Investing in the Future ft. Multicoin's Tushar Jain

30:16And they usually say no. And so I'm like, okay, well, you can't do it systematically and you can't do it discretionarily. So why are you doing it? And the reason why a lot of people do it is they want to dampen volatility. They think that, you know, that is a good in and of itself, which is fair, right? Like I can hear people have different preferences, but if you're worried about damping volatility, I think just lower your bet size is actually a much cleaner way to express that. Because when you try to trade beta, the worst thing that can happen to you is you get whipsawed, where you're like, oh, this is up, you know, 3x.

30:55I think it's fantastic. I'm going to sell. You sell it. It goes up another 10x from there. And you're like, oh my God, I'm missing out. I need to be back in. You buy back in. And that was the top. And that is such a common market pattern for people who try to time tops and bottoms that, you know, I suffered that pain and I was like, I'm never doing that again. I don't want to feel that pain again. So the way that I think about it is, you know, our objective is to outperform across market cycles, not within a market cycle. And whenever we have an investor, like I think of it as, you know, we'll put the money into Bitcoin and then we are underwriting other investments in Bitcoin terms from there.

31:42So that's what we think of as the bellwether that we want to outperform. And if we want to buy something, we have to think it's going to do better than Bitcoin over some time horizon. And then when will we exit it? We'll exit when it's either three things, one of three things has happened. Either one, the thesis has fully played out. or two, the market has gotten irrational and now overvalues it or three, we like something else better. And so this still might have a lot of potential, but this new thing just came across and I love it so much, I want to put more capital in that direction. So those are three reasons why we would sell.

32:22How I thought of the space and one of the reasons I set up XPAM was I just put it really simple terms. The space today is$2 trillion. I think it's going to$100 trillion. That's just the extrapolation of the market cap or the log regression channel of the price of Bitcoin. You can kind of back it out in a number of different ways. And maybe I'm an idiot wrong by 50%. It goes to$50 trillion. By 2032, 2034, something like that. And so the job, therefore, is to ride that trend. It's not because one thing that people don't understand is it will not be a$50 trillion Bitcoin world. Bitcoin might be 10 trillion.

33:02Well, there's going to be 40 or 90 trillion of value created somewhere else. And that's what hedge funds can do because that's a hard job. You need to be super focused to think where is the really big value accrual like you did with Solana. Classic example is you see something really early stage and the value accrual has been vast from that and it's not over. And that's what I think the bigger opportunity. If people zoom out, stop worrying about the cycles as much and just think, how do I capture that trend? Because I think that is the largest, fastest accumulation of wealth in all human history if that plays out.

33:40100 % agreed. And I agree with your ratios as well, because the analogy I would draw is let's look at traditional markets. Gold is what percentage of total wealth, right? It's a small minority of total wealth. Actually, most global wealth is in global equities and real estate and other real productive assets. Yes, we do need financial assets in order to make the economy function. But financial assets should always be a minority compared to actual productive assets. And to me, you know, Bitcoin is going to be enormously valuable, is already enormously valuable. I think it's going to be far more valuable than it is today.

34:24But to me, that is a financial asset. Bitcoin is not a productive asset. You can't do stuff with it. It doesn't generate cash flows. It doesn't have a business model behind it. It's just an asset. Whereas when I look at something like a Solana or a Helium or some of these other projects in which we're investors, these are productive assets. They are businesses that deliver a product that consumers are willing to pay for. And they're just a new way of building that business. It's not an LLC somewhere. and I think that that's going to be a much bigger part of total market cap looking a decade out than the non-productive assets yeah I kind of think if we're building a parallel financial system is probably too small of an expression for what we're building but the let's call it the future of the internet the future of money and value and all of that then it cannot be that the collateral of the system is is the most valuable thing it might be valuable in terms of you need it, but it can't be valued more than the system.

