Sam Englebardt and Richard Kim - Investing in Immersive Worlds - [Invest Like the Best, EP. 259]

Today, my guests are Sam Englebardt and Richard Kim, general partners at venture fund, Galaxy Interactive. Having come from the media and finance sectors, respectively, Sam and Richard joined forces in 2018 to invest in their shared thesis that immersive digital experiences would become the dominant way people engage with each other in the future. Our conversation centers around the evolution of art, finance, and gaming as they proliferate in Web3. Please enjoy my conversation with Sam and Richard. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Canalyst. Canalyst is the leading destination for public company data and analysis. If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalyst.com/Patrick. ----- This episode is brought to you by Levels. As one of their early access members, Levels was one of the most interesting products I've ever used. Levels is attempting to make continuous glucose monitoring mainstream by using real-time biosensors to see how food affects your health. If you want early access to become a Member of their private Beta, (the waitlist is currently at 150K+ people), use this link – levels.link/PATRICK ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:02:50] - [First question] - Their thoughts on the digital art market [00:11:33] - What motivates traditional art collectors and what has been carried over into digital art [00:17:27] - Is there an attractive beta opportunity in the digital art space? [00:24:32] - Why investors should do more work understanding NFTs and ways to consider incorporating them into your portfolio [00:27:55] - The history of Galaxy and their thesis writ large [00:33:09] - Exciting and terrifying aspects of the financialization of everything [00:37:27] - Places where inserting markets could be beneficial with Web3 [00:45:27] - Their perspectives on gaming as a subcategory of Web3 [00:51:38] - Tokenomics and the importance of building great game communities [00:59:18] - What we can learn from successful gaming companies and in-game monetization [01:04:19] - How Diablo 3’s auction house detracted from the core player experience [01:06:36] - Where they disagree with the Web3 investing community [01:10:37] - The kindest things anyone has ever done for them

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

• 0:00Patrick O'Shaughnessy?

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• 0:43Patrick O'Shaughnessy?

  updating models, Canalist is now used by over 400 institutions, including the largest money managers globally and by a number of guests on the show. With detailed company-specific models and data on virtually every public company, Canalist's clients are able to ramp up faster, update models instantly and incorporate the highest quality fundamental data into any workflow. If you're a professional equity investor and haven't talked to Canalist recently, you should give them a shout. Learn more and try Canalist for yourself at canalyst.com/patrick. That's C-A-N-A-L-Y-S-T.com/patrick. Stay tuned after the episode to hear more about Canalist's new quant product, Candace. This episode of Invest Like the Best is brought to you by Levels. As one of their early access members, Levels was one of the most interesting products I've used.

• 1:27Patrick O'Shaughnessy?

  Levels is attempting to make continuous glucose monitoring mainstream by using real-time biosensors to see how food affects your health. Using Levels made me realize how little we understand about what's happening inside our bodies and it was the only product that has ever made me willing to log food. If you want early access to become a member of their private beta, where the waitlist is currently 150,000 people, use this link, levels.link/patrick.

• 1:55Patrick O'Shaughnessy?

  Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts and you can access all our podcasts, including edited transcripts, show notes and other resources to keep learning at joincolossus.com.

• 2:21Speaker 01

  Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

• 2:47Patrick O'Shaughnessy?

  Today, my guests are Sam Engelbart and Richard Kim, general partners at venture fund Galaxy Interactive. Having come from the media and finance sectors respectively, Sam and Richard joined forces in 2018 to invest in their shared thesis that immersive digital experiences would become the dominant way people engage with each other in the future. Our conversations centers around the evolution of art, finance, and gaming as they proliferate in Web 3. Please enjoy my conversation with Sam and Richard.

• 3:15Patrick O'Shaughnessy?

  So, Richard and Sam, we're going to talk a lot about different potential areas of impact for Web 3, from gaming to art to the financialization of everything in our conversation today, probably even touch on topics like mental health, which will be really interesting. I want to start, though, with art and maybe actually in the traditional art world. I know you both had a conversation with a person that runs the Whitney, very classic art institution. I'd love to hear about that conversation. What was the purpose of it? What did you take from it? Maybe touch on this idea of that you learned about art versus market. I'm really intrigued by this concept and think it's a great place to start.

• 3:49Speaker 02

  Absolutely. So, I got into a rabbit hole in the first quarter of last year in a platform called Art Blocks as I was looking into the NFT space and asking myself the question, okay, which of these digital art platforms are actually going to do something interesting in the long run? And the reason this platform, Art Blocks, stood out to me was because they specialized in what was called on-chain generative art. And the idea here was that a lot of NFTs are essentially links to metadata stored on some centralized server. And so, there's this critique of NFTs of, hey, despite all of the promise of decentralization, these things ultimately roll up to centralized servers. And so, it's fundamentally not that interesting.

• 4:32Speaker 02

  What makes Art Blocks interesting is, aside from the dependence on a couple of libraries like P5JS, all of the code needed to recreate your NFT lives on chain. I thought that was a really interesting starting point to delve into what I would later discover as generative art. It's probably worth defining what is generative art for a second. I think the most commonly used definition is from this professor Philip Gallanter. And he said generative art is any art practice where the artist uses a system, such as a set of natural language rules, computer program, a machine, or any other procedural invention that's set into motion with some degree of autonomy that results in a completed work of art. Now, you'll notice that that definition is not

• 5:16Speaker 02

  algorithmic art, which is what generative art is often associated with. And the reason it's not limited to algorithmic art is because generative art actually has a decades-long history, going back to the 50s and 60s and a lot of the conceptual works of art from Sol Le Witt and others. And so I found this intersection of something that has as long a storied a history as generative art with this new technology that in the context of natively digital productions could bring global scarcity and global status. So fascinating. Going back to your original question, one of the things that made Art Blocks as a platform so explosive is it wasn't just an art platform. Prior to collecting on Art Blocks, I would have never

• 5:59Speaker 02

  considered myself a big art collector. And what makes Art Blocks so singular is that not only is it art, but it's this strange combination of almost like Robin Hood-style speculation in terms of which sets are going to go up, which artists are going to have their floor prices increase, this type of talk with almost like loot box-style mechanics or gotcha-style mechanics from gaming in the sense that every set in Art Blocks, how it works is the artist uploads their algorithm. And when you go and mint, say, a piece from a thousand addition set, every one of those thousand additions is a unique one-of-one. It's not a thousand additions of the same thing. And what makes those pieces vary is the entropy you introduce

• 6:42Speaker 02

  at the time of mint. So it's this beautiful combination of controlled randomness intersecting with an algorithm that the artist has created to create a work of art that the artist, him or herself, didn't even curate. The combination of those things really captivated this audience, who again, never knew they were art collectors in such interesting ways. And it has gotten so many people excited that are particularly crypto-natives. When traditional art folks are looking at this space, they say, Well, that's really interesting and it's interesting, you know, these quote JPEGs are selling for seven million dollars, but that to me just seems like a speculative bubble. I think the more nuanced criticisms, or not even criticisms, but reflections on the space,

• 7:24Speaker 02

  a lot of the most insightful comments came from this conversation with the director of the Whitney, where he said, in his mind, there's art which is independent of market. As this thing that if you're a student of art history, you can determine what has quality and what's not. Versus this market force that the crowds determine through traded volumes and floor prices, what's art? And one of the strands you see in the NFT space is this almost counterculture rhetoric of the traditional gatekeepers, it doesn't matter what they think, art is what we say is art. And you see this most compellingly in kind of meme-driven communities.

• 8:04Speaker 03

  With that context in mind, it raises this very important question of, we have this expression, and what I observed in Richard as somebody who was prior to going down this art blocks and generative art rabbit hole, was not a collector of art at all. And we sort of have this idea of come for the market, and it's undeniably true, a lot of the people in the NFT space are initially and have been DeFi people and crypto people who discovered art and were rotating out maybe even from into NFT art and learned this. But you come for the markets and so many of these people then stay for the art. And the amount of passion that I've experienced, and I was at a disadvantage in this in some ways, because I was collecting physical art for years prior to NFT art.

• 8:46Speaker 03

  And so when Richard jumped into this thing, my initial reaction was the same as the reaction we've seen from so many people initially in the traditional art world. The idea of, oh, I don't know what this is, but it's not art and so I'm not going to pay attention to it. And then it was through this process and starting, and I'll shut up and let Richard get back to some of this, but I think it's worth highlighting how far he came personally to the point I'd put Richard next to any art collector I know in the traditional art world and say, I haven't met a person who's more studied or more serious or more creatively motivated around this particular genre of art than Richard. And that is worth highlighting, I think, because it's like, what does that mean for the possibility of this genre to expand the overall size of the market of art collectors?

