated from everything else going on in the world. But what I think you're starting to see is blockchains are really becoming More of a horizontal slice of what's going on globally. So in the same way that you used to have like an internet sector, but now every industry in the world touches the internet and you're seeing that with the blockchain space. Recently went through this exercise at ParaFi of reformulating our thesis and mission as a firm. As part of that, we looked at the missions of other great companies. One of them that resonated with me was Stripe. Stripe's mission was to increase the GDP of the internet. In that same lens, at ParaFi, we want to invest in companies and protocols that are increasing the GDP of blockchains.

• 9:21Speaker 03

  A lot's transpired and we should double click into it. But I do think that this is probably the most exciting time to be an investor in this industry because a lot of the noise and a lot of the hype has dissipated. And now you're seeing actual substance and real fundamental traction.

• 9:38Ted Seides?

  As we dive into what's happened, particularly with these use cases, really curious about the talent piece. Because since in the last three years, first you had this explosion of interest in the metaverse and then of course AI. A couple of years ago, crypto and blockchain was the thing that every young programmer wanted to do. How has the talent moved around?

• 9:57Speaker 03

  I think there are like two ways to look at talent. One is quantity of talent and another is quality of talent. Many people often look at number of developers or number of GitHub commits, ways to measure how much new code is being written in the space. If you look at those metrics, there's been some organic growth over the last three years in absolute terms, but there's been a slowing of growth. That's on the quantity side, but on the quality side, you've seen pretty material uptick, not only in the quality of developers, but also the quality of non-technical individuals in the space. So on the BD side, on the product side, on the go-to-market side, at the C-level of these companies.

• 10:39Speaker 03

  Because I think what you're starting to see is there's a surplus of block space. So there's a surplus of blockchains that you can use that are fast and cheap today. It's not really the bottleneck. The bottleneck is figuring out user experience. Regulatory, understanding KYC, AML, and making sure these products are actually built and can be used by institutions. For those types of dimensions, you actually need people that understand finance, that understand how corporates think about using blockchains. Net-net, the quality of talent in this space, the human capital, is better than it's ever been. I remember when we started in 2018, 2019, people building in crypto were, with a few exceptions,

• 11:24Speaker 03

  not necessarily people that you would really want to allocate meaningful capital to. But today, I mean, we're seeing people spin out of the biggest hedge funds in the world, the biggest financial institutions, whether it's Robinhood or Stripe, also big tech companies to build in this industry. It's very encouraging.

• 11:41Ted Seides?

  The tip of the iceberg for institutional interest always seems to be Bitcoin. Had this big surge with the election. Would just love to start there with your sense of what's happening in Bitcoin.

• 11:51Speaker 03

  Bitcoin is such a unique snowflake of an asset. It's really aiming to be a non-sovereign store of value. And it's been around now for 16 years, since the initial white paper was published and the first block cleared on the Bitcoin network. It's had this Lindy effect, and it's almost become this institutional macro asset. BlackRock recently came out and recommended a 2% allocation to Bitcoin. You now have 11 spot Bitcoin ETFs that launched about 14 months ago, which by most metrics were the most successful ETF launches in history. So BlackRock's ETF had 37 billion of inflows in 2024. That was the third most of any ETF in the market,

• 12:36Speaker 03

  and by far the largest first-year launch in history. More importantly than the numbers, this is a massive credentialization of this asset class. When you have BlackRock, Fidelity, Wisdom Tree, Invesco, all basically saying this is an asset that's worth owning. So now you have 5% of all Bitcoin that's held by these ETFs. You have MicroStrategy that owns a big chunk too. And 70% of all Bitcoin has not moved on-chain.

• 13:05Speaker 03

  In the past year, it's really acting as this macroeconomic hedge against central bank and fiscal monetary responsibility. What's interesting about Bitcoin is that it's a finished product. There's no real additional tech that needs to get built. There will be improvements to the tech stack of Bitcoin, but that's not necessary for the thesis to play out. In some ways, it's better that it doesn't change. That's more of a feature, not a bug. Today Bitcoin trades at about 10% ish of gold's market cap, but by most accounts, I think, is a more beloved non-sovereign store value for the millennial and Gen Z cohorts.

• 13:48Speaker 03

  And as this greatest wealth transfer in human history plays out, 30 trillion over 20 years, from boomers to Gen Z and millennial, there's just a natural demographic tailwind for Bitcoin. I think Bitcoin is very well positioned. There's a lot of interesting things outside of Bitcoin, but I think Bitcoin in particular, it's kind of been de-stigmatized and institutionalized, and I think it's getting ready for a next phase of growth.

• 14:14Ted Seides?

  The extent that Bitcoin is that institutional asset, on the other end of the spectrum, it's baffling to me that we still have these meme coins. Why is that still part of the market?

• 14:24Speaker 03

  I think there are two different perspectives on meme coins. I'll straw man both sides of the argument. On one hand, Bitcoin is a meme coin. There's nothing intrinsically valuable about Bitcoin. It's underpinned by social consensus and people that have decided that it's valuable to them. But no one knows who created Bitcoin. Bitcoin represents a certain zeitgeist in society around governments and libertarianism. For others, they don't care about that stuff, and it's just an uncorrelated macro asset. If you ask Paul Tudor Jones or others that have made Bitcoin a staple of their portfolio. At the end of the day, there is a bit of a memification of this thing Bitcoin.