35:26If not, you don't have a system. You, in fact, probably have the apocalypse. And so it's kind of, there's a health ratio here where you need, as you say, these productive assets to be worth significantly more than the collateral of a system. If not, just nothing works. So how do you, when you look at the space now, what is interesting to you from like a core holdings perspective, you know, where your view is on ETH versus Solana and some of that, and then we'll get into what excites you for the future. But, you know, if you're looking across the broad three, four, five, six assets, whatever, however you want to measure it, what do you think?

36:06How should we think about those? Because narratives keep shifting, as you know, they're not necessarily accurate either. So let's start with the ETH sole question first, and then we'll get into some of the subsequent questions. I think that Solana is gradually flipping ETH on every metric that matters. You know, we're seeing that this year, you know, metric after metric, total transaction fees, total, you know, trading volume, active users, like all of these things we're seeing flipping, maybe not, you know, holding the number one position, but getting there, coming back and like trading back and forth.

36:50yet these assets are priced very differently. And I think Ethereum is in a really, really tough spot right now because in one direction, they're influenced by Bitcoin and they want to be like Bitcoin. They want to be this World War III proof kind of maximally decentralized thing, but they're never going to be as decentralized as Bitcoin. It's just the laws of physics prohibited, right? Like there's just more state in the system. the laws of physics literally prohibit it being as decentralized. And then on the other side, they want like Ethereum wants to support DeFi and it wants to support payments and it wants to support NFTs and it wants to support all of these wonderful things that people want to build on these rails.

37:34But it can't compete with Solana on that side. It's because it's trying to also be Bitcoin on the other side. And, you know, it's kind of in the middle of the barbell. So in terms of big liquid assets, like I think a barbell of Bitcoin and soul is the most effective portfolio construction because you get the best of breed of both, right? Bitcoin is your bellwether asset. It's the asset that's maximally decentralized. It's the asset that's most widely distributed and nothing will ever change about Bitcoin. And then soul is the extremely high performance asset that wants to be the base layer for all of the other stuff and isn't compromising that vision in order to try to compete with Bitcoin.

38:19It says, let Bitcoin be Bitcoin and we're going to go build a decentralized computer. And ETH is kind of stuck in the middle. I think ETH has been outsourcing a lot of its value capture to its L2s because they're the ones who are actually doing the execution on all of the transactions that are happening. And I think that's the actually valuable part is coordinating state. I don't think the valuable part is the data availability layer or the settlement layer. I don't even know what that actually means. So I think simplicity is key. And that's why I like Bitcoin and Sol as kind of the barbell of the top big assets.

39:06Yeah, I mean, I don't disagree. although I'm almost 100 % sold still currently. But for me, I've been thinking through this Layer 2 versus ETH, and I'm not sure the market's got this right yet. I think people think they're parasitic because you take activity and you only use a small amount of the underlying ETH. But I think ETH is valued, and why ETH is more valuable currently than Solana is because it's valued by Metcalfe's law, the network value, and the L2s are included in the total value transacted. And if you look at the number of applications built on Ethereum, it's still larger. When you take into account the layer twos, the activity is still vibrant.

39:55So I'm not entirely sure we yet know, and I could be dead wrong here as well, but how to value this or what the market's actually telling us yet. Because I think markets are actually quite efficient at pricing this stuff. But either Ethereum really starts sinking from here, which it's been doing over the last few months versus others, or we're not fully understanding what is being built. Because I think we all believe in this multi-chain world. So it's just, you know, the pie grows. So it's not like one necessarily versus the other. What do you think about that? Think about the layer twos in the value accretion.

40:31Where does the value accrete? I mean, because we've also seen the base has shown we don't even need a token for a layer two, which is another interesting thing. So I gave a presentation at our LP Summit in 2022. The video is up on our website at multcoin.capital and on our YouTube. And the title of that presentation was MEV as a Valuation Framework for Valuing Asset Ledgers. That means L1s and L2s. It's a short video. I don't think I can do it justice by going through, you know, the 15-minute explanation right now. But the 60-second version of it would be that MEV is unavoidable. There's going to, someone's going to make the arbitrage profits.

