Podcasts Between2Chains B2C0037: Market Opportunities in 2022 with Jeff Dorman and Katie Talati of Arca (w/ Jeff Dorman and Katie Talati)

Episode Summary

Dec 20 2021 . 49 MIN

B2C0037: Market Opportunities in 2022 with Jeff Dorman and Katie Talati of Arca (w/ Jeff Dorman and Katie Talati)

In this week's episode of Between2Chains Jeff Dorman and Katie Talati join our Host Peter Hans, talking about market opportunities in the digital asset industry for 2022. They discuss how long this bull run can last, the lack of current regulation and more.

Show Notes


In this week's episode of Between2Chains Jeff Dorman and Katie Talati join our Host Peter Hans, talking about market opportunities in the digital asset industry for 2022. They discuss how long this bull run can last, the lack of current regulation and more.





1.     Katie starts the episode by discussing how to develop a research team in a space where you have to be nimble and a generalist especially when there are literally new industries coming up all the time. She discusses how to grow a team of both generalists and people that are more focused nuance.

2.     According to Jeff, the strength of ARCA, and probably most digital asset research teams, is their intellectual curiosity and willingness to learn new things.

3.     Kathie explains what DeFi 2.0 is all about.

4.     Peter approaches Jeff with a question "when we think about DeFi 2.0, Is it really a 2.0? Or is it more marked by time? Or is it more marked by a change in thought process? Or is this just semantics?"

5.     Katie and Jeff discuss what they expect from DeFi for the upcoming year.

6.     Peter sums up the podcast with the following statement: "It sounds like you're both stating that a lot of it is theoretical, which is understandable given how quickly this sector is evolving and changing, but that doesn't mean there aren't practical applications. But it's really honing in and taking that next step to make these, more implementable, and more value producing."




NOTE: Following transcript is generated using AI. Minor errors might be present.



Welcome to the real vision Podcast Network.



Before we get going, we want to remind you that Jeff Dorman is the co founder and chief investment officer of ARCA funds and Peter Hans is ARCA funds managing director. The commentary and opinions expressed in this podcast are solely those of the podcast participants and do not necessarily reflect the opinions of our funds or its affiliates and are subject to change for any reason without notice. Any discussion of investments or investment strategies within this podcast are for informational purposes only, and not to be construed as a recommendation to buy or sell any particular investment security, digital asset or strategy. Investing in digital assets involves a high degree of risk and volatility including the risk of the total loss of principal and now enjoy the show with your host Peter Hans.



Hi, this is Peter Hans and welcome to this week's episode of between 2 chains. This week I am joined by two guests actually, a familiar face ARCA CIO, Jeff Dorman. But I'm also joined by ARCA's, Director of Research Katie Talathi. It's a great episode, we discuss the evolution of the research process, and specifically, how that's changing from a fundamental standpoint. At Arca, and within Katie's team, we talk about DeFi trends and how that is evolving over time. And we talk about the overall diversification of the asset class. This is something that just a few years ago, was highly correlated, highly tied to moves in Bitcoin. But it's a totally different asset class right now driven by the technology and where that technology is going into other sectors of our economy. And finally, we get into our 2022 outlook for the digital asset space, and specifically investing in the digital asset space. hope you really enjoy the episode. Please subscribe, rate and review. All the best.



Hello, welcome to between 2 Chains. Jeff familiar face and we have a we have a special guest with us today. It's a ARCA, Director of Research and the real brains behind Jeff Dormans entire operations. Katie Talati. Katie, how are you?



I'm doing great. Thanks for asking, Peter.



You're welcome. So I got I gotta say, I've heard you on a bunch of podcasts before. And I've always been, I've always been very impressed. But it's been over a year. And I've never had you on this podcast, mostly because Jeff and I just fall into the same routine. But I like I like this. I like this format now. So this is this is exciting. I'm looking forward to this. And we're gonna build upon a theme I had Sasha on last week, we talked about his 2022 kind of NFT market projections. And, you know, I had a an entire outline from the marketing team, which went haywire after about 35 seconds. So I imagine something fairly similar will happen here. But, you know, let's, let's kind of let's get into it, you know, right off the bat. And, you know, Jeff, I'm going to skip over your first prediction, because it's everyone knows that already. Regulation remain slow, nothing really to talk about. We all we all know and agree with that. And we've we've talked about it ad nauseam. But let's talk about thematic investing. And you know that because that's that's really what, you know, we focus on and I think, you know, Katie, you do a really incredible job in terms of the ARCA research department and really deep dives in, you know, across the board. So, I'm actually going to start with you. And I'd love to hear how you think about building a, you know, research team in this space where, you know, not only do you have to be nimble and a generalist, but there's literally new sectors popping up all the time. So how do you think about managing that and growing a team and, and, you know, either keeping people as generalists or having them, you know, focus more nuanced.