• 9:30Speaker 03

  And introduce people, and we're going to come back to this theme throughout when we talk about NFTs broadly and the increasing participation in creative endeavors much beyond just fine art or generative art, the idea that they get sucked into something that is much more about participating in the creative process than it is about finance. But in some ways, it starts from the financial place.

• 9:52Speaker 02

  Yeah, I mean, I think this tension between trading and flipping, to use a more derogatory term of art versus buy and hold collectors, it's actually an evolution. Sam put it really well. You come for the market. When I first started collecting art blocks, I was a flipper because I just didn't have the capital to really just buy and hold and suffer the illiquidity of doing so. But over time, as you gain a long-term view of the space, you say, well, if the number of wallets holding, say, art blocks pieces expands from 50,000 to 500,000, what does that mean for the formative sets? You can start to take a longer-term perspective. And the things that simultaneously make NFT so powerful, the fact that every purchase

• 10:36Speaker 02

  and sale is on-chain, the fact that when you do sell something, you get shouted out by the community as, oh, this guy doesn't believe in the project anymore. And similarly, on the buy side, oh, this person's such a trusted member of the community. It's almost cult-like dynamics that intensify what I imagine the excitement is at, say, a local Christie's or Sotheby's auction, times like a thousand. And it becomes so wrapped up in your identity of who you are in these digitally native realms that it's a very interesting tension. And one example of this, that's a pretty interesting experiment in game theory. One of the leading generative artists, Dimitri Cherniak, who created the set Ringers, which is probably the first art block set to bring the platform into

• 11:18Speaker 02

  mainstream consciousness. His set went from floor prices of, say, one ether, the mid-cost, I think, was, I don't remember exactly, I think it was 0.1 ether. And at some point, the floors hit about 100 ether. In this set, he created a really interesting experiment where one of his sets, the eternal pump, there's only fifty of them. What he said to all the pump holders was, I'm going to create a set called the raptures. Initially, the supply of raptures will be limited to fifty, i.e. one for every eternal pump holder. But if any eternal pump holder lists, sells, or otherwise does anything economic, transfers, whatever, their rapture, the supply of the raptures will expand from fifty to six hundred

• 12:02Speaker 02

  sixty-six. And this constraint is a year-long game. And Dmitri's intent here was to try to bring more of the art collector mentality, instead of the art trader mentality, to a space that is dominated by trading. And I think it's such an interesting experiment. I mean, as of now, the experiment's about a month old, no one's violated the pact yet. But I think, you know, as we get closer to the end date, it'll be interesting to see if we can keep up the agreement, because there are some folks who have one rapture, and there are some folks who have eight raptures, and the interests of all the participants aren't necessarily aligned. So just a fascinating experiment in this space.

• 12:39Patrick O'Shaughnessy?

  Sam, you mentioned that you were a traditional art collector prior to this whole new world that you've been exposed to now. Touch a little bit on what you view as the base level variables or motivations in that world that make it go, and how much of them are transferred over to this new world of digital art, and which ones are sort of being left behind. You know, the fact that like Gagosian has maybe less power in this world is interesting, but does that just mean that it's just a different Gagosian, you know, it's Vincent Van Doh or something like, there's nothing new under the sun, and we're just going to see the same re-concentration of influence in this world. Tell me what you've learned from the traditional art world. And also, I want to weave into this whole conversation, like investing and return, even if that's not the core motivation

• 13:20Patrick O'Shaughnessy?

  of a collector. Unlike most investments, you can like discount some future stream, this is really like an eye of the beholder type asset, where the market does play a critical role. So yeah, I'd love to weave in some of the lessons from you and traditional art collecting, and how much that teaches us about, and maybe even the dark side of art, which I think there are some, how that might bleed into this new world.

• 13:39Speaker 03

  It's foolish for anybody to believe today that because this art is on-chain or connected to blockchain technology, that therefore there aren't some of the same information asymmetries and advantages that accrue to a small group of insiders in this world. The reality is that whether we're talking about traditional art or we're talking about crypto art, there's still a tremendous amount of alpha in the form of a small number of people who have information that's not available to everybody. So it's easy for everybody to talk about, oh, it's blockchain and that means everything is open and everybody knows everything. But it's definitely not the case. And Richard talks about this some in terms of even in the world of the highest integrity world of generative art versus projects that we know are created with ill intentions from day one.

• 14:23Speaker 03

  There are small numbers of people that have information the rest of the people don't have. And that's obviously no different from the traditional art world. The opportunity for people to reset that playing field though, and to change who those people are and to reinvent the landscape is undeniable. You know, I do think that if nothing else happens, the people who matter in the evolution of generative art, for example, will be different than the people who have mattered historically in the buying and selling of traditional physical art. So there's been a redrawing of that map. And I think that's going to continue. And I think by virtue of people who did discover this first, and if we believe that it continues to be an important area and if generative art, for example, maintains or earns its place,

• 15:08Speaker 03

  we're only going to know this over time. But if generative art becomes a type of art or a part of the historical art canon, then I think it's a really interesting thing. Again, the collectors in the generative world, the brokers of generative art are this different group of people and we'll see where they take things. The more important that generative art becomes, if it does in fact become important from that lens of art history, then I think the more opportunity this group of people that sort of emerged as pioneers in the space are going to have to really shape where it goes. To me, the observation is someone who collected physical art and not at the level of a close relationship with Gagosian and at the highest end of physical art, although I'm somewhere in the middle in terms of artists that I've collected and I have a collection, but I'm not an important collector in the world of physical art.

• 15:53Speaker 03

  But I've been involved in it long enough to know that what certainly somebody at my level, I have not had the opportunity, other than the occasional chance to meet and mingle with and get to know some artists, and I collect mostly, mostly art on my walls, is from living artists. And yet, there's been very little opportunity today to really get to know those artists and participate, or in any way feel attached and connected to their artistic process. I mean, you can go to gallery event, put in an effort, you get to know them a little bit. That's one really important distinction, I think, that's driving a lot of this NFT art and generative art world is instantly and very intrinsic to

• 16:34Speaker 03

  the process of collecting generative art is a direct relationship with the artist. Goes to this idea of it's not just about the output itself, but it's about the community that's being built around the art, and it's about the process in a way that physical art has never been, at least that I've experienced. And so, the first thing you become aware of instantly is, wow, I'm collecting generative art, but because I'm doing it in the context, and by its nature, it's this digital thing that lives inside of communities, that lives inside of Discord, that is always on and global and participatory amongst the community of people that are involved. It just feels completely different. There's a thrill to it. I call it this idea of like a producer's high, that I really believe everybody, and

• 17:17Speaker 03

  I'm fortunate in that I got the experience or the opportunity to experience this early in my life from getting into, really into content businesses and being involved in producing so many different types of content experiences. Like, when you feel that and you actually get that rush and you get to like, feel like you're a patron to the creation of this art or supporting somebody to realize his or her vision. That's an experiential thing that comes with this, that you really have to keep in mind and understand if you're going to analyze why people are going to be drawn, and maybe why people who had nothing to do with the physical art world, and never would, are going to be drawn to this.

• 17:52Patrick O'Shaughnessy?

  It raises for me such like a critical, interesting question. Sorry, this is going to be a bit of a long question, but I'd love to spend as much time on it as you guys want to. I'll use a traditional investing term of beta. If I think about the world of NFT art, let's call it, or even zoom in on just generative art, we can zoom in to whatever degree you think is right. Does it make sense if somehow I could own an index-like product in this space, which I'm sure will come at some point, may not be there now, is the beta attractive? The beta of equities is attractive over the very long term. All the evidence we have suggests that it is. Something in the traditional art world, Van Gogh produced, I think, less than 1,000, maybe 900 works of art total in his life. There's an inherent scarcity there. And to me, I guess the question I have is,

• 18:36Patrick O'Shaughnessy?

  the attractiveness of beta has a supply-demand story where there's much easier to create supply if you're a popular artist in this world. And maybe, Sam, from your previous experience, like creating a movie, you can only create so many. They're expensive. They're hard. When the creation of new supply and the time lag between increased demand and new supply is so fast and low and frictionless as it seems to be in this world, it makes me worried as an investor that there's going to be any value to capture or beta return. So how do you think about those dynamics in this space?

• 19:06Speaker 03

  Richard, you should talk about this, but time is going to tell. And I don't know that anybody can say yet. NFT art, it's so young and it's such a new thing. And it's not scaled relative to traditional art, and there isn't enough data that could possibly be collected to be able to say definitively. But it does feel like, again, going back to those things that beyond the creation process and the supply of NFT art, it's going to have to be a combination of the art that gets created is married to other things beyond, like you have to look at the value of the community beyond just the individual work that's created in order to believe that it's going to have enduring value.