41:17The question is, who gets to make those profits? And I think in the realities of a permissionless blockchain, it's whoever gets to sequence the transactions is going to make those profits, either by collecting large priority fees or tips or whatever you want to call it. I think whoever sequences the transactions gets to decide who gets the arbitrage and therefore they get to earn the profit. And that's why I think as one component of evaluation framework for asset ledgers, L1s and L2s, you have to look at your discounted cash flow value of all of the future MEV that you believe that asset ledger will have.

41:59And, you know, you can talk about discount rates and all that stuff all day, but you pull that, you know, to the present and that should give you one component of what I would think is a sum of the parts valuation for one of these asset ledgers. And what Ethereum did is it put, it basically took that part out, right? I think there's the sum of the parts is a three-part valuation framework. One is this cashflow component, the discounted cashflow of future MEV. The second is a commodity component. This is the EIP 1559 type, you know, some ETH is burned and some ETH is minted. And what does that ratio look like?

42:39And is it deflationary or inflationary right now? And then the third is a moneyness aspect. And the third one is the most vague, hardest to define. There's no quantifiable thing. You know, this thing is this money versus that money. That's hard to say. So it's hard to put that into your valuation framework in a quantitative way. So I think of those three, ETH sacrificed one. It said, we're not going to have the MEV. We're going to push all the sequencing off and someone else will make that money. And so it cut off one of the legs of the three-legged stool. And then when it comes to being money, right, like in decentralized gold, in a sense, I think it's an uphill battle, right?

43:20Like I think that is very much a, it's almost a religious battle, right? Because it's, what is money is just, what do we believe is money? It's just a mimetic that is commonly held amongst the largest group of people. I mean, that's basically it. Exactly. And Bitcoin has the best story for that. You have Satoshi, you know, being the prophet, delivering this thing for the rest of us and then disappearing. No one owns, you know, too much of it. It's all super well distributed. It was first. Like Bitcoin owns the money narrative in a way that it's very hard to compete with. I'm not saying that no one will compete with it, but it's really, really hard.

43:59Right. And so the only leg of the stool that I think Ethereum really has left is the commodity aspect, the inflation versus deflation, the ETH burn piece. But at least if you've been looking at it recently with the rise of L2s and all the transactions happening there, ETH is actually back to being inflationary again. So maybe it becomes deflationary as there's more usage. That's certainly possible. But I think they lost the MEV leg of the stool, the cash flow leg of the stool. the money leg of the stool i think is really tough and then the commodity leg the stool is not looking super strong yeah the only way to solve this is a massive increase in scale of use correct you know because then the low fees don't matter because it's made up by volume if you get a lot of volume you get deflationary token economics but in this world where currently we don't have enough use for all of the block space available across the ecosystem, it becomes an issue.

45:03Yeah. So let's talk about that. What can we do to get more use, right? I have a theory here, a thesis that I've been working towards. And my theory is that we have effectively tapped out the number of people in the world who will go through an onboarding process to put money on chain in order to make a profit. Right now, the people who come on chain are coming on because they want to use some asset for financial purposes. They're not coming on for pure utility purposes, right? They're coming on like, you know, I want, uh, you know, I want to go make an investment that's going to make me money, right?

45:45Like that, that's, and I think that's a minority of the human population. To you, to me, this seems like a natural thing. Like, of course, I want to do things that make money. So to our listeners today, like, it seems like a natural thing. Like, you think everyone thinks like that. But everyone doesn't think like that. I think we are a small, small minority of the global population. So what do we do to get new people on? And I think what we need to do is we need to give people funded wallets. They need to earn their wallets, their funded wallets with some asset, not buy a funded wallet. And there's two ways that I can see that happening right now.

46:24Number one is you see something like Web3 Gaming really take off and people can earn these assets by participating. Or two is Depin, where people can earn assets by helping build a wireless telecom network or a decentralized virtual power plant or a mapping network or any number of these things, decentralized AI inference cluster. And you can earn tokens that way. And then you end up using DeFi or you use those assets for payments because it's the fastest, cheapest, most convenient thing to do, not because you wanted to go through some onboarding process to, you know, go and like speculate effectively.