• 15:09Speaker 03

  If you look at other memes, there was a point earlier this year where there were 5,000 new meme coins created every minute. The cost of creating these things is negligible. The barriers to launch are negligible. And 99.99% of these meme coins that were created converged towards zero, and most of them were jokes. But what these meme coins do represent, for some, is

• 15:34Speaker 03

  A cultural affinity, they represent community. There is an element of community in investing, even in public markets. If you look at something like what's going on with Tesla right now, or what went on with GameStop in 2021, I do think there's an element of it that's easy to dismiss, but it's always existed in markets. People want to buy things that they feel emotionally attached to. Investing is an emotional and a social behavior. I think meme coins from an institutional standpoint are very difficult to invest behind. They're kind of like buying lottery tickets. But I don't think they're going away. So today meme coins are 5% of total crypto market cap. I think they'll always be here because investing is inherently about feeling like you're part of a community.

• 16:17Ted Seides?

  So we turn from that to use cases. What has been the killer app that's made all the blockchain technology not technology in search of a use case is common critique?

• 16:30Speaker 03

  There's one clear answer to this question that transcends above everything else, at least today, and it's stable coins. If you look at stable coins today, they're a $230 billion market. Those $230 billion rotate on-chain to the tune of about $27 trillion last year in 2024, which was greater than Visa's total settlement volume, almost 2x that. And if you kind of think about inherently like what a stable coin is, it's a dollar that's put in the file format of a token. And by putting a dollar in the format of a token, it makes it easier to move. So you can move it 24/7. You can hold it. Most dollars are held through bank accounts, or held through custodians, or

• 17:15Speaker 03

  brokerages, or intermediaries, and with a different layer of risk. Here you can hold a stable coin, it's directly in your custody and you have access to it 24/7, 365, no matter where you are in the world. You can send it in a way that's disintermediated so you're not going through traditional payment rails. So where this has really taken off is in cross-border remittance, B2B payments, trade finance, as well as micropayments. It's very difficult to send $1. On the internet, but you can do that with digital assets. Actually, I think it was Marc Andreessen that once said the cardinal sin of the internet is that it never made it easier to send or receive money.

• 17:56Speaker 03

  It like transformed every industry, but the internet didn't really solve finance and money in the same ways. There still hasn't been as much innovation there. Stable coins are happening today. This isn't like a theoretical thing. Hey, blockchain may solve this in the future. The scale that it's operating at today is very powerful. You've now seen Stripe recently acquired Bridge, which is a startup in the stablecoin space that was basically building software that allowed companies like SpaceX to pay employees in 160 countries. What they made it very easy to do is use stablecoins without knowing you're using stablecoins. Because at the end of the day, no one really cares about using blockchains or stablecoins.

• 18:38Speaker 03

  They just want to send money and receive money more efficiently, more quickly, with better guarantees, without going through multiple correspondent banks, without paying wire fees. Stripe made that acquisition. You've had Fidelity that announced that they're going to launch a stablecoin. Visa is doing a lot of work, great work in the stablecoin space. 80% of all transactions on blockchains involve a stablecoin in one way, shape or form. So if anyone asks you like, how are blockchains being used today? It's mostly to like move dollars around the economy. What's really interesting here to me is if you look back post-World War II, there was this whole concept of a euro-dollar market.

• 19:20Speaker 03

  If you were a multinational in Moscow, you know, you wanted to hold dollars outside of the banking system. You'd put those dollars with the bank in London. It's dollar deposits held outside of the US. Part of that is you don't want to be subject to banking regulation and the US legal and political system. Today, the euro-dollar market exceeds the total quantity of US domestic banking deposits. So it's a huge market. Really, at its core, you can think about stablecoins really as euro dollars. They're being mostly used in these emerging markets. This trend of stablecoins is, I think, going to be one of the most defining trends of our lifetime.

• 20:03Speaker 03

  The idea of moving dollars globally on the internet 24/7 is very powerful. The number of wallets sending and receiving these and the number of stablecoins outstanding have both been compounding at 40% to 60% per year for the past five years. This is particularly impressive, given we've been in a relatively higher interest rate environment and stablecoins yield zero. So it's grown against that headwind. This is a market that I think will experience 10 to 100x growth over the next five to 10 years. That's the most clear answer of what is happening on blockchains.

• 20:42Ted Seides?

  With all of that transaction volume flowing, where do profit pools occur from the economic activity?

• 20:50Speaker 03

  I think there are like three primary areas. So the first are the issuers of these stablecoins. Their business model, so if you look at Tether, which is the largest, they have about 140 billion of stablecoins outstanding. And then Circle is the second largest. They issue USDC. They have about 60 billion of stablecoins outstanding. The core business model here is you have a token that can be redeemed for a dollar. They take those dollar deposits and invest in short-term treasuries and earn a spread. So they're paying zero to depositors and they're earning, in today's market, 4-ish percent. If you look at Tether, last year they made over $10 billion of profit with a small team.

• 21:34Speaker 03

  And Circle, they're gearing up to explore a public listing. So these businesses can be incredibly profitable on the issuer side. We can talk about market structure and whether it will be winner-take-most or an oligopoly or winner-take-all, but today, in this rate environment and with the growth, they're extremely profitable. The second area would be Layer 1's blockchains themselves. So if you send a stablecoin on a blockchain, if I send you, Ted, a stablecoin, I have to pay fees for that transaction. If I'm sending that stablecoin transaction on Ethereum, I'm attaching some sort of fee to that transaction denominated in ETH, which is the digital asset of the Ethereum blockchain. That's getting burned.