I mean, I think it really depends on each individual's strengths and weaknesses. I would say, what I think has brought the best minds into the digital asset space, is that it is so fast paced and evolving. And I know a lot of analysts kind of come to work here and it can be overwhelming at first like this, the sheer number of assets that are available, and all the kind of growing themes and areas. But for me, personally, I feel like it always keeps me on my toes because there's always something new to learn and something new to understand and evaluate for as you know, an investment and I think that's what keeps people kind of coming into the space. And I think that intellectual curiosity is actually what really is the most important part of what drives the research process, because it keeps you engaged and not just feeling like you're kind of going on, on a on an autopilot, right? In terms of kind of like building a team and working, you know, figure out about people who are generalists. And deep dive, I would say that everybody who starts in the space starts as a generalist, I DeFinitely did. You know, I covered pretty much everything, although at the time, you know, the ecosystem was DeFinitely not nearly as deep or broad in terms of the areas that it touched. But over time, everyone tends to gravitate towards either one set of projects, one particular vertical, or even an ecosystem. And so for me, I tend to, you know, obviously try to kind of shape and guide my, my team into, you know, hey, I think that your strengths really play well to this area. But I also try do it based on their curiosity and their engagement in the space, because I think that's the most important driving factor to getting good research done.



And also, I also can't comment on that, you know, Katie, and her team obviously covered a tremendous amount with a small team in the digital asset space. But there's also a sort of common fallacy in digital assets, that just because you're in this space, you have to know everything that's going on, you know, I invested in debt equities for, you know, decades where there was whole parts of the debt market that we didn't focus on whole sectors, you know, there's whole parts of the equity market we didn't focus on. And that's not a big deal, right? You focus where your strengths are. So yes, there's a lot of new things that pop up. And in general, we have a lot of curious people who, you know, I think the strength of ARCA and really probably most research teams across digital assets is their intellectual curiosity and willingness to learn new things. But it doesn't mean we know it, the first day comes about right, if there's a new protocol launched, or a new theme that is developed, we might take six to 12 months to just sort of watch it from the peripheral from from the periphery and just learn a little bit here, there. And then when the opportunity presents itself, we invest. So that may be a little different than than some of the other investors in the space who like to be first in early, you know, we don't necessarily see it that way, we will happily watch as these markets progress. And, you know, some of them never make it past two or three months, and therefore, we never had to learn about it in the first place. And, you know, that's totally fine as well.



Yeah. I mean, that that DeFinitely makes sense. One interesting point, you know, Katie, in terms of, you know, allowing people to gravitate, you know, where that where their interest lies, which I agree is, you know, DeFinitely important, you know, both in terms of getting good work and keeping people motivated. You know, how, how often do things, you know, switch up? And how do you have to manage demand for that, like, for example, you know, last year, you know, as DeFi was growing out, we didn't have a lot of the sectors that we even have now, a year later, right gaming NFT infrastructure. So, you know, granted, that team was smaller, but do you get the instance where, you know, people just kind of want to jump around to hot sectors? Or is there so much developing now that there's always something interesting and new to work on?



I think it's a bit of both. Um, I would DeFinitely say when we saw kind of that shift earlier this year, from away from a lot of the Sci Fi into more of these gaming ecosystems and NFT opportunities, there was DeFinitely, you know, we all a lot of people are like, our DeFi is dead, like, it's never coming back, like nobody's using these projects anymore. And obviously, it's the effective kind of in this space, a lot of people gravitate towards the new shiny thing. I think what's really interesting about this space, though, is that over time, I do think that a lot of these sectors tend to converge back on themselves. So now, even though you know, NFT, and gaming has really developed into its own very, like specific sub sector, there is a lot of crossover happening with DeFi, for example, looking at things like the fractionalization of NFT's. And how do you use that as collateral in potential DeFi applications. And then even just with like the gaming ecosystems, thinking about on and off ramps, and payment systems, like these all basically lead to like this interconnectedness. So I do think that, you know, we try to keep kind of people from jumping around too much. And obviously, there's times when, like, certain sectors are completely dead, nothing goes on for several months. But even with DeFi, recently, there's been this wave of DeFi 2.0 projects that have popped up. And those are kind of reinvigorated, I would say, kind of our team members were working on those areas, their interest and their ability to like find new ideas in that sub sub sector.



Explain that concept to me DeFi 2.0. What exactly does that mean?