47:15Um, and like the one data point that I would bring up in order to back this up, um, Jupiter is one of the big protocols on Solana, big DeFi protocols. When they launched their token, uh, earlier this year, uh, the Helium community did an analysis that showed that actually 10 % of Jupyter's users had come from Helium and were just using Jupyter because it was the easiest, fastest thing for them to do. And that was 10 % of the users of the biggest DeFi thing on Solana came from this one D-Pin app. And so that's why I think that's the nut to crack to get more users. I totally agree. But the other hard part of this equation is to create a token economy where it's not all outflows.

48:05Because you earn on one side and you transfer value on the other side, you've got a very leaky capital flight problem. And I've seen very few people solve that without the money recirculated. People need to figure out the token economics better. I don't think anybody's got it dead right yet. I think the mechanisms are actually well understood. The problem is building something that has end user demand and has the type of revenue. Because, you know, like burn mint equilibrium, whether that's how it's implemented on Ethereum or how it's implemented on Helium or, you know, any of these networks, like it's fairly simple to model out.

48:46You know, you have a token burn for using the product. You have a token emitted for helping provide the product. And then you find the equilibrium, right? It's not a super complex model. the problem is that there's very few things that have the demand side there to burn enough tokens to provide an equilibrium and so you know if your demand is here and your supply is here like that's that's really not gonna work very well and that's the state that we're in because it's just so early that a lot of these products they haven't been able to deliver the smooth user experience it's not a polished product for mainstream in a lot of cases yet and you need that before you can make the revenue to make this sustainable i also think that outside of the behavioral incentive system that comes inherent with with blockchains or tokens i think there's just simple things like if you just step back and say you know what is an nft it's a it's a you know it's a non-fungible smart contract essentially and then you start thinking about where the opportunities might lie and i just think obvious things are ticketing and i've talked about this a lot i'm like this is at scale something that can be very useful for every participant in the in an ecosystem music sports everything else and these things can maintain value if you go to that amazing concert that great game you know you've got secondary value of which tickets really don't have in the same way and tradability.

50:20And that same thing can apply to hotel rooms. It can apply to airline tickets, Airbnbs. It can do so many things and you wouldn't even know it's an NFT. It's just like your ticket master thing is in a digital wallet anyway. Why do you care? Yeah. Just like the internet where in the 1990s, you had all these great ideas that the companies ended up failing because it was just too early and the infrastructure wasn't ready. I think ticketing is one of those. We have our own scars from that. We've invested in a number of ticketing things that did not work out. But I think the thesis is still fundamentally valid.

50:57I agree with everything you said. And just because Webvan didn't work out in the 90s doesn't mean the DoorDash won't work now. And I think the difference was that you need broadband. You need mobile. You need the cloud. You need all of these different pieces to put together in order to be able to deliver that product. So for the case of ticketing, you need a high throughput chain that doesn't go down and is super reliable and is super easy. And you're not figuring out like, oh, am I pointing to this L2 or this L1? Or do I need to bridge? Users don't want to think about any of that. Users just want to, they just want to scan their ticket.

51:39They just want to say like here, and then go on their merry way. And the Solano compression for NFTs, I think, is showing us the way. It's possible now to do cheaper than printing a physical ticket. So in which case, yeah, I know most tickets are now being replaced by electronic tickets, but you can, for the same cost now, essentially, you can have the extra benefits of all of this. So I think it's a matter of time. As you said, I think D-Pin is interesting. DeFi continues. what's in terms of other ecosystems or things are getting your attention now yeah we're at the stage in in a bull market where it should broaden out into more alts and newer projects what's getting your attention those are the main things uh honestly is looking at different deep end networks looking at defi i do think defi is a second horizon thing i think we need to get more users with funded wallets before DeFi can really take off.

