Roundtable: Where will Crypto go next? with Jan from very early Ventures, Felix from Greenfield and Ani from Dragonfly

0:00Welcome everyone to today's roundtable where we ask and hopefully answer the question, is crypto back? So to those of you who are not just trusted followers of the EUVC podcast, I am Andres, your moderator for today. And as always, I am incredibly thrilled to be here. And I promise you, the next 30 seconds monologue will be the only one from my side. But I just want to make sure that I set the context and share some notes on the format. So please do bear with me. When we decided to do this roundtable, we had two things in mind. First of all, at EUVC, we are investing into very early. with our LP syndicate for angels and operators.

0:39So the topic is very much on our mind. And secondly, we just recently had some buzz around the sector again after the time where the shadows of FTX, the fear of overregulation, etc. caused many to hesitate about the prospects of crypto and blockchain. But in fact, this is, at least in my perspective, the entirely wrong way to think about it. The dust has settled, the frothiness is gone, and the builders, the real builders, are heads down building meaningful things. So now is definitely a better time to invest than in 2021. But before we start, a couple of house rules and some notes on the format.

1:18Because of the crazy schedules of everyone and Annie being in the States and issues with some scammers on our LinkedIn lives, we decided to opt for pre-recording this session. And we're doing so in the evening of the 18th of January. But we are live in the chat, so please do feel free to ask questions there if you have any during this conversation, and then we'll answer them as well as we can there. And secondly, we will, of course, as always, put our key takeaways in an email for you all to read on EU.bc, as well as the recording of this. So do keep your eyes peeled for that. With that said, now let me just introduce our dear speakers for today.

2:02Let's start with my good friend, Jan. Jan is a GP at Very Early, renowned for his expertise in token design and close collaboration with founders just as any good VC. Felix is a partner at Greenfield, a sage in crypto economics, as many would say, governance and capital markets. And then we've got Annie Pai, partner at Dragonfly, known for his knack for identifying trends early and making bold contrarian bets. All of three of them have great experience in the crypto space. So I cannot wait to dive into this conversation. I don't think we could have assembled a better panel for a conversation about where we are today.

2:44So let's go directly into it. And Jan, I'll ask you first, would you give me your insights into your investment strategies in the world of crypto? Because as you all know, we are going to see three quite different strategies here today. Yeah, so very early ventures. We have our strategy has two major parts. The first part is investing early stage pre-seed and seed rounds directly on the VC side. And there with these founders, we work closely together in our areas of expertise. So my own background is in token design. And then the other two partners have backgrounds in Web3 product and data science.

3:29So in these areas, we help support them as good as we can to make sure they're successful. And then on the other hand, we have a strategy of operating directly in the public crypto markets. And that kind of two-pronged approach is very synergistic because the public markets view informs our help and support of the companies. and then our deep engagement in the trenches then also gives us insight for the public markets. So that's a quick summary. At Greenfield, we've been investing in port-ruals and decentralized networks since 2018, largely token deals. So those are usually in the beginning illiquid tokens that then become liquid much earlier than equity.

4:13But we also do some equity deals, long-term focused investment strategy. We position ourselves as a partner for the builders. So we also heavily support them in various different forms. Our venture fund is structured legally in Germany. It's the third fund, 135 million euros, one of the largest in Europe. So we do seed in series A and only occasionally pre-seed actually. So not at the very early stages as very early. And our investment team is in all major European crypto hubs, through Berlin, Lisbon, Paris, London. So we have our eyes and ears spread out on the ground. around. But yeah, as I said, like funding is not enough or also like Jan mentioned, like we were supporting portfolio projects.

4:56We have a bunch of functional experts in marketing, PR, legal, finance, tech team running infrastructure. So to support our projects, we are running validator nodes, for example. We do data analytics, data science, that team and also focusing on token economics, governance, business development and an investment team. We have three sub teams that are focusing on consumer, decentralized finance and infrastructure projects. So I think there are three ways that Dragonfly really stands out. I think the first way is that everyone in the team is like originally very technical. I think a lot of my colleagues were instrumental in some of the big tech companies or like startups, you know, namely Osiib kind of when he worked with biology at like earn.com and all that stuff.

5:45And everyone's had their like I guess own technical forays in the different fields in my case there's a lot of deep tech so I think that's like one way and it helped us avoid a lot of the calamities of the past few years I think the second way that we stand out is but we're probably the largest global crypto firm right now so we invest everywhere every geography so we have portfolio companies like spanning all the way from the US to Africa to Asia of course and we're not really playing in the early stage super early stage market so our minimum check size is a few million so we're not really doing pre-seed stuff.