• 22:17Speaker 03

  More and more people are contextualizing the valuation framework for Ethereum as a capital asset. And you can think about that burn almost like a company using its free cash flow to buy back stock. The units of ETH outstanding should decline as more and more stablecoins are sent. I mean, there's a number of other things happening in the Ethereum economy, but that is the essence of where value could accrue. Blockchains themselves is the second answer. And then the third place is all the different picks and shovels that are getting built around the stablecoin infrastructure. So things like KYC AML compliance software to know who you're sending your stablecoin to, general middleware that make it easier for corporations

• 23:01Speaker 03

  to use stablecoins to send and receive them, smoothing the on-ramp and off-ramp process. There are a number of on-chain applications that allow you to earn yield on stablecoins. So if you think about the entire DeFi ecosystem, that's been a major beneficiary from increased stablecoin supply on-chain. The answer to the question is not buy a stablecoin, because stablecoins are pegged at a dollar. But there's all this infrastructure around the stablecoin complex that is, I think, quite attractive from an investability standpoint.

• 23:31Ted Seides?

  That first group of the creators of the stablecoin, they're not paying interest, they're earning a lot. What is the structure that allows that to stay in place?

• 23:42Speaker 03

  There's been a bit of path dependency. So back when rates were zero, you saw a lot of growth in the stablecoin economy because people didn't really care about earning yield. And also, you could take those stablecoins and deposit them on-chain in one of these DeFi lending protocols and earn some sort of rate that roughly matched the real economy. But today, you're seeing a whole host of different firms focus on yield-bearing stablecoins or tokenizing treasuries. And actually, BlackRock is a great example of this. They recently launched a product that effectively passes through treasury yields, less a modest amount of fees back to themselves in exchange for passing that yield back to

• 24:24Speaker 03

  users. And yield-bearing stablecoins as a percent of the total stablecoin market is growing, as it should. But look, if you're in Nigeria using Tether for B2B payments, you may not really care about the 4% opportunity cost of capital. One, you are likely outperforming your local fiat currency. And two, you're just using this as working capital, and it tends to be a pretty great user experience relative to using their traditional rails or cash.

• 24:54Ted Seides?

  Starting with that treasury example, where is asset tokenization going from something easy and liquid to treasuries to all other assets?

• 25:03Speaker 03

  Yeah, so it's interesting because yeah, this idea of tokenizing a dollar or putting a dollar in the file format of a token is really just formatting. Format of assets matters a lot because it makes it easier to send, makes these assets more interoperable. But that same concept is being applied to the broader asset stack. So currencies, commodities, stocks and bonds. And we're seeing a lot of activity in the private credit world around tokenization, particularly around making the fund administration of private credit, amortization, interest payments, cash flow sweeps more efficient. We're seeing activity

• 25:45Speaker 03

  in fixed income market and equities as well as commodities. Tokenized gold is now billion and a half dollar market. But what's really fascinating is kind of the longer tail of esoteric assets that aren't as supported by banks. And we're seeing a lot of tokenization activity there. So Whether it's litigation finance claims, carbon credits, farmland, even tokenized collectibles like whiskey or Pokemon cards. You're not going to believe this, but we're invested in a company called Courtyard. They've tokenized Pokemon cards and vaulted them in Salt Lake City, and there's a huge market for this. They're doing 500 million of GMV annualized. There are so many assets in capital markets

• 26:30Speaker 03

  that are too small to be supported by banks. And what we're starting to see is critical mass and a very high penetration within these niche markets start to develop in tokenization because it's actually solving a very real problem. We may see more adoption in the longer tail before some of the more institutional assets. You heard Larry Fink come out about a year and a half ago and say that tokenization is the biggest leap forward for capital markets since we went from paper to electronic stock markets in the 1970s. It's that meaningful because effectively, it's this idea of formatting and every asset has a unique Q SIP. And one of the great analogies that really resonates

• 27:13Speaker 03

  with me is if you think about the shipping space, the way goods used to move around globally, there was break bulk shipping, which was you would have clothes and electronics in cartons and barrels and loose goods on these boats, and it was very inefficient. And then you moved to these 20-foot containers, and that made utilization higher. It reduced theft. The actual loading and unloading process for those containers on and off boats, onto chassis was more efficient. It increased global GDP in a meaningful way because it increased the modality of goods globally. And that's kind of what tokenization does. It makes it easier for goods to move. There's not T plus 10 settlement. There's just a much greater degree of efficiency.

• 27:57Ted Seides?

  How far along are we in that adoption?

• 28:00Speaker 03

  This is a gradually then suddenly phenomenon because tokenization is a network effect technology, similar to the telephone. If you're the only one that uses a telephone, it's not that useful. One other person, it's still not that useful. But the utility of a telephone scales. Exponentially with the number of participants on the network, Metcalfe's law. Similar with tokenization, if you're the only one that holds a tokenized treasury, it's not that useful. But as more and more people do hold it, as you benefit from all these features of tokenized assets, it becomes increasingly useful. And that's why when we start to see these long tail assets reach meaningful penetration

• 28:43Speaker 03

  rates, that's a meaningful catalyst. Because if you're an institution participating in one of these markets, you're pulled on chain because it's more useful, because it's the place where price discovery and liquidity takes place.