52:41I think that DeFi right now - It's not easy. It's not easy. It's not easy. I'm a sophisticated user and I sometimes struggle with all of the approvals and keeping track of everything. And I've said more on-chain transactions than 99.9999 % of people, right? Like I've truly sent an exceptional number of transactions, but it's still hard. um so yeah i think it just needs to be simpler and i think uh you need to give people assets to trade with they need to earn them i i just i fundamentally think we've run out of people that want to just put in money to spectroid do you think that bizarrely world coin might be doing the right thing i think world coin is fascinating i think so too now whether they get this right or not.

53:35I love when a narrative is so wildly the opposite way. I'm like, that's interesting. Yeah, tell me what do you think? So let me share a theory with you. I have a theory that new crypto bull markets are kicked off by new methods of token distribution. So let me give you some data points. 2013 market that got your attention and got my attention originally, I think that was kicked off by the proliferation of proof of work forks. This is when people were like, oh, Bitcoin works. Like, let me go create another coin. This is when like Litecoin and some of these things were created. Right. That was a new method of token distribution.

54:152017 was ICOs. It was a new method of token distribution. People saw, oh, this works and you get tokens out there. Then in 2020, you saw liquidity mining and DeFi. And that was a new method of token distribution. And that kicked off a DeFi summer and a big bull market. Then in 2021, we saw NFTs. And NFTs were like the new method of token distribution. You got all these celebrities coming in. You got a new cohort of participants because of a new method of distribution. And now, like, what I am looking for is I'm looking for that new method for this cycle. Memes were like zero friction, launching of zero utilities.

54:57It's an interesting concept that's very early. And I think it'll morph into something more akin to whether it's fan tokens or social tokens or whatever but yeah so tell me what you think of the world coin distribution model because i mean it's clunky and expensive and hard but they distributed a lot of tokens yeah my top three candidates for what will be the distribution mechanism for this cycle is one what you just mentioned around meme coins because it's getting new people in. And it's just fun and different, right? People really like it. The second is Deepin, which we've talked about already.

55:38And then the third is something like a world coin. And I think that there's some value to the meme of this was distributed out to everybody. Everyone has it. And they did a very smart thing where they don't just give you all of your world coins up front. It's an ongoing drip. So you have to come back and you have to get them again and again and again. And that way, even if you sell your first drop of WorldCoin, you have more coming later. So if it becomes more valuable and more useful or easier to use for payments or anything else, then you don't have to go buy more in order to use it. You'll have it come to you.

56:19that's fascinating so you and i both bought bitcoin early days and you know i don't know whether you sold yours out whatever but let's set this idea of you give people some and then you give them a second bite of the cherry later is really interesting because if it does go off in value they kind of have this i'm never going to sell that again concept really behavioral because if you got given like a hundred bucks and now suddenly it's worth a thousand bucks and then you get your second distribution you're like oh but this could be worth a million dollars you'll never sell it this is this is what helped bitcoin is all of those early bitcoiners who sold and then they saw the number you know increase so dramatically beyond their wildest dreams and now they buy and they're like i will never ever ever sell any of this ever again right and you saw the Same thing with the Ethereum group and the DeFi group and the Solana group, right?

57:20Like you have to see that. It's almost like the regret, the human regret powers the holding ability of those people, of that community in the future. Like how much regret has this asset caused? I think it makes sense because you see the same with Amazon. You see it with Microsoft. You see, you know, anybody who ever sold that stock has been proven out to be dumb. and a terrible investor because really all you had to do was hold it. That's why Bill Gates and Bezos and whatever are the richest people in the world because they never sold their stock or not until much later. So final question for you, what are you seeing in the VC side of your portfolio that is shifting your perspective to say, huh, this is interesting that's coming, whether it's in line with the areas we've talked about or just people trying some crazy stuff?

58:14The most interesting things I'm seeing are all revolving around payments and deep in and how to give people funded wallets. I know I'm a broken record on this, but that's... Yeah, I'm involved in one which is around wine, which is a trillion dollar industry. And it's the same thing as you earn your tokens by actually scanning your drinking of a wine into the chain. You have these cooks that are electronic cooks, and that gives data back to the wine producers so they understand who's drinking it. It's fascinating, and it flows into global supply chains, stuff like that. Yeah, we did something similar for whiskey, actually.