6:16And I think there is kind of a surplus of capital probably in pre-seed. And I guess the third thing is we have been doing a lot more growth. And so when we invest in founders, I think they know at this point that we can kind of go all the way to the end. And if you remember in the last bear market, what happened is a few months after the bear market started, a lot of the TradFi firms were kind of selling their crypto positions. And I think in general, that turned a lot of people off kind of working with people that didn't really understand the space. And I think the same will be true for every nascent field.

6:46You're going to see it in AI, I'm sure, where the people that didn't really understand AI will be the first to sell their positions as they go mark to market. And I think, of course, that's happening in crypto right now. So I think those are the big three for us. Next natural question, because now we know how all of you think and see the work because of the funds you're investing out of. So Annie, I think it's natural to start with you for this question where I want to ask you about where do you see us being right now in the crypto market? Because you can then start providing us the late stage perspective.

7:21And then we can go to Felix and Yan that are looking at what's on the ground in the very early stages. Yeah, I think what's exciting for us is that growth in many ways is coming back. I think that there's a lot of room, especially in the kind of double sided war of growth and international crypto. And when I mean international, I'm kind of referring in the Western perspective of things that are like contra, like super Western crypto. Right. So we're seeing this market pickup in Asia, like all around Asian tigers. You're seeing just tons and tons of people kind of working in crypto again, which is very exciting in this pickup.

7:55You're seeing it in both India and the Middle East and Africa. And like, that's very exciting for us. And I think in large part, this is due to liquidity kind of coming back to markets. I mean, 2022, probably in absolute numbers, had one of the worst years of all time for TradFi folks, just because it's like the amount of M2 that was like pulled out was really absurd. And no one really could have predicted the amount of money that would leave the system. And now it's I think conditions are like starting to improve. We don't know how many rate cuts there will be, of course, this year. But I think in a lot of ways, it doesn't matter.

8:24I mean, crypto was always part and parcel of a larger macro trend. And I think the big kind of institutions and TradFi folks are starting to realize it's not like crazy internet money. Like Bitcoin itself is a macro technology because Bitcoin is actually stranded gas emissions. And so if you believe that it's this natural process that you're turning gas into money and, you know, Ethereum is going to turn electricity into money, then it's like anyone could trade this thing. Right. It's actually a very simple mental model to trade. And it's not like it was, you know, 15 years ago or in 2009, rather of like, oh, just this like really crazy alchemy that we don't understand.

9:02And so I think that's like finally rippling to markets and it's very exciting. Can I ask you, Arne, how do you see that? Because one thing is the macro perspective and looking at it as an analyst looking in, right? But how do you see it when you're talking to LPs on the ground, as an example, or seeing it with the companies that you're working with, seeing that there's traction in the companies where there's good fundamentals, we're also seeing them having traction. How do you see that? Yeah, I mean, so in the first part, I guess with LPs, I think so many of them were burned in the last few years that it's kind of what I was saying before.

9:39There's not a lot of top at like the very large scale crypto anymore. I mean, it was like a lot of the big players, probably the majority of the big players in the last cycle got wiped out. Right. And I think it's like finally time for new entrants in the market because it's like basically everyone that we thought was a bit shady got hit. Right. And like in the sort of main character exodus of crypto, it's like really who's left, right? I mean, there's like not that many kind of OG players remaining. And so I think that's a good, and that's what LPs have noticed too, right? I think a lot of them are like, okay, what really can happen at this point?

10:10You know, we've kind of gone through the worst. So many of the big names in crypto have like either been hit super badly, like Binance, or have just gone like completely bankrupt, right? And they're like not in the game anymore. And so I think it's like finally time for a fresh entrance. they're also excited by the amount of money that they think is like coming back in the ecosystem right i mean like if you just see nvidia i think that is like a good protector for a lot of crypto in the future it's like the amount of money that is like flown into tech again since the trough of 22 is a really good harbinger for the future right i mean like everyone talks about this like ai and crypto dichotomy then i think for us as a firm we believe it's like the same thing right i mean it's like of course we're not pivoting to ai but i think a lot of the core innovations and technology namely AI stuff pilfers down to crypto and I think that's good for all of us in this room right now right it's going to go and hit growth where people at the top get a lot more efficient and that's not just like the Elon Twitter thing right that's just like you know naturally the Schumpeterian creative destruction that goes on at large scale firms is really helping and then at the bottom level it's like you know I think many BCs have to contend with the fact that like you know what happens when it's three people that can start a billion dollar company right like how does venture itself transform when it's like I can give a few people like 500 to a mil and that turns into a billion.