• 19:44Speaker 02

  I think it's worth drilling into two platforms as a test case of this question. One is Art Blocks, which we've already discussed. Art Blocks is interesting because it's a curated platform. So the supply is not infinite, but has to pass Art Blocks' curation board. The other end of that spectrum is a platform on Tezos called FXHash. And think of FXHash as an open minting platform for generative art, where anyone, you and I, you and I could go create some code and drop it on FXHash. Think of that as the Wild Wild West. It's the latter platform where supply is actually literally infinite. And yet, what's so interesting about it is that the community that's come up around it

• 20:26Speaker 02

  has become the gatekeeper in terms of which artists are valuable, why are they valuable? If it's a known artist, what are the factors that make one set valuable and another set not so valuable? What's the right supply for an artist to be dropping? All of these community mores that traditionally were in the hands of the Christie's or Sotheby's or the dealers in the space is now outsourced to community. And you would think that model would not work well. I do think we need a bifurcation, just to answer your specific question. I think a beta strategy in something like the generative art space is actually a very bad strategy because of the infinite supply issue. What I look for when investing into generative art NFTs is things that meet a couple buckets.

• 21:09Speaker 02

  The first is what is the proxy to the platform itself? So in the case of Art Blocks, it was Squiggles because it was the first set released on Art Blocks. And Squiggles effectively traded as seed stage convexity in Art Blocks, the platform itself. Then you could say the same for, in the case of Quantum Art, which is a photography curation platform led by Justin Avrastano that we also invested in. When we invested in that from the fund, we invested half in the equity and half in two matching twin flames, which were the formative photography NFT that now trades at over 100 ETH floors. And the reason we did that, not even so much the artistic value of the photograph itself, but what the photograph represented. In the case of FXHash, it's the RGB.

• 21:54Speaker 02

  That were created by the founder of the platform. So those first steps will always retain value. And then you get to the second question of, okay, who are the artists that 10, 50, 100 years from now are likely to be known as having released formative work on the platform? And that's obviously a more tricky question. You can look at things like traded volumes and some of the community myths that have been created around particular artists. But, you know, I would say that a lot of the value on the platform tends to concentrate in these colored blue chip artists. And so then you're left with this long tail that may be amazing art, but unless the strength of the community myth, to Sam's point, has a certain amount

• 22:36Speaker 02

  of velocity and staying power, these things generally tend to trade off over time. It goes back to the heart of what is an NFT, what makes an NFT interesting. I think Kevin Abash had a great quote in his talk recently where he said, NFTs are a node around which communities can gather, a living, evolving piece of art, a performance that we're both willing and unwitting participants in. So the NFTs that really engage community have an active participatory process, like Matt Kane's Gazers is a good example of this. It's essentially like the lunar cycle and this NFT is going to evolve over hundreds of years based on the lunar calendar. And then so a community is formed around that. I think stuff like that's pretty interesting.

• 23:20Patrick O'Shaughnessy?

  Evolution, meaning the art itself will change based on an external variable?

• 23:25Speaker 02

  Exactly. Yes. The exact variables aren't even known yet. So it's a process of discovery where the community is constantly finding new things and it's quite fun.

• 23:34Speaker 03

  It's interesting to think too about this process of risk management, I guess, in terms of investing in NFT artists and the idea Richard's talking about. If you're at least focused on the defining sets, or you could say the artists, it almost feels at this point that you can include, for example, someone like Beeple in this conversation around NFT art and say, well, and here's an issue where he's got so much to apply to that then you got to figure out what within his works, which are going to matter, which is a different conversation. But I think we can all now probably say whether he ends A chapter in a book or a paragraph in a chapter is still TBD, but he's cemented by virtue of being one of the first and of being so intrinsically tied to this idea and this moment in time.

• 24:17Speaker 03

  It's hard to imagine that he's not going to be an artist in the long term that you look back at it and say, okay, there was this thing that happened. And again, if you believe that you've always got to evaluate art from the perspective of its timeline and the historical evolution of it and the canon of art through history. I think you can say that about him. You can say that about, again, it's generative art, which feels like it's such a natural evolution of the creative process married with this technology of our times. That's how at least we come to saying, okay, within this space, we can narrow it down to some of the artists that we have high conviction. If this movement or this genre is talked about at all, which we believe it will be, these are probably a pretty safe bet that they maintain in the conversation.

• 24:59Patrick O'Shaughnessy?

  I mean, maybe just to put a fine point on this opening conversation around art specifically. It seems like as a category, it is undeniably cool and interesting as a new expression of human creativity. Like it's hard not to look at some of these projects and just think, wow, that's so creative and cool and new and different. And therefore it's not surprising that people with means want to collect these things. There's plenty of precedent through history. Like that's undeniably true in my view. To then make the leap from that to like, okay, my opportunity cost, let's say is the S and P 500 or something that I should make the leap to including this in my portfolio is the one where I don't know the answer to. And when investors ask you that question, I'm just curious now with all this experience, how you think about it for your own portfolio.

• 25:42Patrick O'Shaughnessy?

  I love the idea of splitting the investment between equity and actual pieces of art as the right way to express the investing view. Maybe just sum up your view on why this is interesting for investors, why they should at least do more work here.

• 25:55Speaker 02

  I think getting access to the space in the right way is really important. One of the things we've been thinking about is how can we combine, going back to the original question you asked around the director of the Whitney. How can we combine top-down critical narratives and curation in what we think is an important art movement? Together with access to emerging artists and opportunities in a way that there is real investment value precisely because they're undiscovered. And so our thinking there is to really try to create the MoMA for generative art by pairing some of the leading artists and curators in the space with some of the leading collectors and providing a vehicle for interested investors to get access to this space.

• 26:39Speaker 02

  And then most interestingly, not have the financial exit strategy here be essentially flipping NFTs, but acquiring this permanent collection and then tokenizing the engagement and passion of the collector community around that through social tokens or NFT memberships or otherwise. And I think that as a theme is something that is likely to have staying power across consumer markets generally. This idea of tokenizing that latent engagement that has always existed in games, virtual worlds, art, et cetera. But for the first time now, is finally able to be captured.

• 27:17Speaker 03

  Yeah, I mean, I would also say, Patrick, like especially if we want to talk about this stuff in the context of a portfolio and you mentioned like the S and P, for example. I mean, I think you also need to say like, in terms of your individual portfolio construction, or if you're doing this on behalf of monies that you're managing for somebody else, for example. It should go without saying that this belongs still very much, and we talked a little bit about like some ways art might branch out into other as a different type of asset class, but right now, NFTs, generative art, all of this stuff should be in that bucket. And either you're collecting it for like the reasons you just said, people's collectors find it incredibly cool, find it incredibly creatively interesting. Like all the reasons you collect art away from financial returns anyway. Or if you really are viewing this as an opportunity, an investment opportunity, it belongs in

• 28:01Speaker 03

  the high-risk venture portion of your portfolio and a small subset of that, right? And so I think you have to remember where this is and what we're talking about in terms of its place in your balanced portfolio is really important. Certainly, we wouldn't say invest in generative art instead of the S and P necessarily. It's like they're apples to oranges.

• 28:20Patrick O'Shaughnessy?

  Now is probably the right time to done one deep dive already on our generative art specifically to zoom back out to the galaxy wide view on this entire world. We'll classify this world as crypto, web three, whatever you want to call it, and here the thesis overall of galaxy. And then I also want to inject into the conversation, the lens that each of you brings to the galaxy thesis or idea of the view of the world based on your past experience. Sam, you already mentioned your experience in media. Richard, your experience in finance and trading. I think these are really two interesting sets of lenses to view this new opportunity. So maybe begin by level setting us with what is the overall view of the world from a galaxy perspective that can let us then go into some of these other verticals?

• 29:03Speaker 03

  A minute on the history of Galaxy then is helpful because understanding Galaxy Interactive and its place inside of Galaxy Digital, right? Galaxy Digital is a publicly traded merchant bank that Mike Novogratz and a few other partners started in 2018. The vision there was really to be the institutional bridge to web three and blockchain and crypto and to provide a place for people to gain access to the space broadly in as simple a way as possible to really enable people to access crypto and blockchain. Inside of Galaxy Digital, Richard and I run a division of a company called Galaxy Interactive. When we're talking and what we're speaking about mostly is our Galaxy Interactive perspective. And Galaxy Interactive is a venture business. It's a traditionally structured GPLP venture

• 29:47Speaker 03

  fund. We're investing our second fund and focused entirely on this sector that we call interactive, which is really that intersection of content and web three and infrastructure technology. We started Galaxy Interactive back in 2018 when we launched our first fund. Our view of the world was that interactivity and immersive digital experiences were quickly becoming the dominant way that most people are engaging with other people in the world and experience of the world. I mean, it was true then, and it's certainly true now, that people are spending the majority of their conscious time inside of digital worlds and inside, you know, via the devices that they have in their lives. And we talk a lot about metaverse.