• 28:57Ted Seides?

  What are some of the other financial market related real world applications we've seen over the last couple of years take some hold in the space?

• 29:07Speaker 03

  So one of the big ones has been prediction markets, particularly Polymarket. They call it a prediction market, which means you can have a market on whether an event will occur. That event can be in politics, it can be in sports, it can be in science, it can be in culture, and it will resolve at zero or one, depending on whether the event occurs or not. The idea behind these prediction markets are you can get a real time assessment probabilistically of what the world's view is or what the expected value of an event occurring is. A great example of this was in the presidential election market. So Polymarket, which is built on a blockchain, facilitated, I think, close to $3 billion on the US presidential election.

• 29:48Speaker 03

  The beauty of markets is there's an objective wisdom in them that you don't see in traditional media. Anyone can say anything on X or on LinkedIn or CNN or Fox. But if you look at markets, they are a more unbiased source of truth. People have actual skin in the game. What was really interesting there is you could actually see in real time what the markets view on of what would happen in the election. There were kind of like two aha moments for me with these prediction markets. One was in the initial presidential debate between Trump and Biden. As Biden started to falter, you could see in real time the odds adjusting. And then he made a bit of a Come back midway through the debate and you started trading up again.

• 30:32Speaker 03

  Rather than listening to the pundits talk about who won or lost the debate, you could just look at the odds in real time. And if you disagreed with them, by the way, you could express that view. The other aha moment was the night of the election. After the results started coming in from the seven swing states, polymarket reached 95% probability on each of those seven states. In some cases, many, many hours or a day or two ahead of when the Associated Press called the race. These prediction markets are an incredibly exciting tool for humanity to basically understand what the worldview is on something. And it expands well beyond politics to areas like science, sports, culture.

• 31:14Speaker 03

  You've actually seen polymarket's volume stay very strong post-election. I think that if you think about what this is at its core is, some people may look at polymarket as like a gambling app, but it's actually a new market infrastructure. It allows people to create a market on anything. How many inches of rainfall will there be in the breadbasket this harvest season? And that's a form of insurance. You can bet on that or you can underwrite that risk. And it has real business utility. So I think this is an area that will continue to grow.

• 31:46Ted Seides?

  And the sports betting world has become very big and regulated. How do you think about polymarket and the prediction markets relative to the regulatory regime around it?

• 31:59Speaker 03

  Regulation is coming very fast and furious to prediction markets in the US. There's been a couple like pretty important landmark cases of web two prediction market companies like Calci. But I think that it's going to be very difficult for traditional sports betting platforms to compete with prediction markets at scale. These sports books generally like set the odds internally. They'll have like an internal bookkeeper and then they'll do their own risk management. And if they get too much action on Duke, they'll adjust the odds to be more favorable for UNC and vice versa. The beauty of these prediction markets is they're just software. There's no actual market risk that's being taken. There's no Balance sheet at risk and you're just putting these odds out there into the world.

• 32:44Speaker 03

  And there's a central limit order book with bids and asks and people are trading these things in real time. The interesting thing about polymarket and prediction markets on blockchains is that they're global. So they benefit from global liquidity pools 24/7, 365 versus the centralized platforms where you have to like wire in money, wait for your money to clear. And you're typically only servicing users within a specific geography with artificially set odds. It's a more free, open capital market, which I think produces better insights and more liquidity.

• 33:16Ted Seides?

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• 34:03Ted Seides?

  To get a sense of scale, what's the volume that polymarket's generated through the election you mentioned and then post?

• 34:10Speaker 03

  There are two ways to think about this. So one is polymarket is doing about, call it 500 million to a billion dollars a month of volume across its markets. And this is across roughly 50,000 to 75,000 active wallets. That's one way to look at it as a trading platform. But I think the more interesting way to look at this is as a news platform. Polymarket.com in November was one of the 100 most popular websites in the world, had about 2X the website traffic as Coinbase.com. Most people referencing polymarket actually had no idea it was a crypto application. So they're Assuming the data from these markets rather than trading the markets.

• 34:54Speaker 03

  The actual odds are set by, on a relative terms, not that many people. And this data is now being piped into Bloomberg terminals and other key data sources. Produces very valuable insights. Post-election, you've seen some drop off in volume. But even the election in Romania, for example, a couple of months ago, I think that market had 50 million of open interest. 195 countries globally, there are always elections going on globally. There are at the presidential level and then at other parts of government in the US. The House, Congress, you have state races, you have different legislation. There's always interesting markets to bet on.

• 35:33Ted Seides?

  What are some of the other financial market related applications?

• 35:37Speaker 03

  DeFi encompasses everything from lending and borrowing to trading to insurance to more financialized products. There's a whole range of different things you can do with stable coins on chain. And these really started in earnest in like 2020, in the early days of Ethereum, where we realized with these smart contracts, you could basically embed if then logic to these assets. And most legal agreements or insurance contracts are really just like an if then statement. When you really boil it down, if you buy insurance, if this event happens, you get paid Y dollars. This market for DeFi has continued to grow. We would kind of call them the ING verbs of crypto. So it's lending, it's borrowing, it's hedging, it's swapping.

