The Delphi Podcast co-host and co-founder of Delphi Digital, Kevin Kelly, sits down with Tom Lombardi, Managing Director at 3iQ and adjunct professor of Finance at Pepperdine University, to get his take on several important trends in crypto and markets.
The Delphi Podcast co-host and co-founder of Delphi Digital, Kevin Kelly, sits down with Tom Lombardi, Managing Director at 3iQ and adjunct professor of Finance at Pepperdine University, to get his take on several important trends in crypto and markets. The two discuss a wide array of topic areas ranging from the rise of DeFi and its growing popularity among institutional investors to the evolution of liquidity mining programs and how proper token incentives can better align stakeholders to create more valuable products than their centralized counterparts.
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(03:32) – Updates from Tom.
(03:56) – Iron Finance stablecoin debacle.
(08:03) – dYdX’s promotion / thoughts on the incentives and leverage in crypto.
(12:35) – Thoughts on Uniswap’s AMM model.
(16:58) – Tom’s thoughts on incentives – right or wrong?
(20:03) – Token models and incentives.
(24:44) – Tom’s thoughts on global adoption.
(30:58) – What institutional investors really care about.
(37:56) – Uneducated narratives against crypto.
(48:34) – Tom’s students versus institutional investors.
(01:02:13) – Tom’s thoughts on NFTs.
(01:06:38) – Thoughts on current developments and the future of crypto.
(01:15:42) – Where to find Tom and 3iQ.
- Tom Lombardi’s Twitter
- Referenced Kraken blog post on self-custody
- Pepperdine class syllabus
- 3iQ’s website
- Our Video interviews Can Be Viewed Here: https://www.youtube.com/channel/UC9Yy99ZlQIX9-PdG_xHj43Q
- Access Delphi’s Research Here: https://www.delphidigital.io/
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- Creative Commons Attribution 3.0 Unported License
My guest on this episode is Tom Lombardi, managing director at 3iQ, the largest digital asset manager in Canada. Tom is also an adjunct professor of finance at Pepperdine University, where he teaches Digital Asset Finance. We original recorded this conversation several weeks ago, and after re-listening to the topics discussed, I deeply regret not getting this out sooner. Throughout our discussion, Tom weighs in on a wide variety of topic areas ranging from the rise of DeFi and its growing popularity among institutional investors, to the evolution of liquidity mining programs and how proper [inaudible 00:02:58] incentives can actually better align stakeholders to create more valuable products than their centralized counterparts. I really enjoyed this conversation with Tom, and I hope you do.
Really quickly before we get started, just a quick disclaimer: Delphi Ventures is an investor in 3iQ, and everything we discuss in this podcast is intended for informational purposes only. Nothing we say should be construed as investment advice or solicitation to buy any token or security mentioned in this podcast.
The views expressed today and podcasts are my own, and not representing 3iQ affiliate companies or strategies.
All right. I am joined here with Tom. Tom, thank you so much for being with me today. How are you?
Absolutely, Kevin. Thanks for having me. It’s Friday. Let’s have some fun.
It’s Friday, right? Let’s keep it light-hearted. It’s a Friday afternoon. What’s top of mind for you right now?
Oh, man. Well, we’ve got day job stuff, the serious stuff, but let’s have fun. I mean, what’s happening? We had the Iron.Finance debacle, the… What is it? The Mark Cuban Missile Crisis, I think it was called.
I hadn’t heard that, but I love that.
So a bit of background: Iron has a stablecoin, which is loosely pegged to the underlying assets, there’s the asset, TITAN. I think the one on Polygon, something else on Binance Chain, I think it’s called STEEL, but essentially, you have these governance tokens and you have stablecoin, and they’re working together to make a financial market. I don’t believe it was a rug. I hear that word thrown around a lot. That Binance was audited. I don’t think the Polygon finished their audit. But anyways, it was a bank run, and I think that’s what the team said. People just liquidated positions, and-
It operated as expected or as it should, but obviously, when you see massive sell offs like that, the first kind of instinct, I think, for everybody is it’s either a rug or it’s a scam.