It's kind of like a broad generalization. I would say that the digital asset space has ascribed to newer DeFi projects that have been launched in the last couple months. A lot of them are really focused on trying to fix the problems that were faced in the earlier you know, pieces of DeFi particularly around liquidity and rewards, mining and yield, yield farming generally, the I would say kind of one of the biggest mismatches that a lot of projects have realized they faced is that reward like yield farming basically created this massive uptick in DeFi activity. And it was really a huge way to get users in and people interested in understanding how decentralized finance works. But it has proven to not completely be sustainable in a lot of cases. You've seen this with a lot of blue chip projects that you know, had a lot of traction last year. You know, I don't wanna pick on it too many, but like uniswap, and sushi swapper examples, they ended up having a lot of people providing liquidity to them, because they were getting the uniswap and sushi swap tokens in return. And what we saw was that those users, they may have been sticky to an extent, but not quite as much either usage fell off volumes fell off users migrated to other platforms. And then we saw that earlier this year, as other non ecosystems basically started up their own DeFi protocols. So we saw that on avalanche. With projects like Trader Joe, we saw that on Sylvana, with projects such as serum radium, all this DeFi projects. And I think overall DeFi has been kind of having a bit of a it's having issues grasping, like, what do we do? What do we do to fix this problem? How do we keep users forever? How do we issue our token in a, you know, compliant and fair manner? But how do we also keep the project healthy in terms of token price usage, volumes revenues. And I think that's been something that a lot of these newer projects in the DeFi 2.0 category are trying to solve. So one project, for example, that's like doing super interesting stuff on the liquidity side is called tokamak. Um, so particularly in projects that get issued initially, there isn't a lot of liquidity for them. And it really is dependent on somebody going to uniswap, or sushi swap and offering liquidity on both sides of the market, you can't just offer liquidity in your own token, you also have to do it on an ether, USDC pair, or a USD stable coin pair. And what happens is that this thing called impermanent loss, where, essentially over time, while keeping these pools alive, you as the liquidity provider could lose money on either side, depending on the volatility, what happens is, it doesn't really become profitable for you, unless you were the token issuer to continue to offer that liquidity. So tkamak looks to solve this issue by allowing issuers to just contribute their own tokens, and not also contribute like a base pair. Um, I can get into more details of how that works, although I'm not actually the lead analyst on that particular name. Um, the but I mean, I think projects like this, that are trying to solve like real issues that we've watched happen in the last year and a half are part of this, like DeFi 2.0, I would say, I want to, like a renaissance maybe is what we can coin it. The some other projects, too, they're trying to, you know, figure out just new ways to incentivize users and kind of create newer, like newer versions of what already exists. So Olympus Dao is trying to create, you know, more of a central bank type of project. That obviously has a lot of controversy around it. If you're not familiar with it, you basically deposit assets, and you get their token in return, but you can't necessarily get your assets back out. So a bit of a one way bank. Why is that? This one's very complex. Again, you probably need a loop in a song to Siri, who is our actual DeFi expert, and spent two hours trying to explain this to me, until I finally got it. Um, but the idea is you don't just deposit assets you would deposit. Let me know if I'm going too complex. Say you're providing liquidity on sushi swap for the Ethereum and I don't know uniswap pool, and you're decided you've decided it, like I have these LP tokens, I'm earning my you know, my basis points in terms of trade fees on this. But you decide you don't want to provide that liquidity anymore. So you can take your LP tokens, instead of pulling your liquidity. You can take your LP tokens from sushi swap, you can deposit them into OHM, you get your OHM tokens in return. But OHM does is they continue to provide that liquidity, and then all the rewards streams that come from all the revenue that's earned on providing that liquidity and sushi swap, instead of it going to you, it goes to theOHM, like bank or pool. And then that creates that like basically increases the value of what OHM is being backed by.



Essentially these protocols, this idea that has been sparked is called protocol owned liquidity. And the idea is, instead of a mercenary coming in and providing liquidity and earning all the fees, while the protocol gets nothing, why doesn't the protocol own its own liquidity and therefore earn the fees itself. So whether it's Olympus Dow or its others, that is effectively what they're trying to do is basically say, we can be the bank. Instead of having depositors come in and being able to pull their deposit whenever they want to particular depositors come in. We'll give them a quasi equity in return and then we get to hold their deposits. since forever, and therefore use those deposits to become more productive, you know, the whole entire banking system is driven on how to be productive with your asset, right? You know, banks are anywhere from 10 to 30 times levered, right, they're rehypothecation their money, they're being productive with their assets. You know, every hedge fund manager or mutual fund manager has been taught from day one, you know, never sit on cash, always lend your assets always, you know, do something to earn a return. Well, most of these DeFi protocols have not followed that same advice, right, they basically say, we don't need any of our own assets, we're just gonna let communities give us the assets and they can earn all the money, they're starting to realize that there's a reason those business models don't work, right, because the protocol itself doesn't capture any of the money that way only the user isn't liquidity profile providers do. So by coming up with these ways to basically lock that liquidity into your own protocol, and then be able to be productive with those assets yourself. Now, you're earning revenues that go to the protocol rather than just to your customers. So, you know, again, like everything in DeFi is rooted in some level of experimentation. Generally, these things probably get bid up and you know, get used more so than they otherwise would in other industries, because people like to be early liked to be first liked to earn native tokens for rewards for doing an action. But there's still no consensus yet whether DeFi 1.0 or DeFi 2.0 is going to be the best way or something in between. But ultimately, you know, these protocols are solving real world problems, right? They're allowing people to trade, they're allowing people to lend allowing people to borrow allowing people to buy insurance, they just haven't figured out exactly the right formula yet for how to keep your customers sticky, and how to also earn sustainable revenues for your token holders. So it's pretty fascinating to watch in real time.



Yeah, it almost seems like I'm totally missing it. Like it's almost like kind of getting away from the decentralized aspect of it and centralizing it but just centralizing it through another entity.



It DeFinitely is adding back that idea of the middleman, for sure. But I think the the overall ethos of a lot of these projects is that the, you know, the project, the protocol, the direction, that the project takes be a governance like that is controlled by token holders, which in theory should be a very distributed group of individuals.



Right. Right. Interesting,Yeah, I don't want to get I don't want to get too far too far off the rails here. But it almost seems to me so is when you when we think about DeFi, DeFi 2.0? And is it really a 2.0? Or is it more marked by time? Or is it more marked by like a change in thought process? Or is this just semantics?