• 36:22Speaker 03

  So if you're earning a staking yield on Ethereum that's floating, you can swap that for fixed. You can securitize different yield products on chain. You can buy insurance on chain on different events occurring. There's really this supermarket of different financial products that's emerged. And a lot of them are really just experiments and are risky. A few of them have really established themselves as having credible moats and strong products that are continuing to compound and grow earnings on chain.

• 36:56Ted Seides?

  What are some of those?

• 36:57Speaker 03

  A great example is AVE. AVE is a very simple product where you can deposit either a stablecoin or a digital asset and earn yield on it. This yield is generated from people borrowing the asset. How do people borrow the asset? Well, they post a digital asset or stablecoin as collateral and borrow against it up to a certain loan to value ratio. Prices are pulled in in real time. There are effectively incurrence covenants built in programmatically to these loans. While there are defaults, as you would expect, there's been almost negligible loss given default because of the way the collateral is then liquidated in those scenarios. AVE, as an example, now has close to $30 billion

• 37:40Speaker 03

  of capital deposited in its platform and single-digit billions, maybe perhaps over 10 billion today, now borrowed. The business model of AVE is effectively takes a cut of the interest paid by borrowers to lenders. In a market like that, liquidity begets liquidity and users beget users because people want to borrow and lend from the most liquid, largest market with the most asset support. We initially invested in 2019. Here we are, six years later, and it's continued to compound and grow users and earnings.

• 38:16Ted Seides?

  We've had this explosion of private credit assets as an institution's looking at these blockchain assets as a way to get yield. How do the economics work so that if there's perceived risk in doing it, you're getting a premium return relative to where all the dollars seem to be flowing in the credit world?

• 38:36Speaker 03

  The heart of that question is really what's the risk premium for on-chain lending? If I can get 10% in a private credit vehicle off-chain, what do I need to earn on-chain to make that worth the incremental risk? Let me answer that question, taking a step back. There's like the risk-free rate on-chain, and then there's the risk-free rate in the traditional economy off-chain. In the early days of DeFi, the interest rate on-chain was much, much higher than the interest rate off-chain, because doing anything on-chain was perceived as being more risky. So there was a point in time during COVID when interest rates in the real economy were zero, but you could earn 15% to 20% unlevered lending on-chain.

• 39:21Speaker 03

  And over time, that risk premium has compressed pretty materially. We even reached an environment where rates in the traditional economy were in excess. The risk-free rate was in excess of rates on-chain. You could say, well, why would anyone leave stablecoins on-chain, earning 2% when they could earn 4% in the real economy? The short answer was people didn't want to leave the on-chain economy. They didn't want to have to re-on-ramp into the traditional capital markets for a variety of different reasons. But more and more today, you're seeing those two interest rates reach a more steady-state equilibrium. For private credit, the incremental yield ultimately is roughly similar between a private credit product off-chain and on-chain.

• 40:05Speaker 03

  There's no real discernible difference between the two today, because that perceived risk has migrated towards zero. Ultimately, it's a function of who the borrowers are and their probability of default and their risk profile.

• 40:18Ted Seides?

  What have been some of the most developed applications outside of the financial world?

• 40:23Speaker 03

  One of the really interesting areas in the space is called DePin. So it's decentralized physical infrastructure networks. And the idea behind this is if you're a telecom company, you normally would have a lot of CapEx. But can you get people to set up hotspots to form a network and give them tokens so you don't have to spend that CapEx, but they do? And so this idea of externalizing CapEx has been what's underpinned the growth of networks like Helium. Or other of these deep in networks. So you've seen a lot of experiments here.

• 41:01Speaker 03

  A company that is basically paying people to attach a dash cam onto their automobile and drive around and collect data in real time, similar to what Google Maps would create and what's happening on roads. This company called Hive Mapper. And they've now mapped roughly 10% of the world's roads in just a couple of years without spending a single dollar of CapEx. They're basically using their native token to incentivize this activity. And they're doing it in a manner that's much more efficient and quick than Google Maps historically was able to do it.

• 41:39Speaker 03

  It's this idea of can you use a token to incentivize people to perform some action in the physical world? This concept, I think, will eventually extend to other types of networks. If you think about something like, it'd be almost like if Uber paid drivers in the early days with shares of Uber as opposed to just actually giving them cash. And then they feel more ownership in the network and they're participating in the network makes the network more valuable and you get onto this flywheel. So we're seeing a lot in the deep in category that is very promising, but we're still early there.

• 42:17Ted Seides?

  How does the big movement in AI intersecting with blockchain?

• 42:22Speaker 03

  There are a few different areas of overlap. One of the big areas that we're seeing is this idea of AI agents. The end state of AI is not an LLM that you put data into in a call and response format, but it's really this idea of an agent that can take actions on your behalf. Blockchains were almost purpose-built for agents. We often talk internally that people have asked, when are the users going to come to blockchains? When are the users going to come? Well, we think the major users of blockchains just may be AI agents themselves. The reason why blockchains are really useful for AI agents is because they are 24/7, they're programmable rails, and AI agents cannot open a bank account.