58:59The company is called Baxus, B-A-X-U-S, and it allows you to trade high-end whiskeys and just help financialize that asset. We looked at something for high-end watches as well, which we didn't end up doing for unrelated reasons. But we're seeing more of these financializing of dark markets. Trapped value, really? Yeah, there's this trapped value. There's these dark markets that are illiquid. And if you can make them lit, transparent markets that people can go trade easily, then you can create a lot of value. You can unlock a lot of value. so that's a great use of this technology my view of the largest trap value on earth is brand and culture that's where i think the really big unlocks you know what is disney as a tokenized entity worth if you have you know tokens as part of its component parts you know nfts you know what What are these things when you tokenize culture and brand, which can't be done via equity under classic accounting?

1:00:11You can actually value these things. And we've seen a few people move this forward. It's not there yet. It's still too early. But I think there's trillions of dollars to come out of that. I think that's what the meme coins are going to build towards. I think it's going to be a really weird journey. I think there's going to be lots of really strange things that happen between now and there. But meme coins, to me, are tokenized culture. because what is meme coin speculation today? It's a Keynesian beauty contest. It's predicting what do you think other people will like? It's predicting culture. Yeah, and predicting attention.

1:00:49Exactly. And now how exactly will this interplay from the pump.fund meme coins to a tokenized Disney? I don't actually know how we connect those dots yet, but uh you know in in the words of steve jobs you can only connect the dots looking backwards it's really impossible to connect them looking forward listen that was a perfect place to end as well because it is never that easy but you can see it i mean you've clearly articulated there is a path ahead we don't know how that path goes but that path is it is playing out and our job as investors and participants is to kind of be involved in it, look for the opportunities and enjoy the space growing.

1:01:34Yeah. And maintain a long-term perspective. You know, when you're feeling too emotionally close to the market, like remember to zoom out. How do you tell your investors that? Particularly in the liquid side, which is more volatile because the others cheats because you don't have any mark to market in a VC really. But on the liquid side, how do you tell your investors, listen, we can give you some great returns if we get it right, but you will have to take some stomach churning volatility that is unlike any other asset on earth. We show them our performance chart and we say, look, you can see the volatility, you know what you're buying.

1:02:11And we put the disclosures out there. And I'm very grateful for the partners that we have that have been with us for a long time and written the volatility with us. The majority of our capital is from those, you know, investors who've been with us for a long time. And, you know, they've been on the ride. They're not surprised anymore because they were with us through the worst times in 2022 and 2020 and 2018. They saw that, they experienced that, you know, that stomach churning that I felt, they felt it too. And I think that that, you know, really helps because now we have this strong group of really committed long-term investors that I can call and talk about some of these questions openly because they're such a good trusted relationship.

1:03:03Fantastic. Tushat, amazing to talk to you. Best of luck, and I'm sure we'll get you back on again at some point. Thank you so much for having me. This was a blast. Yeah, I loved it. Thank you. I love these kind of conversations because I get to bounce my ideas around off great thinkers in the space and hear where they think this is all going. And I think within that, there's a lot of alpha in how we can position ourselves. Now, obviously, I've got the t-shirt on, don't fuck this up. The idea is we should not, as personal investors, really be going too far out the risk curve with a large part of our assets.

1:03:38We really should just buy and hold the core assets for the cycle. And those really are Bitcoin, Sol, and Ethereum. Now, there is other plays to be had. There will be a big play to be had from the next layer one narrative or whatever the latest narrative that catches on. And so feel free to try and capture those opportunities yourself. But remember, it's a very difficult space and you need to do a tremendous amount of research to find out what's really getting traction and what isn't. Anyway, best of luck out there. Hopefully, you too won't fuck this up. Make large crypto trades with Kraken OTC.

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