Right, so just run for the exit. So I think there’s two funny kind of sort of observations, and one is if you think of the metaphor, what if Tether put their treasury on Uniswap? And that could expand and collapse as fast as the crypto markets move. They would have a tough time holding their peg, or holding, and that’s essentially as I see it what they were attempting to do with this algo stablecoin. But the other sort of irony of this is that all of the yield farming opportunities providing liquidity for these markets for funding the stablecoin, that’s where their earnings were. It was a million percent return. It was the liquidity providers that provided the exit ramp for investors, and that’s been referenced in other scenarios.
But you have people standing by ready to sell at any price, to buy at any price, and when the market moved, I mean, it was just like a death spiral. I watched it in real-time for fun. But it was an experiment. Unfortunately, people got burned. Mr. Cuban, I’m sure he’s got some other assets to cover his losses, and I’m sure a lot of other people lost money. But these are experiments, and this is a new paradigm. So let’s learn from these experiences, and I think step one is go with the audits, go with reputable audits, and they didn’t have theirs yet on Polygon. So if there’s anything you can take away from that is maybe that.
It’s kind of a dream too because when you have such a, we’ll call it, level playing field, your Mark Cubans of the world, as we saw, are also susceptible to this type of… I won’t call it a market risk because that’s obviously very idiosyncratic to Iron itself, but you have this level playing field and you have people like Mark Cuban coming in, and I think he’s doing a great job of bringing more awareness to the space. He had a great write up, I don’t know if you saw earlier, I think it was this week around explaining DeFi and yield farming and very kind of layman’s terms, right? And coming from such an influential person investor like that, I think, is doing the space wonders. But it just goes to show that there is a lot of risk in this market, and it pays to do your own research and your own homework, but at the end of the day, he’s on the hook or he’s susceptible to big sell offs and market risk just like all of us are.
Even billionaires can get burned, right? I mean, the level playing field works on both sides. Blockchain is enabling this new sort of I call it a shadow financial environments and anyone can participate. So for Mr. Cuban, he’ll learn lessons as well. Anyways, what else? What else am I thinking about? Oh! The other fun one was dYdX, which is automated market maker. Cool platform, sort of semi-centralized. They have a centralized order book, but everything’s on-chain. I love the marketing tactics. It’s good to see more nimble, more interesting marketing tactics coming out of crypto because it’s really a lot of what it needs, but I don’t know if anyone caught the recent promotion for… dYdX is offering a $75 credit, USDC credit, so dollars, not funny money if you deposit $1,000 of USDC into your account, but the one caveat is it only available to traders that have been liquidated on dYdX In the past. Amazing.
Here’s your consolation prize.
Yeah, here’s your consolation right here. If you’ve been wrecked, here’s 75 bucks to come back. I want to have fun with it because I think it’s sort of symbolic of the animal spirits in crypto as well as the participation, but let’s look at the bright side of this too is that, and this… You’ve referenced this, think about this with airdrops and incentives, all these metrics are on-chain, so if you have a position on dYdX, I think they have a rap Doge on there, so maybe that’s most of the people redeeming this promo. Think about the incentives. We now have this data of smart contracts that have been liquidated. We don’t need identity to assign a financial position, that’s on-chain. So you can offer that to those wallet addresses who have participated in a certain way.
Let’s like magnify that. Now you get into incentives around volume, incentives around size, incentives around positions. And I think we think about airdrops, mostly people have a bunch of garbage tokens in their Eth and Bitcoin wallet, but now that we have this level of data on-chain for a certain activity, this one was a liquidated position, you now essentially know who that audience is in a pseudonymous way. So now you can incentivize those people for a certain activity. I mean, you could just use your imagination as to how those people can engage, coordinate. I think it’s powerful.