I think the digital asset space is very good at putting names on things. You know, 2.0 is, you know, because if you look at the prices of DeFi assets, really since February, right DeFi has been in a bear market all year, right? January was a great month for DeFi and it's been straight down since you know, there's only argument to talk about a digital asset broad market that doesn't exist anymore, right? There's pockets of digital assets that didn't have been great. Like you know, layer one protocols and gaming and NFT's there's been pockets of digital assets have done terrible like divine there's things like Bitcoin that literally have been like a rock all year and haven't done anything in eight months. So what's happening is because DeFi now has a stale narrative. What do you do you change the narrative you call it DeFi 2.0? The reality is they're all solving very similar things, right? Again, what what is DeFi? Accomplishing DeFi is accomplishing traditional financial institution services without the financial solution, right? You're doing borrowing, lending, asset management, insurance, trading, etc. All these things that traditional financial institutions have done are now being done through smart contract protocols. How exactly those smart contract protocols work, though, that's where things are being tweaked. So I, you know, personally, I don't think they're very different in terms of the output to a user, right, the user is still getting a similar experience, where it's different is in terms of you being the quasi equity holder of the native token and whether or not you can accrue value, right, AVI is a really good example. Right? We loved Ave here at ARCA for a long time Ave has I don't know the number is right now. But you know, at one point close to 20 billion TVL is probably lower. Now with prices down. They don't generate a lot of money, though, right? As a protocol, there's not a lot of earnings that happen in a lending and borrowing platform, right, you're earning your net interest margin if somebody lends to you at x, and you can lend it that back out at x plus, you know, a couple basis points, you earn that couple basis points. But you know, there's way less protocol revenue being driven at a compound or an Ave or a maker Dow, which is just straight lending and borrowing, then there is that like the exchanges that are earning 30 basis point for a fee, right, the revenue that uniswap and sushi swapper massive compared to the revenues at these lending and borrowing platforms. But the service is great, right? People love the idea of being able to go and lend their assets for a return and be able to borrow these for leverage and other and working capital purposes. So there's nothing wrong with the protocol itself. But token holders have not benefited from the growth of the protocol. Right? If you look at any metric, whether it's price to sales price to earnings price to TVL, they've been going straight down, right investors have not been rewarded for the growth of these platforms. So DeFi 2.0, again, is largely just trying to change the narrative of let's provide these things services, let's do it in a way where token holders are benefiting more. So again, all experimental, you know, different versions of the same thing. But what is undeniable is that the growth and DeFi continues, right users are going are going up, volumes are going up, usage is going up institutions are looking at ways to no KYC and get involved. There's no question that d phi as a whole has penetrated the market and is a valuable service. We just haven't find out, we just haven't figured out the right combination yet to reward all stakeholders in the ecosystem.



I would also add that I think the DeFi 2.0 narrative. I mean, there's a couple things there. The first thing is that, as you would do, Jeff, you know, DeFine a sense has kind of been in a bear market since early this year. But as we've also seen the rise in these other L1 chains, we've pretty much seen what I mean, everybody would basically say a copycat versions of all the big DeFi protocols that were on ethereum popping up on these alternative L1 chains. And a lot of these from when I was speaking with a lot of folks over the summer, especially any of my contacts that do more of the early stage investing in the space, they were explained to me how honestly exhausted they were of seeing very, very similar projects, very little differentiation, the same business model, the same token mechanics, really nothing, nothing new. And I think the idea of the DeFi 2.0 Was that, you know, it was kind of a branding idea as well, like, hey, like, this is a new set of protocols that are trying to attack things in a different way. And they aren't really recreating the same project that already exists. They're actually coming up with something new. And then I think the secondary point was also this, it was also kind of a return to ethereum, which I know a lot of people have been debating back and forth all year, you know, with ethereum having such high gas prices, you know, seeing a lot of TVO go to these alternative chains. And a lot of retail users say that they much more enjoy the user experience on a cilona versus on ethereum.



Interesting. Yeah, I mean, but you know, those those other kind of DeFi copycats on those other chains, those others live right now, does anyone use them?



Oh, yeah, totally. I mean, I mentioned a few earlier Trader Joe is pretty much the exact same as sushi swap. There's also you know, there's a lot of similar products out there, I don't want to name too many names in case I get email later. But you know, I know Solano, a lot of projects are, you know, fairly similar in the mechanics for you know, they have pretty direct parallels to like compound, Ave, you know, a lot of projects are trying to actually bundle all the DeFi services. So I've seen polka dot projects that are adding maker Dow Ave, and, you know, like a sovereign wealth fund all into one. And so I think, you know, time will tell if these projects actually work. Most of the live ones, though, I would say are on avalanched Solana, Luna, and I forgetting one more, they're probably the big three right now.



Got it? So, how so I guess, you know, for both you and Katie, I'll start with you. You know, given given how DeFi's performed for much of this year, at least eath base DeFi. Right. And and even though those have, you know, you mentioned some of these other projects, you know, it's not like we've seen a massive flight away from sushi and, and uniswap. Right, you know, so the, the eath based protocols are still frankly growing, maybe not as rapidly as they did last year. Right, what that was, which was unsustainable, but you know, what, what's your what, what do you think we see next year? Like, you know, do you think it's, it's somewhat cyclical a draftee? I mean, I can't imagine you think kind of this is it? How are you looking at DeFi as an investable, investable sector theme for next year?