• 30:30Speaker 03

  We don't need to go down that rabbit hole necessarily right now, but and all the visions of what that could mean. But the reality is, and especially if you think about second screens and third screens and what's going on. From the time that you wake up and certainly the younger generations than me, the time you wake up to the time that you go to bed. You are primarily conversing with and entertaining yourself digitally. I mean, that is just the reality of how people are living their lives and where their friends are and how they're building their identity. And it's only getting to be more the case every day. That realization of like, okay, we are in the process of whether we like it or not. Talk about the good and the bad of all this, but we are in the process of a migration

• 31:09Speaker 03

  from a predominantly, at one point entirely, physical existence to a predominantly digital existence. And everything that we use to define who we are in the world is at least touched by and increasingly influenced significantly by the digital experiences that we have and the friendships we have in these digital worlds. That is the thesis that Richard and I really bonded over. And the thing is, we didn't come together initially to build Galaxy Interactive. Where Mike and I and everybody, we'd launched Galaxy Digital, we were building a business. We initially hired Richard as the founding COO of Galaxy Digital. And he came over from London where he was in the FX business at Goldman and came over to be the COO of Galaxy Digital. And then he and I, in the first six months of him, of him moving to New York and joining Galaxy.

• 31:53Speaker 03

  We were spending a ton of time together and I was in my seat originally overseeing the overall venture business for Galaxy Digital. We had a fund that was going to be a generalist blockchain fund that sat inside of the Galaxy Digital top co ecosystem. And then Richard and I just realized we were completely bonded around the idea that sort of Exodus into the immersive digital worlds and what was that going to mean? And wow, they're really like the tip of the spear we thought then, and it's still very much the case, was gaming and video games. That was my perspective from having been a media investor and content producer and creator for 20 years. Every imaginable type of old media that then led me to video games.

• 32:34Speaker 03

  And by 2018, it was like very clear that this is the most interesting thing happening in the evolution of media and content. And Richard came at it from a different perspective, but an equally important one. And you need both, I think, to really understand what's going on in the world right now, which was wow. So these video game worlds are robust economies in and of themselves. And without talking about crypto, look at what's happening and the way that they monetize them. Look at the collection and trading of digital objects and look at the way people are acquiring these things to build their status and their identity. We just really bonded around all these ideas and said, well, okay, this is super interesting because if we're right, we're sitting in this moment of time where there are these two massive growth trends.

• 33:14Speaker 03

  Traditional gaming and video gaming and immersive interactive entertainment on the one hand, and then everything that this evolution of finance and decentralization of finance and trading technologies, all the stuff on the financial side of things. These two worlds are growing at enormous speeds with tremendous tailwinds and they're colliding.

• 33:34Patrick O'Shaughnessy?

  I was gonna say, I want to come back to gaming, but I really would love Richard to hear a little bit about, before we do that, setting the stage with this concept that you said before about the financialization of everything. Like, one of the, I guess, both exciting and also somewhat horrifying ideas of Web three is that you could insert a market into everything, into a game, into a company, into a whatever, and trade it 24/7. And you come from, you know, an FX trading background, deeply familiar with trading systems and how that world works. I would love to hear your view on, based on your history, the financialization of everything, what the opportunities to that are and what scares you about it? And maybe here's where we can talk about mental health.

• 34:17Speaker 02

  I just wrote a piece on this, actually. It was my 36th birthday a couple of days ago. I was thinking about this question, what would I tell my 18-year-old self? When I was 18, I just graduated university, going to law school, and I was just in a rush to get somewhere. And for someone who works professionally, I grew up as a lawyer first, and then I moved on to the markets business. You know, these are all zero-sum markets. And I think particularly for those coming from a financial industry background to crypto, they bring this zero-sum mentality that is perhaps the most destructive thing possible. Coming to Web three because Web three is this environment of abundance, not scarcity. And if you bring that mentality, you'll come to all the wrong conclusions.

• 34:59Speaker 02

  So I concluded I would tell myself that don't be a trader, be a builder and play these games of abundance. And actually try to restrict your optionality entirely on the speculative sphere of Web three. Because if you think about, you unpack, what does Web three mean? And if it really boils down to the financialization of everything, there's three distinct buckets of it in my mind. There's a speculative sphere because you can now tokenize so many different things. The opportunity for markets and best execution and price discovery and all these things lending has just massively expanded. That's one sphere. The other sphere is for participants. How do you earn these tokens?

• 35:40Speaker 02

  If tokens are the lifeblood of networks generally, one path you could take is come to the space with zero capital. I guess ask this question all the time. How do I get started? There is now a credible path where you don't need to come to the space with 10 ETH and make your way by flipping NFTs. You could go discover how can I productively spend my time and participate in as many networks, DAOs, et cetera, that correlate with my interests and values and just earn, never really think about trading and which projects are going to outdo the other. And then there's a third sphere of the consumer side of it of spending these tokens on say NFTs or skins and games, et cetera.

• 36:20Speaker 02

  And all these three spheres today, when I hear talk about Web three, they get conflated into one bucket. And what worries me about that is I just don't think retail, mass retail is ready for the financialization of everything. Why? Because the psychological impact of having these tokens, which are greater than 100 of all assets, go up and down and thinking, oh, I should have sold at that local top and I should have bought at this local bottom. It will kill you. You literally will not have the stamina to survive the game. And In my post, I was recounting how I bought 10,000 ETH at 97 cents in 2015 after reading

• 37:00Speaker 02

  a fantastic book about the promise of ETH. And then I printed it out on a paper wall and I told myself, I'll come back to this in five years. And then three weeks later, I was reading an article on ETH and I saw it was $2.25 and I said, oh my God, I have to sell that. That's a three X in. You know, three weeks, the ROI of that is insane. What I did when I sold that was I created a mental block in my mind of, okay, I'm obviously not going to buy this thing until it goes back below 225, $2.25. And obviously that didn't happen, right? It just went from there. And so these missed opportunities, they really, really add up over time. If you believe the super cycle hypothesis. And what that doesn't mean is everyone go buy, go market, buy Bitcoin and crypto. That's a tremendously risky strategy.

• 37:42Speaker 02

  This idea of earning without capital outlay is something I'm quite focused on, and I think is key to the long-term sustainability of participation in Web three.

• 37:52Patrick O'Shaughnessy?

  Yeah, I think it's such a fascinating topic because there's been some stories about the dark sides of, say, a Robin Hood, where in the one sense, I'm a deep believer in the introduction of markets and the price discovery they represent as being like a driving force for good through world history, certainly in modern world history. And at the same time, price discovery happens through humans to some extent. And there's just been some painful trading. It's painful. Trading is bad for almost everyone, right? In terms of just returns, we just, we know that from equity market data. And it's a fascinating conundrum. On the one hand, I'd love to hear more about where you think we'll see more markets pop up because of Web three infrastructure. And what are the good sides of that ledger are? So maybe we can go there now. Like, what are the most exciting places that we might insert markets?

• 38:36Patrick O'Shaughnessy?

  In the financialization of everything that have you most excited?

• 38:39Speaker 02

  I think lending is really interesting in the right context. Today, fortunately, lending against things like NFTs is used in a way that frankly fuels some of the dark side of what's happening. And I'm speaking from personal experience here. One of the other pieces I wrote a couple of months ago was, I called it the diaries of an accidental art addict. What ended up happening is I became so. Consumed by art blocks and what it represented that there's no end to want. There's always a better piece that you just wish you had. And when you have financial primitives like lending, where you can get thirty to fifty percent LTV loans against the floor prices of your NFT collateral.

• 39:21Speaker 02

  And the reason that's possible is because of this idea of composability as a primitive. Because NFTs are standardized ERC seven twenty ones. It becomes very easy for a company wanting to be a lending protocol to build a smart contract that takes that seven twenty one and creates a simple marketplace for lenders and borrowers to come together. On the one hand, you can say, that's amazing. I can't believe we have these composable building blocks being built together so quickly. On the other hand, what that results in is just everything being sped up a hundred X. And if you start with this fundamentally unstable base of desire, these financial building blocks will compound you probably into oblivion. So the question is, what is the healthy version of this world?