11:22And you're seeing that in crypto all the time, right? It's like, you know, you don't really need that much money in crypto to get started outside of salaries. And then it's like, they can just go infinite. And I think venture itself is due for reckoning in that case. But with our companies, I think they're also excited by that, right? It's like, you know, crypto is both deflationary and inflationary. It's inflationary in a way that there's so much money in the space chasing so few deals, but it's deflationary in the fact that like you get operational leverage given so few fixed costs so few people can make you know something like uniswap or like you know they can make a brand new uh l1 right and the l1 trade is still alive and well where it's like you can put in a few uh tens of millions into an l1 and then it can go and like hit evaluation like optimism or something like that or like aptos and the rest and so i think that people are super excited by the fact that it's like technology was always about doing more with less and i think you don't see that any more than in crypto right now yeah i think I mean, we generally have to see like the current state of crypto in the context of the last few years and like the macro headwinds we have seen with like a lot of really bad events like Russia invading Ukraine, raid hikings.

12:27And I think like, you know, I mean, already mentioned like the bad actors getting flushed out. I think like in the public eyes, like crypto had like over those periods a pretty bad rap. But like in the end, like all of those players were basically combining the best, actually not the best, but the worst of both worlds of traditional finance and crypto basically unregulated centralized intermediaries. leverage was building up, fraud was building up and that had to implode at some point. And now that those are flushed out and those guys that overshadowed all the positive developments, yeah, the light can actually shine on the progress that we've made as an industry.

13:08That's kind of a good summary of the outside in and now inside out. Yeah, just as you mentioned, there's been so much happening. I mean, from new kind of whole ecosystems, differentiating and, you know, So we don't just have one ecosystem in crypto that's working right now. We have like dozens. And then it's blockchains have started to clearly scale, right, with layer twos, with other networks for data availability. We just can facilitate so much more or host so many more users at lower cost than was ever possible. So these, I think, are some of the most, you know, just fundamental changes that we've seen.

13:51And yeah, I think crypto has always done these cycles. And I think it's somewhat to be expected, you know, that after a big boom like 2021, there was going to come a bear market. And now I think we've seen the most of that. Yeah. And I guess to Jan's point, you know, that naturally leads to the question that I'm sure Andreas has on the tip of his tongue, which is like, you know, what's working in crypto. Right. And I think in many ways, it's like a lot of the deep end stuff is actually taking off because, you know, if you look at like the biggest companies in the world, a lot of them are both hardware and software companies, right?

14:23I mean, Apple is like, you know, a core piece of that. I mean, Tesla is kind of playing multiple levels of beta at the same time, right? It's like, you want to bet on AI, you can do that with Tesla, you want to bet on cars, and kind of cheaper operational processes with the gigafactory, you can do that. And I think, you know, as we're seeing like all this stuff in the deep in space, you know, I guess to people who don't know, it's like a decentralized physical infrastructure with things like Helium. We have a company called Andrina that's kind of doing that with Wi-Fi. You have decentralized CDNs and all those things.

14:52And these things are seeing rapid growth. That's stuff normal people can use. You don't need to be a PhD in computer science to pick up a Helium node and get started or to use Render or Akash and get access to cheaper GPU stuff. That's something that anyone with an internet connection can do. So I think that's one of the biggest ways that I fight back against the naysayers of like, okay, you have Bitcoin, you have Ethereum, but then what else? I mean, are we all going to be on Farcaster? Maybe. I mean, that possibly right but like you know we don't need to wait for like web3 social to work and like to fit all these other mental models for us to like actually see crypto on the ground and you have stables and you have all these other uh kind of core innovations yeah i mean as those like deep in networks um you mentioned akash like and uh distant rest compute networks i think a bunch of people let's say the tourists of the space have shifted from crypto to ai like as the new hype wave came up and uh and a bunch of people like discussing you know is it crypto is it ai what's what's the what which channel has the biggest potential and i think it's it's definitely not either or we that's a like those those deep networks are a great example where basically with crypto protocols we can source uh computing power which is getting the super scarce resource in in the age of uh machine learning that is basically extremely hungry for for compute and basically leverage crypto technologies to satisfy that demand.

16:15And so I guess as the hype cycles play out, people I guess are shifting for onto next, but those are the tourists. And I think the ones who stick around, in the end, will reach the results. I wanted to highlight some of the simpler, more kind of pedestrian, but nevertheless very important things that have changed. Again, Ethereum already like not just is it scaling now with uh layer twos but we've also had uh the merge in 2022 you know it seems like forever ago but like that was actually quite a big shift of like proof of stake as a consensus mechanism like working on the second largest network and by the way doing that swap while kind of the engine was running so to say that was a hugely um impressive technical feed.