Yeah, I mean, I mean, the you could argue that there's only been two real successful applications of digital assets to date, right? Really three, right? You could argue money store value would be one, you could argue DeFi as the other and then you could argue, you know, NFT's is the other right? Those are the three kind of main drivers of digital asset usage thus far, you generally want to back new technologies that are heavily right. And there's no question that that DeFi falls into that camp, just because some of the tokens weren't issued correctly, or they had inflation problems or reward problems or structural problems. Those are largely fixable. You could also point to the equity market over the last 10 years even though revenues and earnings are up there really the reality is the most of the equity growth of the last 10 years has come from multiple expansion not from earnings and revenue growth. Right that is basically the market starting to assess what something is worth based on future cash flows as well as the fact that interest rates have been low for so long. That same thing is likely to happen to DeFi so if you're if you're bullish on the usage of DeFi which we are and you find certain projects that are cheap again, using whatever metric you want to use price to TVL, price to sales, price to earnings, dividend yield, etc. You know, you can win in a couple of different ways, right one is just tremendous growth, I mean, the overall market cap of all DeFi tokens is less than 1% of the equity market caps of all the banks in the world, right? That's tiny, if you really believe in penetration of DeFi to is, you know, we talked about all day, for example, being under 20 billion in CVL. That could be a trillion TVO in a year or two, I mean, you could just bet straight on the absolute growth of the usage here. And third is you can bet that multiple expansion, right, if we start to get new investors into this ecosystem, who care about traditional metrics, they're not coming into Bitcoin, right? They're not coming into a web 3.0 protocol that has no actual traction yet, they're going to go into the things that have real users revenues, and cash flows, and that's largely DeFi and gaming in its use right now. So you can have a lot of different reasons why DeFi you know, comes out of the sluggishness, right people in digital assets like to trade momentum, right, they like the thing that's going up, they don't like the thing that's going down. Eventually, that stops when the fundamentals are as strong as they are. So you know, I'm not necessarily calling for a complete reversal of DeFi, but if you're trying to play a more defensive strategy in digital assets, you DeFinitely want to own the sector that has been the most beaten up with the strongest growth, and that certainly a variety of different projects with a default.



I think it's I think it's fair even though I asked Katie, but I appreciate you jumping in. Katie, anything to add there?



Yeah, actually, I mean, I DeFinitely agree with just that. Um, you know, DeFi still has really strong fundamentals. And I would DeFinitely re emphasize this point that, for the most part, they haven't really figured out how these fundamental metrics should kind of float a token holders in, you know, revenues. I think that's probably the next hurdle that some of them start to tinker with, beginning next year. And I think, you know, we've kind of seen this, by the way, with every, I would say, kind of innovation with token issuance, or token use cases, one project, we'll do, you know, something completely different, completely new, and then all of a sudden, everyone will be jumping on that kind of trend. And either it works, or it doesn't. We saw this happen with uniswap. They were kind of the first ones or uniswap, and compounds, like first ones to issue a governance token. And that was all like, oh, well, they're gonna issue a governance token, and then everyone can vote on whether the fees should accrue to the token holders or not. Obviously, we haven't seen that play out. But you know, from issuing that first governance token, we've pretty much seen every project DeFi gaming on web three, a lot of those tokens have been focused on governance now, because the supposedly that is what you know, gives value to these projects. Um, the second trend that we saw more recently, I would say, is this. Actually, it was a trend from 2017 but airdrops through usage, so instead of yield farming, you know, providing liquidity and, you know, into DeFi protocols. A lot of it has been based on usage. So dy dx, for example, their whole AirDrop, has been based around how much were you trading on the platform? And that drove I mean, I think they're in for context, dy dx is a decentralized derivatives platform. Their volumes went from fairly, I would say anemic to I think they eclipsed Queen bases at the height, which is pretty impressive for centralized derivatives exchange, but everyone was on their trading and basically trying to get their activity up. So when the dy dx AirDrop occurred, they were kept they were you know, being rewarded with that uh, that value. And so we've seen that kind of trend continue and it's easy for projects to to also issue those airdrops retroactively. Another example being like XE infinity, he basically said, Hey, anybody who was playing the game, prior to us issuing our token year ago, they got heavily rewarded, depending on how much they played the game, how much they participated, and how actively engaged they were in the community. And I think these are really kind of interesting ways for, or trends for people to kind of like, be dispersing their token. Anyway, the second point, I would say about kind of DeFi, and what I see for it next is, I actually think next year is going to bring a lot more, like I alluded to before, like crossover between DeFi and other aspects of the digital assets universe. So I think, you know, we're already seeing it, I've seen a bunch of gaming projects that are trying to kind of gamify DeFine a sense, and bring the play to earn model to DeFi protocols and kind of leverage those two on basically these two sectors to create growth and to reward users and also give them kind of a, you know, more financial freedom, in a sense. I think we're gonna see it more with just NFTs, especially the area of NFT's that's considered arts and collectibles. You know, the biggest issue for a lot of folks is that if they have a very healthy like NFT collection, so they own like a crypto punk, or any of these really high value at PRPs there's not really a way for them to use it, they can't stake it, they can't necessarily lend it out. Um, and a lot of the primitives that have been created so far. far have a lot of drawbacks. Um, there are some kind of like lending and index NFT type products, they just haven't really worked out fine kinks of like, hey you have like a non fungible and you know, even a non fungible asset that is going to different value from this other non fungible asset. So, those are kind of some, I think the problems that I'm excited to see projects tackle next year.



