Crypto Spring Is Here: A 2023 Macro/Crypto Outlook w/ Kevin Kelly

26:41There's, I think, still some questions around when you fractionalize, let's say, an APE, right? Or even a PUNK. APEs is probably more applicable here, just given the other utility or ways in which you can use it. There's still questions, I think, around, you know, at the end of the day, who owns that, right? Or like if it comes to, you know, some type of voting for an NFT, a high price NFT, and you have a thousand people that own fractional shares of it, is there a way in which you basically just aggregate what the, almost like proxy building, you aggregate what the general sentiment is of all the owners, And then that gets pushed forward as the single vote from an ownership perspective.

27:18So there's still questions, I think, around that. But in terms of exposure, yeah, there's platforms that are now fractionalizing NFTs and even starting to allow you to borrow and lend against your NFT holdings. I think it's interesting because both of us are really focused on this kind of mass consumer adoption part. That's where I think the next phase is. You heard it from the CEO of Microsoft saying it will have its AI moment at some point. What is it going to be? Well, we'll come on to DeFi on a sec, but the financial system is slow to adopt it. They're testing it, but at scale to get the NASDAQ to adopt it for security and stuff like that takes a long time.

27:59So it feels that retail brands and that part is where the next really big phase is. I think you agree with that as well. That's probably where, because for this whole space to grow, we have to go from 300 million users to a billion users this time around or more. And that's going to come from something else that is at scale. And we've seen, you know, you and I have been involved with this stuff like Ticketmaster that I've talked about a lot. And, you know, we're seeing people use this. We've just seen California talk about putting car registration documents on Tezos. It's like, okay, that's kind of interesting as well.

28:34Two things. One, I forgot to ask this before, is I feel like Bitcoin's lost its narrative. Bitcoin, I think, is, I'll probably get blasted for this, it's the least exciting thing to me in crypto. And some people say that's the point of it. I get that too. I think especially with the ETH merge and now ETH's economics changing and altering, I think it definitely took away some luster from the Bitcoin crowd around digital scarcity and an actual hard cap. Now, again, it's not as if there's a hard cap on ETH. There are fluid dynamics there. One of the things I've, over time, kind of grown to realize is, while again, Bitcoin is absolutely instrumental in everything we're talking about today, wouldn't be here without it.

29:24But having a digitally scarce, hard capped asset, in order for that to become this true kind of peer-to-peer, decentralized type of money network over time, or even be used as a reserve currency that I think people are still kind of holding on to, you have to have – there has to be some type of, at least in my opinion, flexibility around supply, right? Because if not, this asset will always be exposed to excess volatility that will make it very difficult to eventually be some type of more kind of stable, true store of value that people would want to engage or interact with. Right. And we've joked about the Starbucks example for years now in terms of like, I wouldn't pay for, you know, cappuccino with Bitcoin.

30:15But I think, again, it has its purpose, I think, as a potentially as a store of value long term, like from an investment side. But the peer-to-peer kind of, you know, digital cash narrative that it was, you know, one of the reasons it was originally founded or founded upon. To me, it just it has lost some of its some of its luster. RAOUL PAL Yeah. And if we think about how things are valued in terms of Metcalfe's law, and this is valuation, not the philosophy of Bitcoin, you need the number of people using the network and the connections. And there's no connections on Bitcoin. Yes, we've got the lightning layer that batches transactions, but there's nothing else being built on it in the same way.

30:54So by definition, it can't do as well. The other thing is that But if you're an asset allocator, and given the choice of ETH versus Bitcoin, and the green narrative stuff, you're always going to take ETH because it yields. You get 5 % real yield after supply, and you've got the access, you're betting on the technology being adopted. Why would you not? So yeah, I just feel like Bitcoin's floundering. And it's actually going narrower in its focus. And somebody was joking, I can't remember who it was, was joking, you now need to only eat meat, only take cold showers in the morning. You have to be this austere.

31:40You only read Seneca every day to fixate, or Marcus Aurelius to fixate on how terrible life should be. You should be wearing a hair shirt. You never spend any money. You just stack sats. And it's like, that's not a very big audience. No, and especially when the long-term security, right, of that model really depends on a much wider audience coming in and actually using it, right? Because eventually that becomes much more kind of fee-based in terms of what your security depends on, right? And again, that gets into more of the kind of, let's say, technical aspects that maybe isn't a problem, certainly not in the next 12 months, maybe not in the next five or 10 years.