17:04And now I think Ether and Ether staking yield as a kind of internet bond, like that's a very attractive value proposition to a large set of market participants. And equally, the ETFs for Bitcoin having launched, I think that too will just make it accessible for such a large audience that previously just couldn't participate, whether certain institutionals or investment advisors and so on. And then maybe lastly, stable coins. I think, Ani, you mentioned it briefly. Yeah, it sounds trivial. Okay, we can have dollars on the blockchain. So what? But hey, I mean, we can send around US dollars to anywhere in the world within minutes, if not seconds.

17:46And, you know, much cheaper than any bank could service that. And that's, I think, right now, one of the most used crypto applications, ironically, are dollars on chain. And that's In many countries, this is making a big change in people's day-to-day lives. Definitely. I think that stablecoin volume in 2022 already has reached visa scale. Like nearly$10 trillion of value have been settled via stablecoins. And a lot of it in emerging markets and markets that are craving dollars and cannot access dollars usually. And if there is a more stable alternative to the dollar, I guess that would be even better.

18:27But so far, that's, I guess, the best they can access and to access also some more investment options, I guess, through on-chain solutions. But I think digging into that, I think, you know, so I came back from Africa somewhat recently. I think one of the interesting things that we're in an inflection point with stable coins is that we're finally getting away, I think, from the Tether circle duopoly. And, you know, Tether's been just around like forever, right? And I think anyone that's been in crypto has just seen the tether, truer debate of like, you know, do they actually have the funds? Do they not?

19:00I think finally we're at a point in the market where it's like there's so many new entrants that are, like to Jan's point, capitalizing on this internet yield that they can like pass it back to consumers and like finally trying to get rid of this duopoly. Because like, you know, I think the future of money itself is not just going to be like this kind of post-World War II remnant of everyone's like using the dollar. Right. I mean, of course, like people have staples right now. they're pegged to the dollar but like in a hundred years do people really think that's still going to be the case i mean maybe right i mean it's possible but like you know i believe in entropy and i think a lot of other people do too right i mean like centralized control especially with currency is not really a thing and so hopefully yeah the decentralized stable is i think fun to make a comeback and like it's actually a lot more it should be hopefully a lot more interesting than just like putting your money into a money market fund and just like hoping right like coping i I guess.

19:47That's true. Yeah. And I agree with your sentiment in the long run, but in the short run, you know, just getting these, you know, treasury bill yields into actually passing them on, because that's Tether's business model, right? Is they pocket the money market fund yields and then, you know, stable coin holders just don't get anything of it. So I think while I agree with you in the long run, I think in the short run, it's nice to get these yields on chains. You know, It's like it's an interesting step, I think. Crypto is one of those things where it seems like there's very quickly politics involved and even geopolitics when you're talking about currencies and whether we're going to have a duopoly or we're going to be all be using the dollar or what are we going to be using in the future?

20:36That's not just a matter of which social media we're going to use. Could you all shed a bit more light on where crypto is in terms of, let's call it policy and government and so on on a grander scale? And where are the different main powers moving? I mean, we believe that Europe is actually pretty well positioned here with going forward with Mika regulation. It's not perfect, but I think it's a step in the right direction that we have harmonized regulation across the euro block. And I think that's one of the big topics that's holding back, especially institutions. It's regulatory uncertainty and risk that prevents them from building on specifically on public blockchains.

21:26And I think once that is being cleared up and there is more certainty around that, a lot more players will move into the industry. And yeah, I think it's a better approach than the regulation by enforcement that the U.S. has driven. I mean, there are a bunch of like, I think other good examples or like kind of very pro jurisdictions. Singapore with like a regulatory sandbox. Project Guardian is pretty interesting. They're building basically interoperability across a bunch of different private chains for rebalancing of portfolios with rebut assets. Dubai is pretty forward-looking. And I guess, Jan, you can probably also speak towards Switzerland.

22:10Yeah, I mean, Switzerland has been like an early mover in terms of regulation. And that's why a lot of the foundations have set up a shop in Switzerland. And yeah, but I think on the grand scheme of things, like there's, yes, there's the EU, the US and so on. But I think what's important for crypto as an industry is to just, you know, like for parts of it, to be able to choose to comply with whatever jurisdiction they want to be active in. And I think that is one of the remaining challenges. But we're seeing some progress. Like, for example, one of our recent investments, Ethos, they provide a framework for any DeFi app or really any smart contract, kind of have a firewall around themselves and then choose what policies they want to follow.