Interesting. So, you know, when I was talking to Sasha, last week, on the show, and he was he was talking to me about it, we got it, it was a funny conversation, but we turn to talking about, you know, is is a very like philosophical viewpoint on, on NFT's and gaming and, and where he believes that, you know, value should accrue. And it reminded me a lot of DeFi, you know, so it's funny to hear you talk about, you know, kind of the, the marriage of, you know, NFT's and gaming and DeFi because in spirit, it seems like, you know, they're very similar. In essence, it's putting economic benefits in the hands of the, of the, of the customers, right, of the users of the platform. You know, and you know, that that's not I suppose, dissimilar from the entire concept of web three. You know, we my accurate there? And if so, like, how far can you take that, like, Is that Is that something you guys discuss in terms of, you know, when you look to identify themes, you know, obviously, we're very early on DeFi. Very early on gaming, like, what's next?



Well, kind of your point about, I do believe that, at least for me, part of the reason I even got into the space was because I did see digital assets as a way to kind of, you know, it's the whole idea of like redistributing wealth, and getting away from using middlemen, and letting customers in the middle own kind of piece of that upside, that they weren't able to participate in before. But, you know, I think to date, it has been a little lopsided, there, you know, particularly within DeFi, you know, there's been all these studies that have been run to show that most of the wealth in digital assets is owned by, you know, a certain number of wallets, or that even within DeFi even though there was so much activity in dollar terms. And in volumes, last summer, majority of it was really only coming from like a couple 1000 people. And it was a lot of people who were, you know, in the know about which yield form cropped up first, for which new project, and those were the people who were able to be early adopters and jump on it. Um, I think that gaming has actually changed that a bit. Particularly, you know, xe infinity is really the only example we have so far, but they've been a fantastic example of how digital assets can really level the playing field and can allow, you know, millions of people access to, you know, a different income stream, or just the ability to put their wealth in something else that is not, you know, their own native currency or, you know, tied to, you know, a job that maybe is dependent on their, on their local economy, which may or may not be in trouble. Um, so, I think that, you know, we are going to see these two converge, like I said, and I think that's why it's important to watch how DeFi kind of becomes more intertwined with the gaming sub sector, because I feel like so far, in terms of the adoption we've seen, we're still so early, and there's just, it really hasn't proliferated nearly as much as it should, and as it will in the future.



Jeff, anything to add there?



You know, I get excited just constantly about things that we don't even know yet. Right? I mean, as you as you said, we, we were early do a few themes. And that was great. But you know, we weren't the first one in, you know, DeFi in gaming, it had been around for a while, before we really found which ones we liked, and which projects, we liked the same things, the same thing is going to be true of other pockets. Right? I mean, you know, I know. You know, for example, there's people in the ARCA team who are, you know, really big believers in decentralized identity, or did DID's, you know, with the idea of basically creating instead of having, you know, credit scores that are run by three centralized institutions, that you basically build up your online identity based on actions and things you do, maybe that's include play to learn, right? Where you, you do something online to learn something, and you get credited as an expert in that, or you become a heavy user on a DeFi platform. You know, there's things like that that really excite me is like how are these new things that you've heard about a little bit but maybe there isn't a lot there yet that how are those going to develop? You no doubt is another one for example, like we've invested in a few dollars here and there we we've participated in governance, but that was are largely a mess, right? You know, single purpose Dows do really well, something like constitution doubt. That's really easy, right? You say, Okay, I'm going to spin up a dowel. We're going to go buy a copy of the Constitution. People say money is you know, there's no real decisions that have to be made you go and bid for the Constitution. You either get it or you don't and that's it. But you know what happened? After the Constitution Dow, you know, after they were unable to actually win the bid, a lot of that money still sits there in the Dow. And now it's a mess. What are we supposed to do with it? Are we gonna continue to grow this dow? Should we elect leaders? Should we go invest in other things? You know, it's like, it's hard. It's hard to run these these, you know, these quasi decentralized projects. So I think seeing how Dows develop is going to be super interesting, right? Maybe that's not a new theme, because that was already exist, but how they evolve is going to be a new is going to be new, right? Well, you start to see project leaders will you start to see, you know, a very standardized cadences with regard to governance votes are standardized cadences with regard to board of directors, meetings, things like that. So, you know, maybe more of an evolution than necessarily completely new theme. But there's gonna be some really interesting, there's gonna be some really interesting growth angles with regard to where we see existing sectors and existing themes, but how they evolve and develop?



Yeah, I mean, that that's DeFinitely interesting. You know, and I think there's, you know, there's really two avenues, right, these the consistent, you know, evolution of, I hate to call them like experiments, but really kind of like these thesis of new organizational structures that are empowered by blockchain. And then and then as well, as you know, the introduction into, you know, different sectors, right, you know, healthcare is one where I think we can all think about different use cases, especially when it comes to things like records. You know, that would be highly beneficial for an environment like this, but we just haven't seen yet for probably a variety of reasons. I want to touch back on that kind of decentralized identity, or I don't know why, yeah, centralized. But, yeah, yeah, it seems that's interesting, because, you know, like, a credit score, by DeFinition is very backwards looking. Right. Like, it's the establishment of your credit. And, and I remember when, you know, so fi was was launching, you know, they made a big effort to, you know, kind of say, like, this is, this is a very archaic way of predicting whether someone is credit worthy, right, like, you should look at instead, you know, whether they, you know, and they coined the term like, Henry's right, high earners, not yet not rich yet. And, you know, because, you know, they might pay off their bill, and what you're talking about is much the same thing in terms of like, using, I would imagine some sort of predictive analysis based on based on behavior and based on what they do, but, but but not even taking into account the identity of like, who they are.