32:20But it is something that people have started to even question within this last cycle around. If you look at just the amount of fees that Bitcoin brings in versus something like ETH, right? Putting the proof of stake change to the side, it just isn't, it's just not nearly as exciting. And it's not as, I just don't think it's as useful. There's not enough, you know, there that's being built on top of it or eventually be built on top of it. Sure, maybe central banks and sovereign wealth funds want to hold it in their balance sheet because it has no claim against it like gold. But that's not mass adoption.

32:55So yeah. I mean, to the point of them going more narrow, you had the announcement, I think it was earlier this week, right around Bitcoin NFTs, right? And you saw immediately this huge rift between two camps of one saying, we're adding too much to this, right? The beauty is in Bitcoin simplicity, and that's what it should always stay as. And they have others on their side saying, well, if this actually potentially increases the demand for block space within Bitcoin and then that could increase the amount of fees it brings in, like people are trying to start to see if that helps to maybe have it catch up with something like ETH because the fees eventually will become really important.

33:36It was just really interesting to see like that bifurcation almost immediately between the two camps. And the network protectors have generally won out in Bitcoin's case all the time. So the people who don't want change have generally won out. And again, maybe in the long game, that works. But in the next phase, I just don't see it working as well. I just don't think it's going to attract your uncle to invest in Bitcoin next time around. He'll end up probably buying or getting an NFT, which is attached to ETH, without even knowing about that he's got ether exposure. It's going to be very interesting.

34:14The other thing that I think we've skirted around is you said something very interesting that I think is dead right is you usually get an innovation bubble. Then you get all the failures and stuff doesn't work. But out of that comes the learning and the next phase. And I feel that DeFi, given what happened to the centralized exchanges, and listening to Joey Krug at Pantera, who's like, this is the big theme for us. I think it makes sense. I don't even know where or what. Sure, you can own Uniswap and Aave or whatever. DXDY is another one that people are looking at. But it feels that there's a lot of innovation to come out of DeFi, because people have been building, resolving issues, figuring out what goes wrong, what goes right.

35:00Thoughts? Yeah, no, I agree. I think in this cycle, I think there will actually be more of an appreciation for some of those, if you want to call them blue chips, right? I mean, I know that's a bit of a loaded term within this space, but the Uniswaps, the Aves of the world that held up extremely well, right, when they were tested. And we almost take for granted at this point how well they do work, right? Right. So I think on one side, you know, again, having exposure there, I certainly think they'll benefit, especially if we get to a point where. Institutions, we'll call it more professional investors are coming into the space, they're leveraging or relying on valuation frameworks to justify or figure out where they're allocating.

35:44Right. On the on an individual asset level, Uniswap itself. Right. And DYDX is actually another, I think, great example of one that potentially has even more potential. So those are actually generating like real fees, right? There's real actual like, you know, network activity happening on those applications. So that I think they certainly have going for them. Options, a centralized option is something that, you know, our team has been focused on for probably the last 12 to 18 months. It's still very early stages, but it's necessary infrastructure, especially when you have more of those type of those investor types coming in and they want to be able to, you know, efficiently hedge positions and run different strategies.

36:24What I do think is important, though, and this kind of ties a couple of themes we've been talking about together is we don't get to the next 100 million new entrants within Web3 by just trading DeFi tokens on other DeFi protocols. And so that's where I think, again, you have this merging of themes around And NFTs seem like they're kind of out here on their own island. But if you're able to now fractionalize those, let's say you have a fungible token component to that, or there's hybrid models that arise where you've got NFTs that serve as more kind of membership, loyalty, even being used to as personal kind of identifiers.

37:05And then you've got layered fungible tokens on top to tokenize communities. Point being, the more of that we have, the more we increase, I think, the surface area for new entrants to come in, in which case you're now trading, and DeFi benefits from this immensely, you now have more assets or more different diverse types of assets to trade across these different DeFi protocols. And it's similar, if you want to draw the parallel to just traditional markets, it's not as if we only have access to financial and banking stocks within the S &P. You have a whole litany of different sectors and industries.

37:40That's made me think of something. I've never looked at this is percentage DeFi of the overall market and where it should be. Because yes, the modern system in traditional finance, actually, the finance system actually became larger than the economy. And it still is to the day. But that's an interesting dynamic to look at. Because I think, as you say, right now, particularly with the experience in DeFi and how difficult some of these things are still, that you can tell whether it's overshot because it shouldn't grow massively as a percent the space needs to grow first, and then the opportunity to use DeFi once you've created stuff.