• 40:05Speaker 02

  And the healthy version of the world is one where you have marketplaces for virtual goods of all kinds, whether NFTs, in-game skins, membership tokens in communities, whatever. You have these concepts that you have in FX like best execution and minimizing brokerage fees being put into these meta marketplaces that previously you couldn't extract value from at all. Because these virtual goods, it was never possible to instantiate engagement value into a thing you could trade. That to me is what's really exciting about this is that you can get paid for the first time for doing the things you love and could previously only spend money on, i.e. consume,

• 40:49Speaker 02

  which is one of the three spheres I was talking about. Now you can earn and consume at the same time, and I think that's the long-term promise.

• 40:56Patrick O'Shaughnessy?

  Sam, what about you? What has you interested and or concerned about this financialization of everything trend? The DeFi kind of large might represent.

• 41:05Speaker 03

  A couple of things on the excited and optimistic side buried in what Richard was saying is this idea that by actually participating and not getting sucked into the speculative financial games, but participating in the things you love to do. It's enabled this whole group of people to create value for themselves in a way that they never could before. And they don't need to put themselves at tremendous financial risk to do that. They just need to actually build and execute on a set of skills that many of them have. And are finally, for the first time through this, scalable in a way that they weren't previously. I'll give you a real close to home story that I find super inspiring about all of this. And it is exactly what Richard was talking about.

• 41:45Speaker 03

  I mean, my sister Tara, who for 20 years has been an incredible, frankly, underappreciated, independent musician and artist that is creative in every imaginable way, both in music and in visual arts, and has spent most of the last 20 years of her career, building up skills around community building. And initially, really in an effort to apply those talents to build an audience for herself and for her own music. And she had no money to bring to the NFT art world in a speculative way. All she had were her skills and her abilities that she'd honed in terms of how to build audiences and how to expose people to creativity and share her ideals.

• 42:27Speaker 03

  And in this period of time, she's radically changed her life. No financial risk, but by getting involved in projects and building community and doing all the things that if NFTs were to go away tomorrow, these would still be incredibly valuable skills in the world today, given this sort of evolution to digital. And by avoiding a lot of the dark side that we were just talking about, it's been almost entirely a positive experience for her. And it's changed her life financially and it's enabled her to build a community of people and friends who was never possible when she just had her own music to market. But for me, in some ways, away from the financial risks, the most obvious, and I've felt it in myself, and it's been a constant tension for me in terms of how involved to let myself get in this world.

• 43:12Speaker 03

  The part about the financialization and the trading and all of the stuff that's going on in this world, and some of it is tied to mental health, but it's also just directly about what are you doing with your time each day? It is, as anybody that's spent any time on Discord, or the more involved you get in the world of NFTs, like the speed at which this is going on and the volume of notifications and the distractions on your life, if you want to really engage in and participate in this world in a meaningful way. And this is true, if you ask my sister, whether you're spending money or you're not spending money, if you're involved in this world, there is a psychic cost to it that we gotta pay attention to. Because I'm eight years older than Richard, and no, Brad's always jokes he's the oldest guy in crypto, but I'm 44 and I'm, I'm old for this space.

• 43:56Speaker 03

  And I'm old for it, and I'm also somebody that generally I don't enjoy in any way spending my time on social platforms like Discord, even though I recognize the importance of it and I'm fascinated by it intellectually, and it's impossible to opt out of it if you're in our business. But I look at it from that perspective of, wow, how distracting is this? And is this world, in order to do it at all, are we subjecting ourselves to an exponentially more like distracting experience than we had already created for ourselves by introducing the always-on constant barrage of email and then text messages and then all the other notification platforms?

• 44:40Speaker 03

  It's like, if you participate in this, you realize, oh my God, what is this doing to my ability to concentrate, to my ability to think, to my ability to just get quiet and, and figure out for myself on a daily basis as we all need to do? What do we care about? What matters to us? That's my biggest concern, and it's 180 degrees from the minutia of financial market sophistication. It's more about What life are we living? What are we thinking about? What do we value? But then if you ask about the dark side of that, so that's a very personal individual thing. Are you or aren't you actually realizing a quality life for yourself? A sense of calm and thinking and talking somewhat existentially now, but there's that.

• 45:22Speaker 03

  But then there's like, okay, so at scale, like what happens if all the people participating in this? And the ones that do cross over into at least some temporary sense of financial progress? Or they've changed their lives with crypto or they do this? Just think about like, the more that you've made this your whole life and your whole purpose and your sense of self. Then what does that do to you if the financial part goes away? Are we in this moment in time where that could lead to radicalization of a whole generation? And it's all that kind of stuff that I go to when I think about the dark side of this.

• 45:52Patrick O'Shaughnessy?

  We'll stop the staring into the abyss part of the conversation there. But I do think it's a fascinating question, like, is this cigarettes? There's already questions about social media, which we've got 10 plus years of experience with now. Is this more of the same of, well, we look back on this in 30 years and say, can you believe we let our 16 year old trade this shit? You know, on their phone, like, it's an important and fascinating question. We're not going to have the answers here today, so let's focus on the positive. And I want to get to gaming. Sam, we've hinted at your past career in media. Would love to hear both what you were doing in that 20 year period, but also the models that you bring with you. Maybe specifically around gaming to media. I love this producer's high concept.

• 46:35Patrick O'Shaughnessy?

  People as individuals or as groups love producing things which create wonder or awe in the audience. Whether that's a piece of art, a movie, a game or whatever. That seems like obviously something we can bet on persisting and growing. So talk me through your background and both of your perspective on gaming as a subcategory, an important subcategory of this new technology.

• 46:56Speaker 03

  I'm also like Richard, I'm a lawyer by training, a recovering lawyer, as we both say now. And it happened while I was in law school. I was a very passionate man about film and had been for a long time. And I just was looking for things, you know, the third year of law school is notoriously boring. I ended up just indulging a passion I had in trying to make films. Mostly motivated by a couple of friends I met along the way who were also, you know, in similar places in their life. And so I ended up starting my career producing films. And then I never really fully let myself just go down the entirely creative path. And I always felt pulled back to doing something in a business context. We don't need to get into all the reasons why, I think, but it was interesting.

• 47:39Speaker 03

  I was passionate and interested in making films, but I also wanted to do something more than just be an artist out there. So that led to really a career in traditional media investing and building businesses. And really every possible old media, as we say, like if it was a business in the media sector that was in or had been in secular decline. I was probably involved with it in one way or another from two thousand and two to two thousand and fifteen or so. With a longtime friend and partner, initially I went to work for him, a guy named Michael Lambert. He had his own amazing career in in media. I went to work with him and then we ended up partnering. We built a couple of chains of movie theaters and we rolled up record labels and we were involved in production companies and all of that.

• 48:21Speaker 03

  And that just, I think, very naturally, if you were doing old media from two thousands, led me to digital media and more emerging media tech. Just mainly out of curiosity and things were happening in the space. YouTube had launched and the iPhone was released and streaming video was becoming possible. And you see all those things and it was just, even back in twenty ten, it seemed impossible to miss the fact that video games were going to be incredibly important in this story and in the way that people were consuming content. I invested in my first game studio. I convinced Michael to let me have a little allocation of one of our portfolio companies to build a portfolio. Earlier stage venture bets. And one of the first ones was a video game studio called Seismic Games, which ended up getting sold to Niantic in twenty sixteen.

• 49:04Speaker 03

  That led me down the video game rabbit hole and that led to investing in some back then emerging VR and AR technology companies and eye tracking technology company called Ifluence that I bought Google and it just was like opened my eyes to this whole world and I found it super interesting. And it's also actually how I wound up in Bitcoin and crypto because I think the world of crypto back then, you were either somebody coming from the real hardcore like hacking community or you're coming from the video game world because it was the video game people that were already comfortable with and had been comfortable for years with the idea that digital objects could have value because they were critically important part of the early NMRPGs and people were already actively then even

• 49:47Speaker 03

  trading digital objects and mining digital gold in Warcraft and creating secondary marketplaces for their purchase and sale of these objects and all the things that we think about now with digital objects and blockchain. It was like those people had accepted this ahead of most other people in the world that these digital things could have value.

• 50:02Speaker 03

  And so it was like the pioneers in that world that I met through the gaming world that then convinced me like in 2012, I guess, when I first bought Bitcoin, hey, you should pay attention to this. And one thing that was consistent for me through all that was seeing the emergence, the emerging importance of digital technology and the video gaming in particular. And it just seemed to me there was always going to be a place and I still believe there will always be a place for passive lean back entertainment. And there are times when you're not going to want to have to engage and make choices and you just want to be entertained or you just want to allow yourself to be sucked into a story.