The problem with predictive systems is that people can gain them, because then they know like, oh, yeah, if I like have like, really well, like, if I'm great online, and I do good for like, a year, I can totally scam somebody right after that. Right. Um, and, and actually, I'm sorry to cut in. But like, the idea of decentralized identity has actually been around for a while, it was like one of the things I learned about super early on within digital assets. And I'd had some personally terrible experiences dealing with identity fraud. And I personally was like, this is a great idea, like, why should somebody be able to just pick up my name and my social and open a bunch of credit cards in my name? Why can't this be kind of like an open type of information repository, I've tried actually remember what they used to call them, because I think DIDs is a newer name for them. But it's the idea of self sovereign identity. SSI eyes, is what it used to be. And the idea that you own your identity, and you own your online data, and you can actually monetize it. And I thought that part was really interesting. And actually, it kind of goes back to the idea of healthcare, within digital assets. Because there are a lot of projects that said, hey, like you have, you know, your health data on your Apple Watch. And maybe you don't want to sell that individually to someone say, My name is Katie Tilati. And you get all my information on my health data. But a lot of companies, they want demographic information, they want to get information on, you know, people in this age range, this gender living this type of lifestyle, but you can actually monetize it and get paid for it was the idea with self sovereign identities. I personally think that's very far away. I don't even know if we'll see that start to get tackled in 2022. But I do think the idea of tracking users activity online as a way to build up a history and, you know, a, and create kind of a credit type of credit score, or even a Karma score online is DeFinitely where we are headed.



The idea of reputation score, right? I mean, it's, if you if you take out a loan and you show Hey, you know, here's my w two from last year. Here's my proof of my job right now. Well, that's great. What happens if you lose your job in three weeks? Right? There's no, there's no, there's nothing in that credit score that says this person is going to fight like hell to continue to pay their bills and not default. Right? So of course, but if you have a bunch of actions that you've done, let's say you've been a default user for two years, and you have always paid back your debts, and you've always, you know, been over collateralized and things like that, like there's a way to create that kind of higher reputation score. Like most things, these are not new concepts. It's not like Katie and I are getting ahead of things that don't exist yet. For the most part, we have, you know, it's no different than 2017, 2017 there was a lot of really bad projects, but some of them were interesting. A lot of the interesting ones didn't work until 2021. You know, same thing, a lot of these things have been around for a couple of years. And our predictions are not based on predicting the future of new things that haven't happened yet. Our predictions are based on you know, when will these things start to really gain traction? When does the infrastructure have been laid enough for these to start taking off from a thematic investing standpoint? And that's ultimately what we're trying to do here is to figure out when that maturity level and when that usage level increases to a point where these become investable as an everyday usage, and not still kind of a speculative future.



Sure, yeah. And sometimes I'd imagine it might be as simple as, you know, you have a product and you have, you know, take, you know, an example, we always give, like a great business with a bad token is brave and the bat token, like, um, you know, I'm on the brave browser right now. But I don't know what the token does. And, you know, but like, kind of restructuring, rethinking about the economics behind the tokens of certain projects, which is something I think we briefly started to touch on here. And, and also something I think that, you know, ARCA is getting more and more involved in right, whether it was you know, Gnosis in the past sushi right now, and in the past. You know, how much do you see that really taking shape? In, you know, in 2022, next year? Katie, do you think that's a big part of like, you know, both what we'll be focusing on from a research standpoint, or what ARCA we'll be focusing on from a research standpoint is whereas, you know, maybe others will start to get involved, because there's DeFinitely a lot of a lot of opportunity there, it seems.



Yeah, I mean, I think this kind of come back comes back to what Jeff and I discussed on the, I think we're gonna start to see within DeFi, a lot of projects that have been around for a while start to really think about how do we make ourselves better? And how do we make ourselves more valuable, and whether that's, you know, redoing a product to make it more sticky and more user friendly, to, you know, reconfiguring a token, as you guys alluded to the example with that, and the brave browser, like, you know, brave could come out tomorrow and come up with a whole new plan for bat. And that could totally change the trajectory for brave. And for that token, and any token holders in the past. I think that, again, the market for this kind of seems to be set by a few people who are the trendsetters? Or are the groups that managed to kind of pioneer certain ideas or try them out. And once one or two of them sticks, you're going to just see a lot of other projects, follow suit, whether that, you know, is suitable or not is another thing to be debated.



Jeff, how are you thinking about kind of constructivism governance in the space?