38:21So you can see it with ETH and ETH staking, which is why Lido and other stuff has done well, is that became something that there was enough people holding ETH, and therefore, there was demand for this. But until we get to that, we probably don't, DeFi can't massively outperform the market. RAOUL PAL, JR.: Right. And yeah, today's market, I mean, you're definitely, I guess, over-indexed towards infrastructure, right? So really like L1s and DeFi, right? But again, that's not entirely bad. And that probably actually is the way in which, if we think about, again, order of operations of how these markets progress, we needed that infrastructure to be built for us to be able to actually - You need the foundation.

39:02You need the foundation. Exactly, right? You need the base layer networks for all these applications to be able to run on. And you need the DeFi infrastructure to be able to trade, borrow, lend, and use these. RAOUL PAL, Ph.D.: Something I've been mulling over is, do you think this is the last wave of layer ones, this next lot that come, the SUI and a few others? And is that the end of it? I mean, there's a marginal return, unless somebody's got a total step change in transaction speed security and all of these things combined, it feels like that game has played out because of layer twos and other abilities to change stuff.

39:42Is this the last of the layer one cycle? Then that's probably the entrance that we've got, and that's it. It then goes to layer twos plus applications layer like NFTs and other stuff and default. RAOUL PAL Yeah, I think it's a really good question. I think because of the inherent network effects that come with layer ones, especially the base layer level, the argument there is for the first movers or early movers to wind up securing their position and potentially even dominating going forward. Even though that may be suboptimal as well. Right. It makes the barrier entry a lot higher, certainly, to compete head to head.

40:23I think you're going to see this divergence. This is something our team ops who tracks pretty closely and is built out a thesis around. We go back to Cosmos. I think the rise of app chains is really interesting because they're not necessarily their own separate L1s or Layer 1s. Right. But they do allow you to create, you know, your own kind of custom chain in a sense. Right. Or build your applications on top of customized base layer infrastructure. Right. That, again, do you idea we saw this have a do you idea X where they move, you know, plan to move over and use the Cosmos SDK for the next version of do you X because of, you know, some of the inherent limitations with other solutions.

41:11Right. So a world in which to try more directly answer your question, that could be, you know, a bull case for the Cosmos ecosystem going forward. But it's not as if, you know, it's the last wave of L1s. It's just more fragmented app chains, right, that are built for more custom uses that are tied together within, let's say, one L1 ecosystem. done. Yeah, I just think that layer one hype cycle, I think it's really hard, particularly by the next phase of whatever the size ETH is at that point, and where Solana is, and some of these other very active chains, is how the hell you as a brand or somebody who's using an application on top of Web3, how are you going to say, oh, you know what, I'm going to choose some random small chain?

42:08When we still haven't abstracted away the wallets and everything else to make it easy, you're just not going to take the risk. So even if there's things like within Cosmos, like interchain security, right, where you're able to help smaller, let's say, app chains like bootstrap security, right? So you don't have to launch necessarily your own native token that serves as your economic security. You can actually bootstrap that through the network itself. That, again, I think is a pretty big improvement and a pretty big selling point for the examples you're using. Those who want to be able to benefit from the customization side of, let's say, an app chain, but also don't want to have to worry about building up the security side of it, too.

42:55because again, there's obviously trade-offs to that in other ecosystems. And if you think about the L1 hype wave, a lot of these were already in, let's say, production were being built leading up to that. Some of them weren't, but that also stemmed from a problem that people were trying to find a solution for, which was congestion on ETH and on Ethereum, where you had gas prices that were through, especially in the NFT wave, is that really ramped up. You had insane kind of gas wars between and at random times, you try to make it like a DeFi transaction, you'd be like, why the hell is this$2 ,000?

43:32And Gary Vee's just done a drop. Right. And you have to almost plan trades around other things that are happening within the ecosystem, this concept of a monolithic chain, because all activity is funneled there. And so, out of that congestion rose some of these other L1 solutions that I think really that event or that trend accelerated the L1 narrative, which again, you could put into this historic kind of innovation trigger hype cycle that we've seen across the space the entire time. And through that lens, I really do think, and it might be misguided, but I really do think this focus on bringing more mainstream in and that focus being on brands, organizations, companies, I mean, artists create like that whole side of things that is more the traditional world, especially creative industries, bringing those in, because that's the next wave of new entrants to come in.