• 43:06Speaker 03

  You have to be a human or a company to open a bank account. But if you're an AI agent and you want to send micropayments to other AI agents or micropayments to humans, that's really not possible on traditional banking. You really have to go on chain. If you look at the way this AI agent economy is evolving, you have flows between humans and AI, but the biggest category is AI to AI. That type of activity from First Principles, I think, makes the most sense on blockchains. And so you're starting to see a lot of AI agents use blockchains, use DeFi, send stablecoins to do things. And while blockchains are difficult for humans to use because the UX isn't necessarily intuitive, that's not an issue for an AI agent. They can figure it out.

• 43:51Ted Seides?

  How do you think about the risk of that activity? The whole sci-fi aspect of, okay, you have blockchain and there's agents moving around. Now you're talking about moving around money. It feels a little scary.

• 44:01Speaker 03

  I think there are different levels of autonomy that you can give to these agents. You can program them with an allow list where they can only send or receive from certain other agents or certain other people. And you can cap how much you deposit in their wallet and give them discretion over. So there are safeguards, but there are also AI agents that are basically operating autonomously on chain, buying tokens, trading tokens, ingesting data, drawing judgments, and then expressing those judgments in the market in real time. A really interesting use case for agents comes back to prediction markets. Imagine like a polymarket market about how much the earth's temperature will warm in 2025.

• 44:41Speaker 03

  You can have AI agents that are reading every meteorology publication globally that are taking an alternative data on weather patterns from every country in the world, feeding it into their model and in real time recalibrating the probability to what extent temperatures will warm over the coming year. How can humans compete with that? So then if you have multiple AI agents that are trading against each other in like a weather market or how many Model Xs will Tesla sell next quarter? Taking all the world's information. You start to be able to look at those markets and say, that's actually like fairly valuable data point. If I'm thinking about underwriting Tesla, or if I'm working at an NGO thinking

• 45:24Speaker 03

  about global warming, like these types of data points can be really interesting. That's really only possible with AI agents and 24/7 internet rails that blockchain provides. I think you're just going to start to see AI agents become bigger consumers of everything in DeFi, stablecoins, tokenized assets, everything in the blockchain application space.

• 45:45Ted Seides?

  As we look out over the next couple of years, what other things are you most excited about that may come to fruition?

• 45:51Speaker 03

  The game theory around nation states adopting Bitcoin is one of the most interesting things I've ever studied or observed. We're now discussing a Bitcoin strategic reserve at the federal level in the US and in 31 states. And you're seeing other governments globally look at that very closely and think about front-running that. You kind of think two, three, four steps ahead in where this is going. It starts to get very, very interesting and reflexive. Witnessing that adoption curve in the coming years, I think, will be fascinating. I'm just excited to watch that play out.

• 46:28Ted Seides?

  Any others?

• 46:29Speaker 03

  We have a stablecoin bill that just passed the Senate Banking Committee and may get formalized into law in the coming months. Basically, stablecoins have become politicized in a sense, where, right now, we just basically have dollar-denominated stablecoins. But I think other governments are not going to just lay down and accept that the dollar is going to have a monopoly on blockchains. Right now, the dollar is used in 70% of all global commerce in Web 2 or traditional finance. I think in DC, there's been a wake-up call that it's a huge benefit for stablecoins to win Web 3 rails, because every time a stablecoin is issued, on the backend, someone's buying a treasury, and that's in turn incrementally

• 47:14Speaker 03

  lowering our cost of capital. And Tether alone was the seventh-largest buyer of treasuries in the past year. And so if stablecoins grow from 200 billion and change to 2 trillion And change and beyond. This is actually like an area of pretty strategic national importance. I think that other countries are going to furiously compete in this market. And the US is also going to furiously try to win this market. Eventually, my view is the stablecoin market or tokenized fiat currencies will exceed traditional fiat currencies. This is going to be like, I think, one of the biggest races and most competitive arenas where governments are basically competing over blockchain currencies. And I think that's going to be very exciting to play out.

• 47:58Speaker 03

  And there can be a lot of investable themes behind that trend.

• 48:01Ted Seides?

  We've had a series of crypto winters, even just in the years you've been running ParaFi. As you look out, are there pockets where you are concerned about risk?

• 48:11Speaker 03

  Always. And I look at the crypto space, I think like 99% of things in this industry are not investable. But 1% are. The amount of dispersion that you see and the amount of creative destruction is massive. There's nothing systemic that I see right now where I would say like, this is going to cause an earthquake in crypto markets. There are a couple of risks that I think people have been talking about for a while. One of them is Binance, one of them is Tether, the transparency of those organizations. In today's market, crypto is two enough to three trillion. We're below where we were in crypto market cap in 2021, almost four years ago, despite all the progress in the space.

• 48:53Speaker 03

  And there's never been more real economic applications of blockchains that are relevant in the world today than there are right now. And there's never been more institutional interest in the space from the investing side than there is right now. And I think the question is flipped from, why should I pay attention? Today, it's more, why shouldn't I have exposure? Oh, why don't you have exposure to crypto? Because having zero exposure to the space is almost a view in and of itself. This has been the best performing asset class of the last 15, 10 and five year periods. Not having a position today, despite the increased regulatory clarity, despite the institutionalization, despite the use cases, I think is becoming a bit more of a contrarian view than a consensus view.

• 49:38Speaker 03

  So I think about this as a special moment in time in the market. I have a bit less worry than I usually do. I'm usually a more worried person. But right now, it feels like, as I look at valuation and fundamentals, the setup is actually pretty attractive.