I mean, look, when when you can make 10,000% Just by jumping into Sylvana, because your friend told you about it, you don't really think too hard about how about working hard to extract value, right? When you can make, you know, 10x on sandbox or golla. Just because, you know, Facebook changes their name to meta, you know, when the easy money's there, you're not going to work real hard to extract value other places, when the easy money goes away, you work a lot harder to extract value, right? I mean, the idea of constructivist investing is to take something that's working really well, but is not accruing value and fix it to accrue value, right. I mean, that's, that's fundamental investing, right one on one, which is how do you unlock value that seems trapped. So I think more and more funds are going to have to start doing that, to unlock some trapped value. You know, I also think a lot of individuals are going to personally enjoy being a part of that, right? I mean, how many passive investments have you ever had in your life where you're like, I could do that better? Or this doesn't make sense. Let me offer my opinion. Well, in digital assets, you actually get to voice that opinion, you get to be part of the forums, you get to be part of the discord groups and telegram groups and be part of the votes. So I think, you know, again, there's some structural issues that need to be solved for shout out to the guys in the sorry, in the sorry, just came out with a pretty interesting new dashboard that's supposed to streamline and help some of the voting processes with regard to Decentralized Governance, would love to see that get traction. You know, also we need to figure out, you know, where along the spectrum of decentralization some of these projects really are right? You don't want to be fully decentralized, where everything has to come to a vote, because that's not efficient, and you'll get low voter turnout. You also don't want you know, one or two people having unilateral control over a protocol or a company's fate. So you have to figure out a cadence, right, maybe, and we've suggested this to a couple of projects and companies that we've invested in, which is, you know, how about Once a month is voting day, where everybody just knows the 17th of the month is sushi voting day. And if you have something that you want to vote on, make sure you around on the 17th, because that's when we're voting or, you know, the 12th of every month is proposal day, if you have a proposal, get it in that day, and we'll take a look at it. Or maybe it's you know, every three months, the directors or individuals who are leading projects are going to be you know, up for vote on on a, you know, reappointment or there's going to be a compensation committee, like there's certain things that should go to a vote, other things shouldn't go to a vote, right, we should have no say in the hiring or firing or onboarding or off boarding of different developers, you know, we have no insight into what's going on day to day, right, we shouldn't be involved in the direction of a protocol with regard to whether or not they're going to, you know, switch gears from one project to another. So having some sort of very clearly DeFined roadmap in terms of what is going to be handled internally by the team versus what is going to go to a vote, I think that's gonna go a long way in terms of increasing voter participation, and ultimately, streamlining how these protocols and projects run themselves.



Yeah, in summary, it sounds like you're both kind of saying so much is theoretical, which is somewhat obvious, given how quickly this space is moving and growing, you know, daos governance, right. And, you know, they're not that not to say that there isn't practical use cases as well. But it's really honing in and taking that next step to make these, you know, what are very good ideas, you know, more implementable, and more value producing blu ray, you know, like, like we can we can talk about this stuff forever? I think so we'll DeFinitely have to have to do this again. But, you know, any parting comments for 2022? And what we can expect? And, Jeff, I'll start with you this time.



Yeah, I think you can expect incredibly high returns relative to the risk once again, you know, I, I just don't see the bear market thesis, I don't see this scenario where just because we have 2017, or 18, PS PTSD, that the whole market goes down, I know, that's been floating around, I think there's going to be pockets of real strength and real growth throughout digital assets. And the alpha is going to come from finding those one or two themes that really work. So yeah, you know, we're looking forward to investing heavily across this ecosystem as we find those themes.



Yeah, totally agree with that. I think, you know, that that stuff always makes me laugh, because I think there's a lot of people, you know, in all markets, but especially in this market, who have no clue what the hell they're doing. And charts are easy to look at. And anyone can find the pattern and say, you know, this is gonna repeat itself, but there's no, like, actual evidence or reason why it would. So, Katie?



um, for me, I mean, I again, it kind of goes back to, I guess, the intellectual curiosity, part of the research process. For me, at least for next year, I'm, I think we spent the last 40 or so minutes talking about kind of some of the challenges that have been faced by digital assets, projects, whether it's how to revenues acquired, like, accrue to token holders, how do you keep customers? How do you deal with Decentralized Governance, and I I'm personally really excited to see projects tackle some of these issues next year, and how that kind of turns into additional invest, you know, investable themes within kind of the scope of some of the sectors that we discussed here.



Great. Yeah. Love it. Well, it's been a fun year. And obviously, we got, you know, few weeks left, which in this space is an eternity. But yeah, very much appreciate the time today, everyone and looking forward to next year. We'll have to do this again soon. So thank you both.



Thanks for having us on, Peter. Happy holidays to you and your family.



You don’t get that.



I do.



Thanks, Peter. Happy holidays.



Same to you both. I genuinely mean it from the bottom of my heart. everyone's laughing.



Take care everybody. Have Fun.



If you enjoyed this episode, we hope you subscribe to the podcast, share with others, post about it on social media or leave a rating and review. To catch all the latest religion. You could follow us on Instagram at real Vision TV and on Twitter at real vision. That's all for this episode. See you next time.



Peter Hans headshot

Peter Hans

Follow Us

We'll be tweeting new episodes, polls, questions, and show updates. Follow us and say hi!


Join the revolution

Choose your membership level below

Real Vision Essential

Essential insights for all investors

Our core membership, Real Vision ESSENTIAL, unlocks our most popular shows, introducing the key market themes we focus on and featuring hard-to-access guests like Kyle Bass, Jim Chanos, Jim Grant, Stan Druckenmiller and many more.

Become a member now and get analysis you won’t find anywhere else.

  • Daily interviews, investment ideas and presentations

  • The Real Vision Daily Briefing – after market close

  • Quarterly two-week long investment themes

  • Full, ad-free access to the archive

  • Binge anytime, anywhere on mobile and OTT apps, and offline with downloadable video, audio and transcripts

Become a member today

Plans starting at just $239/year. Cancel anytime.

Select your plan