And then also too, we think about leverage in crypto, and I think it’s aggressive, quasi-irresponsible, but look what it’s enabling. It’s enabling this peer-to-peer financial infrastructure that’s never existed before, look at the giant draw down we had a few weeks ago when coins got cut in half. Coinbase shut down, Kraken had issues. What happened on Uniswap? It kept on humming and everything worked, everything worked. And there’s a bunch of pundits out there, I won’t name names, but certainly guys who are trying to build services and products for the Wall Street types and saying, “Oh, crypto’s great,” but you need this as a sort of cover.
And gosh, with DeFi and especially exchanges, you don’t need anything. They work better than the centralized version. So I might mock the dYdX promo, I think it’s funny, but at the same time, look what it enables. It enables incentives for individuals that had a certain level of participation. I mean, we can go for days, but think about Uma and Synthetix, think about all the things happening there, trading currencies and real-world assets, and now you have identification of those markets and this participants, and there’s just so much you can do with them.
You bring up Uniswap, I think that AMM model, that automated market maker model that Uniswap essentially kind of pioneered, I just find so fascinating. At this point, you and I were talking offline about this, but it’s almost as if Uniswap, it works so well at this point compared to some of the other, call them, decentralized trading venues that we’ve seen over the last couple of years kind of being developed. It’s almost you take for granted that it’s there, and what’s really cool is when you think about, again, you were getting into the incentives and liquidity mining and yield farming, and all these things, but at the end of the day, you’re providing some type of monetary incentive for participation, and supplying some type of supply-side work, in this case being the assets for creating these liquidity pools.
I think, and again, we can spot check this five years from now, and come back and see if I’m completely off or a total moron about this, but I think that type of model where you’ve got a lot more, we’ll call it, heterogeneous liquidity providers compared to what you see… Even today in the US equity markets, for example, there’s really only a handful of really large market makers that… And across few different markets where liquidity, it’s almost phantom liquidity because when volatility strikes, a lot of these market makers, you’ll have these risk parameters trigger, they start pulling liquidity from the market at the exact time that the market needs that liquidity, and you have these really, really large dramatic sell offs that aren’t just crypto-native necessarily. You can see this in the US stock market, and we’ve seen it recently.
And so, point being I think longer-term, that type of AMM model is really, really interesting, and quite frankly just cool because you now can have potentially even a better system, or better liquidity buffer during those periods of volatility because not everybody… For example, during that sell off, I’m a provider for multiple pools on Uniswap, I wasn’t pulling a panic, pulling all assets out of there. Whereas, if that’s kind of more confined to, let’s say, a concentrated group of individuals who are making those markets, you can see that domino get triggered really, really quickly, and then all of them are pulling liquidity at the same time.
You’re totally right, and I tell you what, the Iron.Finance, it wasn’t really a death spiral. It was an organized liquid funded draw down to zero because those market makers in that AMM were standing ready. I mean, it’s what we call lazy LPing, but if they didn’t have the liquidity providers who were the ones benefiting from this yield farming scenario, the price would have dropped to zero in minutes. Instead, it gradually went to zero over 18 hours. What’s the difference, we’re splitting hairs. I guess the difference is in that dramatic move, there was liquidity, there was price discovery, there wasn’t a halt by a regulator, there wasn’t a tech issue.
I think Binance talked about having a tech issue on March 13, 2020, where, I don’t know, they were just selling off. But the way these AMMs, the way that they work and maybe the sort of the lazy LP… I think Uniswap v3 might change the scenario. You’re providing liquidity in a range, and as soon as it gets out of that range, your position is sort of not productive, and so maybe that changes. There’s one more point here is that this… Gosh, the yield farming. We went from yield farming inflationary type numbers, then we got into double digits with governance tokens. SUSHI kind of changed the game with more exponential ones. But holy moly, you could earn your position back on Iron.Finance in a day just yield farming. I mean, it was outrageous.