• 50:35Speaker 03

  There are other times and probably the majority of the time going forward where you really want to actively create a narrative for yourself and be part of making the story. And that's where video games and everything that's emerging from this trend are so important. What that leads me to think about now, as we look at gaming and blockchain and crypto, I think the observation I have is how hard it is to actually tell great stories. If you've had the opportunity to engage with traditional media and understand film and TV and especially Content pre the last 10 or 12 years where everything got chopped into shorter and shorter blocks and back when the format still allowed for and required the telling of a great story in three acts and the evolution of our characters and the journey that they're on and all the

• 51:20Speaker 03

  things you think about with storytelling that I think are universally true and we've been talking about them going back to Plato and Aristotle and I don't think anything's going to change going forward and we need to remember that and I think some experience with traditional media and traditional storytelling can really inform how you think about video games and how you think about especially like as new genres of games and games intersect with blockchain and all this stuff, some fundamental things are not going to change. I think storytelling in particular is timeless in terms of what ultimately attracts people to great stories and how great stories are defined because really what it is is existentially what we as human beings are going through in our lives. And so that's a big part of what informs everything that I think about when we look at companies to invest in or games that studios are building.

• 52:03Patrick O'Shaughnessy?

  Richard, I think there's an interesting like other side of this coin in the web three context where obviously like table stakes is you have to have a great game. If it's not a good game long term, people don't play it like who cares about anything else. But then within a great game, if you've got two great games, a distinguishing feature of a winning game and maybe therefore a winning investment in a studio or in a platform or something may be determined by the economic structure of the world, the rules of the game, the rules of the currency, et cetera, the financial incentive system. And I would love to hear your view on, I guess this is a game specific question, but also just bigger like the design of economic systems, all of a sudden people call it tokenomics or something is a really important thing. And we've seen with things like Axie where people that were in these

• 52:46Patrick O'Shaughnessy?

  play to earn games for a time were making like these incredible wages, they fell off a cliff. I think they've now, or at least they did at one point, fall back below the minimum wage or the minimum amount that people were making in some of those geographies. The design of these incentive systems is critical to the long-term success of the ecosystem. Talk me through how you think about that side of the coin, taking for granted like there needs to be good games, people will not play them if they're not fun. But what's your take on tokenomics and the importance of that discipline?

• 53:14Speaker 02

  We like to learn by doing, and one of the things we did in the third quarter of, I think it was 2020, we created a Discord community called RNG, Random Number Generator. I really wanted to drill into this question you just asked of, can you go from nothing to something? Creating a token and wrapping a community around that and creating long-term games and use cases for a token. And so we launched this thing and in the first few weeks, it was the most mental experience I've ever had in my life. Like thousands of people flooded the Discord. And we had the silliest game that people would compete for. And some of them people spent all night staying up competing in. So this token that literally did nothing other than a promise is going to hold some interesting value.

• 53:57Speaker 02

  And I had one of our portfolio company CEOs, Raf Koster, who's a legendary game designer, was involved in Ultima Online, Star Wars Galaxies, come in and I said, hey Raf, isn't this the greatest thing ever? I mean, you've written books on this, but I just created a token and I just did everything you thought you knew in two weeks. What do you think of that? And he had one of the most amazing responses to that. I actually just want to read what he said. It sticks with me to this day. He said, "Community exists because of what they share first, values and interests. Money is a way to reduce friction and improve trust between people who don't share values, interests and the like. Money exists so you can engage in exchanges with people you do not know or trust or like.

• 54:42Speaker 02

  Communities exist for the exact opposite reason. You do not build the community around the currency, you build the currency around connecting communities." And then he went on to describe how, what was strange about RNG was that the unifying force was crypto. And crypto is a very big tent. Because within that big tent, you have sub-communities of gamers, thinkers, funders, makers and so on. And it's not an ecosystem, it's a crowd. And every human community on earth is centered around a town square and some organizing force. And so he was like saying, "I'm unclear on why this community exists." Over time, I discovered he's right. And I think those words are something that

• 55:24Speaker 02

  Every profile pick community and every community that's kind of high on rising floors and such should really think about. Because it goes to this question of what drives long-term sustainability of any community, right? Like, the first question I ask myself on any token is, why would someone buy this? And it seems like such an obvious question, but in all the talk on Play to Earn, what you hear the most is some variant of, oh, it goes back to the metallic story. I wish I could have sold my sword in the game. I can't believe I didn't own my things. And that's all great, but that's the supply side. Where is the demand side? Who's gonna come in in the context of a system of constantly inflating virtual goods and wanna buy this stuff?

• 56:07Speaker 02

  And so it got me thinking pretty deeply about what drives sustainability. I think the most insightful thing I heard on Play to Earn in the last year was at a cocktail party from someone entirely outside the space. I was telling this individual about the wonders of Play to Earn and asking her like what design heuristics she thought might drive long-term sustainability. And she replied very simply, a virtual world that mirrors real life. I thought that was actually a very deep statement because it goes to kind of what Sam was describing at the end of what he was just saying. That simulation, this idea of simulation and this world where we can kind of learn something about ourselves that we just don't get in the everyday.

• 56:47Speaker 02

  And that these impactful experiences are the ones that are this almost alternate reality that teach us about our true selves. I think that's why kids love playing Minecraft. I watch my eleven-year-old play Minecraft and build these virtual worlds that are amazing. And I said, hey, why are you spending all this time in Minecraft and not the sandbox where you could be earning tokens for your time? And his answer was very simple. In sandbox, there's no redstone. And without this concept of the building blocks of electricity, how could you build a living world? The core to this simulation environment and what makes simulation sustainable is user-generated content at the end of the day. And I don't think user-generated content in a vacuum works well.

• 57:31Speaker 02

  Loot is a great example of this, where you literally Have these NFTs that have some words on it and it's like go build a myth, a narrative, whatever you want to call it around this stuff. And you saw some early experimentation, but unless you have some more top down storytelling, as Sam was saying, to kind of bind together all of that UGC. One reason you see the most successful mods in gaming come off of games like Starcraft and such is because you have that great top down experience first and foremost.

• 58:01Speaker 03

  As I listen to that, it's such a reminder that it's the balance and if you're building a game or you're telling a story of any kind right now, right? You today especially, absolutely, you need to think about like, how do you introduce enough tools and opportunities for user generated content for people to feel empowered? And not enough so that they just are off the rails and don't know where they're going. And this is true, like if you think about whatever the meeting, if you think about film and the fact that like, it's not an accident that great stories are told through the lens of a camera, which has a very finite range, you're able to point people to where you want them to look. And they're going to take from that what they experience and they're going to, everybody's going to bring to any content experience their own unique perspective and history and point of view. But ultimately like being directed enough.

• 58:46Speaker 03

  And when you start thinking about game development, or I remember in the ongoing evolution of something like VR where the promise is, oh, you're going to be able to put a VR headset on and look everywhere. It's a really interesting, empowering idea. And again, this comes up all the time in metaverse conversations. But it's also hugely problematic because at the point that you introduce the ability for people to look everywhere and there's no more real direction of a camera, the, the dilution of the story you're trying to tell. And even just giving people enough rails to tell a story for themselves becomes really maybe an insurmountable obstacle to people having a great content experience. And that's going to be the thing that I think every creative person, as they start to build games or as they start to introduce these

• 59:29Speaker 03

  idea that increasingly rely on user generated content to allow community to build. We're going to be constantly up against this tension of what do they need to be guided towards? And ultimately, should they be democratically able to create for themselves?

• 59:43Patrick O'Shaughnessy?

  Coming back to like an investor's perspective on all of this, Richard, I thought that answer was so interesting. So many interesting aspects that we could dive deeper on, community before token and mimicking the real world and all of these things. And then there's been the reality in gaming that some of the most successful, both usage and financial outcomes have been in platform companies. You could think of Minecraft like a tooling company. You could think of Roblox like a platform or a tooling company that allows the creation of other stuff on top of it. So when you take that reality and then think about investing in gaming or gaming related companies or projects in web three, how do you think about where that return might accrue? Are you thinking about it in those terms or is it more bottom up?

• 1:00:25Patrick O'Shaughnessy?

  What can we learn from what kinds of gaming companies have won in the past and apply that to the future or not?