• 49:52Ted Seides?

  I'd love to get an update on the various ways you're participating to take advantage of this opportunity, you see.

• 49:59Speaker 03

  On a high level, if you want exposure to blockchain technology or the digital asset ecosystem, there's not just a point and click one way to do it. You can invest in liquid digital assets. That can mean just investing in Bitcoin, or you can invest in all of the other 22,000 tokens that are listed on exchanges globally. You can invest in companies in the space, software fintech companies, building services for the ecosystem. Those can be early or late-stage companies. You can invest in non-directional strategies. There are now public companies in the crypto space like miners, companies like Coinbase that are providing services. There are all these different parts of the ecosystem.

• 50:38Speaker 03

  In addition, just in token capital markets alone, there are private token markets where you invest before team launches a token. There are what we call piped tees that are private investment in public tokens, where you're buying liquid tokens at a discount while agreeing to a lockup. So crypto capital markets are broad, they're complex. Each of those areas has a different liquidity profile, risk-return profile, captures a different element of the growth of this technology. And I don't think there's like a one-size-fits-all approach. So if you're an endowment or foundation, or you're a family office, or you're a pool of capital,

• 51:17Speaker 03

  and you want exposure to this technology, you really need to think about blockchain technology as a slice of your portfolio. And then within that slice, there are different subsegments that give you different types of beta and alpha undercurrents to capture the growth and the upside. Our mandate at ParaFi, the way we kind of view our role in the ecosystem is we're not just an early-stage venture firm. We're not just a liquid token firm. We're really capturing the full risk-return profile across crypto capital markets. And there are a lot of advantages to doing that. One is just the information. So we have over 100 different portfolio companies, big and small, that are focused on different areas of this ecosystem and space.

• 52:00Speaker 03

  And so we can get the data from our private portfolio companies and use that to formulate theses on the public side. And then on the public side, as we're researching public tokens and Looking at trading in public token markets, we can use those behaviors and lessons and then apart them on the private side of our portfolio. So there's this virtuous flywheel in terms of working across the broader ecosystem.

• 52:25Ted Seides?

  What are some of your favorite stories of something you learned from, say, trading that applied to something else you're doing?

• 52:32Speaker 03

  The best example of this was in 2019, the term DeFi didn't exist. We called it crypto finance. As part of our diligence process, we forced ourselves to use every application that we invested in because the best way to really understand something is to use it. We were early users of Uniswap, which is the largest decentralized exchange, Compound, which is a large decentralized lending and borrowing market, MakerDAO, fiddling around and using them. As we kept on using these products, we realized to ourselves, wow, this is capital markets that moves at the speed of the internet. There are no transfer agents or fund admins. There are no credit agreements or bond indentures. Everything kind of just works and you click buttons and it moves.

• 53:16Speaker 03

  And just through using these products day in and day out, and we actually became power users of many of these early DeFi protocols, it produced a massive, massive flywheel for our business. One, because we understood what products were good and we ended up investing behind those. Two, because we were power users of DeFi, we could help our private teams build towards where the puck was going and build great products because we were using these things day in, day out. We understood all the nuances and edge cases. And it also led us to develop different non-directional strategies in the space using stablecoins because stablecoins were the main substrate flowing through these DeFi protocols was. We also found that by using these DeFi applications every day,

• 54:00Speaker 03

  we had a better sense for what picks and shovels were needed for institutions to use them. So that led us to great companies like Fireblocks or other custodians like Anchorage that are building basically front-ends for institutions to interact with DeFi. Those became some of our best investments. So the best way to really understand something is to use it because there's no substitute. Once you get into the arena and you're using a product and interacting with it, you understand what works and doesn't work. Imagine being like a gaming venture firm, never playing the games that you're investing in. You want to have that type of mentality.

• 54:35Ted Seides?

  What are some of the non-directional strategies as an ecosystem evolves? Do you imagine there should be some inefficiencies to take advantage of?

• 54:43Speaker 03

  In the early days, stablecoins were an area ripe with opportunity. And there were two different types of opportunities within stablecoins. So, stablecoins theoretically should trade at a dollar. In practice, they may trade at a dollar and 2/10ths of a cent, or 99.7 cents. And they trade at different prices on different blockchains, or at different prices on different exchanges. And so, there were opportunities to play the pull-to-par game. You go short above par, long below par. And there weren't that many pools of capital that were really pursuing that. The opportunities were also episodic. They were capacity constrained, but very uncorrelated, and also had a positive correlation with volatility in the market.

• 55:28Speaker 03

  Stablecoins tended to de-peg when markets were experiencing bouts of volatility. In addition to that, there were markets where you could borrow a stablecoin at 5%, take it, and relend it out at 8% elsewhere, in a way that was very capital-efficient, and make a spread. And you could identify these opportunities programmatically and execute on them. And eventually, the markets have become more efficient in reaching equilibrium. So, stablecoins were really like the first hunting ground for alpha, from a non-directional standpoint, for us at least. And then, as the markets evolved, one of the areas that we're finding very interesting

• 56:05Speaker 03

  is you have public assets, whether it's MicroStrategy, Coinbase, Bitcoin miners, public trusts, that are crypto proxies. Even like Robinhood now is getting deeper into crypto space. And then, you also have spot assets, spot crypto assets. And there are different ways to think about the relative implied and realized volatility between those two worlds, where there are very, very interesting arbitrages between those two spaces. And then, lastly, long-short, borrowing digital assets has historically been very difficult, but recently, there have been massive improvements in infrastructure to be able to do that, and to be able to execute on a more fundamental or event-driven long-short strategy within

• 56:50Speaker 03

  the space.