44:32Because I think NFTs are going to be the gateway for most new Web3 entrants. That could very well, you know, be what sparks the next wave of this, right? The next push higher. Because again, a lot of the pieces within the crypto economy or the crypto ecosystem benefit it if that vision comes to fruition. There's just a lot more activity going on in the network, and there's a lot more service area for new people to come in. Let's turn it 180 degrees now and talk about what are the risks? Both of us, you're more cautious than I am shorter term. Long term, we're both frothing at the mouth balls. I'm more bullish right now.

45:15What gets us wrong this year? What is your biggest fear where you think, fuck? I think for me, one of them is the ripple case. Because we just don't know how it's going to get ruled. And I don't think it's not ruling on ETH or anything else, but the market may fear are getting deplatformed. I think that could be something that could cause quite a hurdle here. I think all the leverage and most of the big level scamming and all of that concentration risk is gone. Obviously, Binance is always a risk because it's such a large part of the market and lawsuits against Binance, but I'm actually very bullish on Coinbase because of this.

45:57It's a fantastic position for Coinbase to be in. Yeah. So and then macro wise, I don't really see a macro risk in terms of inflation coming back yet. Yeah, sure, we can talk about that in 2024. What risk do you see where people need to keep an eye out for something? Yeah. Or is there anything they should be focused on to say, this feels a bit, I don't really like this, this could be a problem? Yeah, I think the biggest risk this year is access to funding for the crypto space. And what I mean by that is there are a lot of projects, a lot of companies, a lot of teams that raise back 2021, 2020, beginning, let's say, of 2022, and even well into 2022.

46:43too. Public markets started to fall. Private valuations remain, as they typically do, remain pretty high and started to certainly catch up to where the public market is now trading. But those are still relatively high. The scrutiny around projects and deal flow has certainly increased, where the power has shifted away from. In 2021, you're banging at the door trying to get into these kind of top deals, and even just about every one of them was oversubscribed. now the benefit is the quality deal flow is certainly a lot higher in terms of you know venture bets that you want to be making but there were a lot of products and teams that raised back in let's say 2021 that are probably coming up middle of 2023 back half of 2023 are going to be coming back to market for new funding and depending on whether or not condition funding conditions improve, I think that's going to be a pretty big risk because at the end of the day, it takes money, it takes capital to build a lot of these things we're talking about, right?

47:47And to continue to push this space forward. And especially when you're talking about developer talent, that's expensive talent. I think there's going to be a lot of teams that run into liquidity and potentially even insolvency issues because they just don't have access to that. That funding, those funding conditions are not nearly as favorable as they were 18 months ago. No, and the hot VC money has definitely gone to AI. So we're seeing a ton of activity of people building new stuff. And if there's anywhere that's getting allocated capital, it's that. Well, it was Web3 last time around. So I think it holds back the capital in the space, which is also good because the strong survive as well.

48:28And people focus more on the structural business model as opposed to the, listen, this is a binary option. Let's give it a go, see if it works or not. So I think it might be a more intelligent stewardship of capital, but it's going to hold the space back because you get less innovation as well. So there's a trade-off between innovation and business models. Exactly, right? Silver lining is all these things we've talked about in terms of, some people may say it's not something we should be focused on because maybe we're not there yet, or we still have scalability, things that we're trying to solve for.

49:03The mainstream crowd, like what makes crypto and web three interesting and kind of cool is that it is a bit behind the curtain, right? It's a bit of a, it is a bit of an insider's game today. And, but that being said, if you're able to create these experiences and increase that service area for new entrants to come in, well, that comes in with capital, right? That's another way in which you can have capital come into this space that isn't wholly dependent on, you know, this way of institutions that everyone's talked about for years now, or even just, you know, pot dc money coming in and funding you know a lot of these early stage product teams or even later stage growth teams right that have really scaled up they've got actual businesses and they they're they're just running headcount or uh overhead that's way too high that access to funding like that's a very critical source of liquidity for the crypto economy right now and that i think i think conditions will still be even if we see markets like turn around I still think they're not going to be nearly as favorable as they were when most teams raised 18 months ago, 24 months ago.

50:10No, and that would give me so we had we talked about one. Upside scenario where the rally just kind of forces everybody in and we've got, you know, the lesser ETH supply, et cetera, et cetera. And somebody comes up with a bit more of a killer app. There's the base case that you and I talked about, which is, you know, we bottomed between June and October, depending which thing you're looking at. We rise up and then we correct. And then there's another scenario, which I think what you're saying expresses, which is we actually don't rise as much. And we just we kind of. Because there's no new adoption, it just kind of stabilizes and slops around for a year.