• 1:00:32Speaker 02

  What's interesting is the types of content investments we've made are those that in success can parlay the UGC dimension of what they're doing into a broader platform. But I'm very skeptical of content pitches that start out purely as UGC players for the reasons we've just discussed. So what you really want to see is that storytelling, that top down, great player experience, and then leveraging the mythology around the characters and the lore developed in that world to inspire users to create variance on that theme and then use the power of web three to monetize some of those creations.

• 1:01:14Speaker 02

  I think that's the heuristic that we'll see be quite successful going forward. It doesn't start because you say we're going to be a platform. And any pitch that starts out that way, when they have zero users, I'm immediately quite skeptical of.

• 1:01:29Speaker 03

  They need to start as here's the world we're going to create. And again, that's the top down perspective. We're going to create this world and this is the experience and people are going to want to live in it and spend time in it. And then these games, you've hit on it though, Patrick, in terms of the blurring of the line between a game and a platform. And that's increasingly, I mean, part of the reason why you're seeing games become so venture investable, for example, over the last few years is. Because that line has been blurred, the great games today are both content experiences from a top down and they evolve into places where people can spend time and create a persistent life for themselves. I think the best games will, over time, be somewhat indistinguishable between is it a content experience or is it a platform? And we'll be asking ourselves those questions all the time.

• 1:02:14Speaker 02

  Yeah, and we're also so early in the blockchain gaming space. Like, there's a real risk of over-indexing on some of the, quote, early successes in the space, like Axie, that, you know, I'd say 99% of blockchain gaming falls within a few buckets today. Some variant of buy this NFT and stake it and earn rewards. I think the term I've come across is game-fi. That's one bucket. Then there's the other bucket of buy this NFT, like, say, your Axies, and then go and battle them and level them up and earn this soft currency type of framework. And I think these initial use cases are interesting and teach us a lot, but they're not how this stuff is gonna go mainstream. When you watch the videos of people like Asmongold after the Square Enix announcement on their NFT plans,

• 1:02:58Speaker 02

  and you actually drill into the objections. The crux of the objection is that gamers view NFTs as like microtransactions squared, in terms of how much exploitation there is of the consumers who, going back to our point about simulation, all these gamers just want is suspension from reality and to not have to worry about, oh, my God, when I buy this sword, is it a good buy or a bad buy? And what do I do with it? And all these questions. It really suspends the immersion that you seek as a gamer. So how you retain that immersion, I'm playing Breath of the Wild for the second time now, and it's just such a beautiful game. Imagine you're playing Breath of the Wild and you have a marketplace on there for every herb you collect and all these things. We saw this with Diablo III and what that does

• 1:03:41Speaker 02

  to a game. How you bring open market primitives to closed-loop immersive worlds, I think, is a really interesting question. And I think the path forward there involves giving gamers value for their time in a free-to-play way without asking them to buy anything. Over time, by virtue of spending time and engagement in these worlds, they'll earn the equivalent of a soft currency or a grind currency, like in Axie, this is SLP. They can keep that or sell it or do whatever they want with it. But to the extent you want to be more of an owner. In this community owned game, then you can go and buy this hard currency in the ecosystem to which economic rents of the activity in the game will accrue over time.

• 1:04:22Speaker 02

  And I think that's a really interesting bifurcation of players on the one hand earning soft currency for their time that they can monetize versus more hardcore believers who want to go more in the financial side, become truer owners, having that option as well. And I think the introduction of these concepts to gamers in a way where they don't even know it's crypto is one of the things that excites me in the coming years.

• 1:04:44Patrick O'Shaughnessy?

  What was the lesson from Diablo three? What happened there?

• 1:04:47Speaker 02

  What Blizzard found with Diablo two was you would have through eBay, these players coming together and like basically exchanging items because you could trade items. And I thought, oh, well, why don't we just in-source this marketplace functionality and create the auction house? And that did, and it really resulted in this player experience where everything you did in the game was guided by the extrinsic motivations of wanting to earn a buck in the marketplace. And it really detracted from the core player experience and was this kind of cautionary tale that you often hear as a reason why blockchain gaming is not going to work. Gamers generally have this attitude that everything interesting has been tried before and usually failed. I think there's a way to learn from the past while also

• 1:05:30Speaker 02

  improving on some of the deficiencies that have taken players out of the mental state they want to be in and really give them what they want without talking about it.

• 1:05:38Speaker 03

  If you think about it in a really simple way, if you think about a gamer who, whatever the game may be, but let's just think a gamer was an incredible shot in a first-person shooter, right? There's almost no reason to assume that that person or somebody who's great at exploring worlds in an MMO or whatever it may be, there's almost no reason to assume that that person should have or will have any of the financial sophistication to then convert over and understand markets and trading and all the stuff that we've been talking about. You almost have to ask yourself on the Venn diagram, where will those people overlap? And to the extent that they don't, how do you make sure that the people who are playing this game are going to enjoy it and be able to do something? And Richard sort of alluded to that, the stress of wondering all of a sudden if you don't have

• 1:06:23Speaker 03

  the ability to participate in this world in the way that you thought you did can be really just a viscerally unpleasant thing for people. And that's why I think it's really worth this question of we ask ourselves all the time, undeniably, like the TAM of blockchain games alone on all of the games that ultimately require or take advantage of these financial skillsets. That's looking to be like a big enough business in and of itself. And there's a lot of reason to be super optimistic about where those will go. But I think the question of whether that will cross over into traditional gaming in some of the ways that we talk about is an open question, because again, it just isn't clear that these are overlapping skillsets amongst people or interests amongst people.

• 1:07:02Patrick O'Shaughnessy?

  My second to last question for you both is a bit of a tough one, because most of this story is in the future, not in the past. I'm trying to come up with new ways of saying it's early, because everyone keeps saying it's early and it's starting to bother me. But clearly, in this case, it is early. If it is the thing, if it is a massive value creative event like the internet, like many people believe it might be, there's tons of uncertainty. So it's hard to have tons of contrarian views. But if you had to identify something that maybe you most disagree with the Web3 investing community on, is there something that comes to mind for both of you?

• 1:07:33Speaker 02

  Yeah, I'd say on the investing side, you've seen a massive capital influx into token projects because of this idea that if you get in early at, say, 30 to 50 million type of valuations, on launch, you see these token networks often trading at fully diluted valuations of well over a billion, in some cases closer to 10 billion at launch. And it's this massive unlock. And you have all of this capital and productive activity flowing from the notion that your 20 to 30 billion valuation has turned into a billion to 10 billion valuation. But that's not actually true in the sense of what you're looking at with the 10 billion F D V number, fully diluted valuation number, is the top of book

• 1:08:17Speaker 02

  mark on a token, not taking into account any liquidity depth, and more importantly, not taking into account vesting schedules. So this issue of non-comparability, so take two tokens, imagine they're the exact same thing, but one token, something resembling a fair launch with no insiders, investors, whatever. Basically, it was mined by the entire community and therefore is more distributed without any vesting schedules. And then take the same token and have it owned 25% by investors, 25% by team, and a bunch to insiders, basically. And you have, let's say, your standard four-year token vesting unlock. That latter token, I would argue, from a purely financial trading and hedging standpoint,

• 1:09:02Speaker 02

  it strikes me a lot more similar to like a binary option in terms of its hedging profile than it does a continuous thing with liquidity along the spectrum. I think this idea of token non-comparability is going to be a really important thing, not just from a financial reporting standpoint, as you compare like fund performance, for example, but from a actual productive allocation of capital standpoint. Because the reality is we're seeing, we're just seeing terrible projects get funded at valuations of ten to two hundred million dollars. Companies that would have gone bankrupt for lack of ability to raise funding prior to Web three. I think hopefully the effects of this will be localized in terms of just those investors

• 1:09:46Speaker 02

  investing that capital, just realizing there were losses. But you would hate to see a broader skew of productive capital as a result of this fundamental misunderstanding of FTV. Sam, what do you think?

• 1:09:57Speaker 03

  I guess a related point, but slightly differently. I mean, I think the general conflation of financial KPIs and actual use KPIs in this space is really alarming, even by some pretty sophisticated investors, or you would think, where they're looking at token performance and inferring from that things that have to do with the success of a game or the idea that people are going to ultimately be in that world and build things in it and care. And it's like in so many of these projects, actual use is nothing. And the value, I mean, this goes to Richard's point. And some of that is because people don't understand or aren't digging into what a fully diluted token value means, and some of it is just because they're speculating on token prices. They're not considering the fact that none of this is going to matter

• 1:10:41Speaker 03

  if people aren't in the software, playing and building things for a long time to come. And that's the part where I just think we're still are seeing very, very few examples of enough people in these worlds for it to matter. And on a relative basis to traditional games, for example, like they shouldn't even measure a blip. And yet we're seeing valuations that are shockingly high.