• 56:52Ted Seides?

  So your firm, I think when we sat down three years ago, was probably roughly the size it is today with typical with the cycle, a big dip and a big recovery. How do you think about continuing to maintain and grow a business over the next couple of years?

• 57:06Speaker 03

  We have a super long range view on building this business. There's a lot of short termism in crypto, a lot of medium termism, but there's very little super long term focus. There's a cultural answer to that question, which is like every decision we make, every hire we make, we want to have that very long term alignment and build towards what we want our business to look like 10 plus years from now. But really, the core of it is as more and more institutions enter the space and want to generate interesting risk return profiles and also want to understand this ecosystem, we want to be the institutional partners for them. And then really the North Star is crypto is a secular trend. People think about crypto as a cyclical macro asset, but we really think about it as a

• 57:48Speaker 03

  long term secular trend and we want to invest in real use cases that are bringing GDP onto blockchains. That has to be the North Star. Everything really comes back to that. It all has to come back to what are financial applications or other corporate applications for this technology that actually makes sense, actually unlock 10x better use cases because they're on chain. That has to be our North Star as a firm. And I'm just a believer that in building a business, to build something extraordinary, you just have to do something consistent over and over and over again. That kaizen mentality of just get better and better every day.

• 58:28Speaker 03

  Our team is not chasing things and we're also not trying to get everything right. That is, I think, the other thing that in markets in general, but particularly in the blockchain space, there's so much noise, just being able to say no and really focus on what are the two or three or four things we truly believe that underpin our thesis and finding the N of one entrepreneurs building in those areas or the N of one secular trends and themes that we can invest behind and then put the entire weight of our firm into making those things as much of a reality as possible. I mean, that is like all we can really ask of ourselves. I think if we get that right, we'll be fine.

• 59:08Ted Seides?

  Ben, I want to make sure I ask you a couple of new closing questions. What was your first paid job and what did you learn from it?

• 59:15Speaker 03

  So I grew up in Seattle, Washington. When I was 14, I got paid by the Seattle Times to collect high school basketball game box scores. So I actually got paid $20 to like call in and tell them how many points, rebounds and assists each player and each team had, which was great money at the time. And actually funny anecdote about this is I could only be in one place at a time, right? So I would go to like my high school game anyway, but I ended up calling friends at other schools and getting them to provide me the box score. And I actually got leverage on my own time, which was a great lesson for me on building businesses and getting leverage on my time instead of getting paid by the hour.

• 59:54Ted Seides?

  How's your life turned out differently from how you expected it to?

• 59:57Speaker 03

  Well, I could have never guessed I would be in this industry in crypto. When I was at KKR, I thought I was going to be there forever. I loved my job at KKR. I loved investing in across the capital structure and credit and distressed. But I could have never imagined that, one, I'd be investing in crypto. But two, that I would be fortunate enough to like be working at part of such a great team with people that I respect. I just find it like very humbling and that's one of the things that I'm really, really grateful for.

• 1:00:27Ted Seides?

  What's a mystery that you wonder about?

• 1:00:30Speaker 03

  I'll make this about crypto. Bitcoin was created by this guy or a gal or group of people called Satoshi Nakamoto. And the fact that this is a $2 trillion asset that started in an obscure corner of the internet, focused on cryptography, and no one knows who that is, is one of the world's biggest mysteries to me. And will we ever find out? I'm not sure. But I think Satoshi Nakamoto, whoever he, she, they are, has triggered this entire movement. It kind of shows you that a butterfly flapping its wings can compound and cascade into something so incredibly like meaningful. To me, that's a big mystery.

• 1:01:10Ted Seides?

  Ben, last one. If the next five years are a chapter in your life, what's that chapter about?

• 1:01:15Speaker 03

  I recently bought this calendar. It's called a Memento Mori calendar, and it has 52 columns and then about 85 to 90 rows. And the idea is each one of these data points is a week in your life. Every week I've now like filled in the bubble. And to me, it's like a great reminder of how short life is and how there's no guarantees you're going to get to the end of the calendar, by the way. But to me, it's been just grounding to think about the passage of time and how fast it can move. So I kind of think about my life, not in like chapters, but almost in sentences and try to make things more atomic. Read a great book recently by Saleil Bloom, Five Types of Wealth. They talk about many people like go about their lives

• 1:01:59Speaker 03

  just optimizing for one or two of these types of wealth. But there are all these different elements to, I think, what makes life rich and fulfilling. It's a multi-dimensional equation. And so for me, my next chapter, maybe on the surface, won't look that different from my prior five years. It's really just, I want to build deeper relationships with the people that I love. I want to build a deeper understanding of who I am. I want to achieve great things as a business with our team. And I want to have a great family life. So it's all those things, continuation of the journey that I'm on now.

• 1:02:35Ted Seides?

  Ben, thanks so much for sharing this incredible update on the space.

• 1:02:39Speaker 03

  Yeah, thanks, Ted. Great to talk.

• 1:02:42Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.