23:01For example, they could decide, okay, we want to follow the OFAC regulations around money laundering and not including any assets that have gone through privacy mixers, for instance. And then just that fund sent to the smart contract will kind of get sent back. And only the funds that don't fall under any of these blacklists, they can use the applications. And what I like about that paradigm is that it's kind of, you know, you're instead of everybody having to KYC and like register and send in your passport and so on, it flips it around and looks for, OK, who is not complying and then those people don't get to use it.

23:46So it kind of keeps some of crypto's original ethos while also complying with regulations around the world, really. You know, one of the big topics politically right now is demographics, right? Like demographics across the world, not just in the West, all look terrible. America at one point, you know, I think America has had the kind of greatest effect here. Like millennials were super young and that helped America way back when. But now it's like everywhere you look, demographics are terrible, right? I think countries, if I was a policy leader, I'd be looking at the twin plinths of like, so you have crypto, which makes moving capital super efficient, which never existed before.

24:24At the same time that I, as a policy leader, am reckoning with the fact that my country in 50 years is either extinct or looks enormously different than it does today. I mean, South Korea is one portion of that. There's so many others. Japan is now considering immigration in a way that they haven't done before. So I think countries itself have to use regulatory kind of arbitrage to get the dwindling numbers of people into their country before like all of this kind of hits the fan. Right. And if crypto makes moving money super easy and capital now is very cheap across the world, then it's like, what do you do?

24:59Right. So I think they either have to submit to crypto super easily and be one of the few jurisdictions right now that really supports Bitcoin and the rest of the ecosystem, or they just watch as they experience unprecedented levels of capital flight over the next few decades. Well, it's also because if they don't, you have to raise taxes, right? So it's like, what's going to happen? You're going to raise the tax rate, taxes 15 % a year to pay off the debt. That just didn't make sense in our political cycle, right? No one wants taxes. interest rates will have been going down for the past 50 years, right?

25:30So like the longer term trend of interest rates has been this like downward shift. You know, you have blips here and there in like the 70s and stuff and like recently, but like that's not the long term trend, right? So it's like either I just let people move their money and be the best jurisdiction and these countries all fight, these 195 countries all fight, or it's like toast, right? I want to flip from this topic of policy and geopolitics and so on into other kind of main issues or main obstacles, main challenges in crypto. What are we looking at? What are the things that you're saying this is on the list for us to get nailed to really get crypto to get to the next level?

26:10Years ago, we kind of had this thesis that, you know, blockchains are, to Andreas's previous point, kind of like cities. And cities itself, you know, they're ones that kind of best thought as cities in the hub and spoke model of like you might be on this chain, but then you can kind of move liquidity and human capital kind of around the ecosystem. And the four things that you need to kind of make that happen, I think, are privacy, security, usability, and scalability. And I think scalability is finally solved. I think, you know, the usage of L2 is like to Jan's point has been growing nonstop, but then also in other chains.

26:44Right. I mean, I think that's been great. Privacy, I think you might see with ZK somewhat soon. But I mean, people have been saying that for the past few years, but I think it's like kind of getting there. you know as it pertains to the rest um usability i think is like getting better with 6651 and like account abstraction i think hopefully that helps but uh i think really it's just like you have to make a killer product and i think the killer product is like probably staples right like i think staples itself is going to be the thing that brings people from like the abject gutters into uh the forefront and so hopefully with all these things like scalability and staple coins i think is like a very dangerous way to weaponize crypto against like all these people that don't believe in it yeah and then i think just to um unpack some of the things uh other things you mentioned um privacy uh on one hand right is still i think we now have the technology so like uh zero knowledge proofs and all these new cryptographic primitives that have been developed over the past years like they should give us the tools to finally you know solve some of that um uh you know for for regular users because right now it is still the case to just to make that clear that if I now send Andrea some Bitcoin or even USDC, you know, like somebody, Andrea's, can now look at all my financial transactions that I've done, like basically on-chain, whatever, what I've invested in, what I've used.

28:05So that is not necessarily what will work for end users or especially if we want like corporations to pay and use blockchains for payments so i think like solving privacy is one of the uh remaining challenges and then also one of the opportunities in turn um and similarly with um the things you mentioned any around the account abstraction and so on just getting away from this hurdle of you know needing to secure your seed phrase and and private key i think that is just so difficult for most users as an entry barrier it might might seem like okay we're all used to it by now but for most people that is really weird and and it's like uh being able to you know like use i don't know like google or apple to log in while still having custody of their own assets i think that is a a big uh unlock i think that will help bring in the next wave of users yeah i agree with those points actually for privacy specifically i think individual users unfortunately most don't care so much but businesses definitely care.