• 1:11:02Patrick O'Shaughnessy?

  I love both answers. What's a great closing point on what I've enjoyed about the conversation, which is this mix of excitement with two different but relevant real world previous set of experiences that you bring to the table and that it's okay to be excited and skeptical about a lot of the details. And from an investing standpoint, that's actually critical. Like you have to be that probably to do well. I ask everyone the same closing question. Excited to get to ask it twice. Richard, maybe we'll start with you. What is the kindest thing that anyone's ever done for you?

• 1:11:31Speaker 02

  Yeah, this one's pretty easy for me. It's gonna sound somewhat contrived because Sam's on the call, but when I came to Galaxy, I came from Goldman where I was running the crypto business and in my role as FX COO. It's something of a career high for me. And then when I joined Galaxy, I think there were certain things that didn't align with my expectations. It was something of a blip in my career. And it was a time when I really thought I've been in these zero sum markets for several years and how am I kind of reinvent myself? And there was a moment in time when I felt like my only two friends were my 19 year old analyst at the time and this guy Sam who really took a chance on me in saying, hey, let's forge this amazing shared destiny together of there's a lot of potential from

• 1:12:16Speaker 02

  Web three crypto and gaming and let's go see if we can build a business around it. I think sitting here three, three, three and a half years later, it's, it's been pretty incredible to have the blessing of having raised $650 million in the space and hopefully more soon. We're just getting started. So to have gone from that career trajectory where you feel like you're on top, but actually don't know anything and then go and kind of relearn everything you thought you knew, I think is a very healthy thing to go through. And one where in this world that's changing so quickly, I'm just really grateful for having gone through that.

• 1:12:51Patrick O'Shaughnessy?

  How about you, Sam?

• 1:12:53Speaker 03

  If it's not obvious, first of all, from Richard's answer, it's like, I always described him as the hundreds of venture investments, I guess, in my life. I always describe Richard as the best venture investment that I ever made. You know, it's like, it should be pretty obvious to everybody. They've got a chance to hear how his mind works and also the humanity behind all of it. I've had the good fortune, I guess, of so many acts of kindness directed towards me over my life. I don't even know where to begin to pick one. It is like, in so many ways, the blessing of my life, for sure, that I've just had people that have been so wonderful to me. I mean, I think ultimately, if you think about, in my case, having parents who never really put boundaries on all the crazy things that I've wanted to do, or told me once that I couldn't go do them.

• 1:13:37Speaker 03

  And I was a very strange person growing up in terms of just getting obsessively interested in a variety of extraordinarily random things. I mean, there was no way you could look at the stuff that I dove into over my life and make any real sense of it, except to say, I was curious, and fortunately, I had parents who just said, you know what, all right, you want to go do that? Go do it. And make it your own and do it well. And like, in hindsight, that was really the kindest thing that anybody could have done, because I think it was by then enabling me to just go explore, that I was able to kind of feed this curiosity that I've carried through in my life. And most importantly, taught me to just find people that you care about and that you want to be on the journey with. That's manifested itself now, obviously, with Richard and with

• 1:14:21Speaker 03

  a couple of great business partners I've had in my life, and my fiancee, Megan. And it's just like, you learn, you look back and say, well, okay, am I happy where I am? Do I think I've figured out a pretty good way to pursue life? I think I've got to attribute that to the lessons I was fortunate to get from my parents.

• 1:14:37Patrick O'Shaughnessy?

  As a dad, it resonates so much. And what's cool about the internet or the digital age is it feels like the opportunity to do well in niche curiosities is higher than ever in growing. And if anything, like

• 1:14:49Speaker 03

  Absolutely.

• 1:14:49Patrick O'Shaughnessy?

  it may even flip, where the best opportunities are not in the traditional past, but in the unusual past. So fostering that as a dad or as a parent is really important, I think. So, love it as a closing answer. Guys, this has been so much fun. Really appreciate the time today and all the lessons you've shared with us.

• 1:15:05Speaker 03

  Thanks, Patrick. Patrick, thanks so much for having us on. It was really great.

• 1:15:11Speaker 04

  Stay tuned to hear more about Catalyst's new quant product, Candace.

• 1:15:16Patrick O'Shaughnessy?

  Maybe, Jed, just real quick, just to get it on the record, it would be great to hear you just describe Candace. We got to it organically here, but just literally if you're, if you're meeting a counterpart at an investing firm for the first time, you're just saying, let's assume familiarity as the audience has with Catalyst. What does Candace actually literally do? And then Roger, I want to hear how you've engaged with the product and implemented it.

• 1:15:37Speaker 05

  There's a long tradition of puns in computer science. C++ is in the language C, if you want to increment an integer, you'll say integer++. So C++ was the next step from C, and that's a bit of a pun. Catalyst itself is, I wouldn't say it's a pun, but it's a planned words. And when I was interviewing, I saw what they had done to the API and I realized they needed a panel data solution, which is to say, serve the data like you would look at it in Excel, super easy. I said, you should call this thing Candace because it's a pun on the very popular Python library Pandas, which stands for panel data, which was invented at AQR in 2007 by the great Wes McKenna. And it's the most popular open source library for data manipulation.

• 1:16:18Speaker 05

  So I named Candace in homage to Wes and to my surprise, Catalyst said, yeah, that's a great idea. Didn't really think that they would go for it, but they did. And what's good about it is when I talk to clients and I say, we have this data science library, we call it Candace. If they laugh, I know that they know.

• 1:16:35Patrick O'Shaughnessy?

  You got somebody. It's like a bad signal.

• 1:16:39Speaker 05

  Absolutely. And I tell the sales staff this, is if they don't laugh at Candace, then we probably have a lot more work to do with getting them on board with Python.

• 1:16:47Patrick O'Shaughnessy?

  So Roger, I would love to hear how, back to that concept of rubber meeting the road and using Candace as a part of that process, how you've engaged with this product and actually made real the intersection between data science and fundamental investing.

• 1:17:01Speaker 04

  At Newburger, the role of the data science team is to work with the investing teams to deliver, I'd say curated output from data analysis. While some of the teams here have people on them who actually are interested and want to work with some of these tools, most of them, I would say, are more interested in getting our read of the data, the interpretation of the output and how it's relevant for them. We typically engage with PM teams on single names. They'll come to us with a question. We're trying to figure out something that we're not finding an answer to anywhere else. Or maybe it's more open-ended. What trends are you seeing in Nike?

• 1:17:44Speaker 04

  And we can then go back to our new analysis across our data sets, credit card data, web traffic, et cetera, and put together basically a presentation of the trends we're seeing. And the key there, though, and this is where I've spent a lot of time, is to tie it back into what matters for that company. So our job is to actually dig into the investment thesis of the company we're looking at, just like the fundamental analysts would. So it's not just all about automation and data analytics, because we need to understand what's relevant, because there's a lot of data we can look at. Some of it matters, some of it doesn't. Or some of it might be relevant to a small 5% of the revenue. It's not going to move the needle. We want to focus on where there's really insights that are worth sharing.

• 1:18:28Speaker 04

  Now, when it comes to the Candace product, I'll actually give you an example. It was over a year ago. I think it was before Jet joined, but we were working with one of the teams here to look at some of the consumer names, probably a basket of like 45 tickers, and want to look at earnings sensitivity, basically operating leverage in the businesses where you would see with a working Excel model how much earnings or operating income would change with a given change in revenue, right? For a dollar, a 1% change in revenue, how much of that falls to the bottom line? Different companies have different levels of fixed structures. That ratio is going to differ. So without the benefit of Candace at the time, we were using Canalys.

• 1:19:09Speaker 04

  We downloaded these 45 models and basically manually had to go through and tinker with the inputs to make those revenue changes and then capture the earnings change and then manually copy paste that into another sheet and basically build this up. Probably took close to three days to do that. Since Jed came on board and we talked about this use case of running sensitivity, he built functionality into Candace via Python. Now we can basically throw a list of tickers in and get back earnings sensitivity to a 1% change in revenue. And that Jed runs in probably a couple of minutes.

• 1:19:47Speaker 05

  Yeah, it's slower than I like, but yes.

• 1:19:49Speaker 04

  Three days, right?

• 1:19:50Speaker 05

  And we're working on it.

• 1:19:51Speaker 04

  And there's no mistakes either. The manual process had plenty of mistakes and we had to go back and do it twice to make sure we got it right. That's just to me, a very, very clear example of the power.

• 1:20:02Patrick O'Shaughnessy?

  To hear the rest of our discussion on Candace, you can find the full interview at the end of my episode with Ricky Sandler. If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.