50:52That's the other possibility here. It's not easy. I'm still - And that's why I think this year is that more of like a year of accumulation, right? And you have these kind of choppy volatile periods and potential phases. That all sets up for what's to come. But if 2022 is a great reset, 2023 is a great accumulation. What happens if it just goes straight up? This is the thing I can't get my head around. And I know I'm not trying to sound crazy bullish. I always try and think about all these different outcomes, right? I don't really care if it goes sideways. I don't really care if it goes up and corrects.

51:28But I think everybody's going to fucking care. Much like we're seeing in equities right now, is everybody's going to care if it just doesn't pull back. Because nobody, I mean, that's a huge problem for everybody. Yeah, 100%. Because everybody's not exposed. And if it's pretty much up and to the right, right, for the rest of the year, again, it operates on a bit of a lag. But that's when you really start to see interest come in. That's where you see more VC money come in, more institutions FOMO in. That's what really sparks or is the catalyst that pushes people over the edge, where they're not just sitting and waiting and evaluating and observing what's going on.

52:05They have to become active participants. I think, yeah, if we see up into the right for the first half of the year, that risk of access to funding and liquidity within the crypto ecosystem certainly becomes less of a risk in that scenario. Well, because a lot of people in the ecosystem, like Delphi, it's the tokens that they sit on that create the capital to be able to reinvest. So the space goes up, the more capital people have, and the more they can be able to do stuff. So, you know, because a lot of it comes from the space itself. Yeah, no, definitely. The flip side to that, too, is there's also, I think, a pretty sizable amount of protocols and project teams that, again, you raised funding back in 2021.

52:52Now you're starting to see unlock schedules, right, in terms of actual tokens come to market for the rest of this year, overhead supply, right? So there's a number of different factors here that I think, again, it really clouds up exactly what's going to happen in 2023. But the important thing is if the short term is still murky, I think what's become clear is the long term, like the end game hasn't changed. It's just a matter of timeline. Yeah, and we just don't know the path. That's why I just don't trade it at all. I just accumulate, hold it and don't do anything because I hate the fear of fucking that up.

53:29And I've done that. I've done it in the past where I sold Bitcoin at 2 ,000 on the way up. It went to 20 ,000, came down. I felt really good. I re-bought it in that amazing pullback in 2020. I felt like a god, straight into that hole. I bought it. Then I look back and thought, why the fuck did I sell out at 2 ,000 and then buy it back at 6 ,500? It's like, if I just held on to it, so I just keep out of its way and just observe it. but you know i just play for the long game i think it's easier yeah no and definitely uh helps you sleep better at night that's well you're in stable so this makes me laugh because it goes up you're going to be squealing you won't be able to sleep at night yeah and that's where the position i sit in now right watching this market for the last and i again started waiting in earlier this year i was like oh this is great and then i was like right now i'm sitting here going should it should have done more right i should just should just been irresponsibly long the whole time and just not even dealt with any of it.

54:30That's all I did. Kevin, great conversation. Look forward to doing these much more often for the pro-crypto crowd, because I think people hopefully get a lot out of it. We'll get some questions. We'll get some cadence of what people want to hear from us. And we can talk about all sorts of shit. You and I can talk for hours anyway, so it's pretty easy.

54:52I love the framework where we talk to Kevin and we spin through at a top-down macro level, where we think the opportunity sets are. And his philosophy is very much aligned with mine, where we think that the kind of web three angle is going to be the big unlock for this next cycle. It was also good to dig in with Kevin and learn, you know, he's more risk averse than I am right now. And it's always good to hear somebody's angle. And also thinking through some of the risks to what could happen, what could go wrong, because it's a really important conversation too. And I think that I enjoy doing these so much that I think Kevin and I are going to do more of these on Real Vision Pro Crypto, where we'll start really digging into some of these topics, catching up and getting people more understanding of the broader narrative, and then trying to dig in to some of the things he's talking about.

55:41I have no fucking idea about Cosmos, what it does or how it works, but I want to find out now if Kevin's interested, I'm interested. Anyway, hopefully you come with us on the journey. What's up, revolutionaries? Thanks for tuning in. For more content like this, head over to realvision.com and get unfiltered access to the very best, brightest, and biggest names in finance.