So incentives, is that right or wrong? I’m mixed here because let’s go back to the traditional world. There’s incentives for… If you buy a bond, oftentimes you’ll get a warrant or an equity kicker, and that’s incentive. You’re a bond investor, you’re looking for debt, but there are incentives sprinkled on top of that to say, “Here, if the performance works out, if the… then you get more. You get more.” And there’s probably a lot of other scenarios. So I think a healthy amount of incentives, especially for lendings. No brainer. Lendings and order book. I can provide, someone can borrow, and then there’s a spread, and these crypto lenders are making pretty healthy spread. So these incentives, I think, are healthy.
It’s sort of like if I’m a yield farmer… Let’s make the metaphor, you go to a Lakers game, and you pay a lot of money for the ticket. Don’t expect one of the players to let you play the game or give you his car while you went to the game. Be okay with buying a ticket and leaving with a free t-shirt. That should be your kicker. Right? I love DeFi, it’s going to change the world, but these incentives have to pencil, and these incentives also have to be… It has to be an upside that you didn’t count on in the first place. I think that’s a healthy mix.
Yeah, and I think to your point though, that concept around, let’s call it, yield farming and liquidity mining, at the end of the day, I think is not only here to stay, but also sets up really interesting longer-term use cases for just about any industry, any type of even consumer-facing application or industry that is trying to bring people in the door, trying to incentivize more usage around, let’s say, that application, now all of a sudden you’ve got this tool via tokens, and you can design these in different ways, it can have different incentives, they can have discounts programmed into them. Eventually, they’ll probably come with more kind of tangible cash flow generating attributes as soon as we kind of get more clarity around securities regulation.
But the long-term vision of this I find to be absolutely fascinating. It’s one of the things I’m most excited about seeing over the next five to 10 years within crypto and within digital assets more broadly is we’re starting to lay the blueprint or the playbook for starting up any type of new company and building incentives around that and using tokens and some type of digital asset to help drive or bootstrap the usage of whatever it is that you’re building, that application that you’re building. I think, again, it just creates an entirely new business model for a lot of people that otherwise maybe would have struggled to bring people in, in the front door.
Right, right. And I mean, I look at models something even like Curve. I think Curve has a good model, where there’s a base, there’s a kind of like a base APY, and then there’s a reward on top of that, which is usually modest. And that reward, CRV, they have an insane supply schedule. I still don’t understand it, but you weren’t going to make that money anyways in the first place, so might as well use that to do whatever, do you want to punt it and stay long, or do you want to cash it out? I think there’s that healthy mix, but I wouldn’t LP into Uniswap with the expectation that they’re going to dump their $3 billion treasury into your wallet as an incentive. LP on Uniswap because of the fees and the compounding. That’s the core of it. And even in that, think about that in just in basic world.
One of the things we’re going to talk about today is sort of what’s happening in crypto and sort of what’s reality on the outside. If you can get a 7% yield on US dollars that’s measured risk, people from around the world would chase that down. And they and they eventually will become comfortable, that’s sort of the DeFi approach, and that’s available without taking crypto risk, more or less. There’s layers to that. But once this industry matures a little bit more with things around custody, and what is money sitting in a smart contract really mean to investors, to custodians, those yields will definitely compress.
It’s law of diminishing returns, but with negative interest rates in many parts of the world, dislocations and valuations that are surely driven by the Federal Reserve… I mean, look at equity markets in the last two days. The Fed Chairman says what everyone was expecting, and the market tanks. Not to get into that too much because I know you’re the macro guy, they’re your expertise, but just the dislocation of a lot of markets around the world. But at the end of the day, you can get 7% on cash in DeFi, even in CeFi. Sometimes when I talk with institutional investors… I think that description’s a cop-out. When I talk to people with lots of money, that’s something that’s interesting to them.
Yeah, and I think to your point, one of our kind of long-term base cases here really is to your point around not only just that low interest rate environment, but also when you look at the performance of tech versus the rest of the equity market, and you look at just the equity markets in general and valuations and all that. I really truly think that you’re going to have this cohort of growth investors who, again, are hungry for some type of growth type equity play. And when you look at crypto, I mean, crypto is so ripe for capital flows that are looking for high, above average growth opportunities, because one, I mean, the space is, as we both know, it’s got to the point where I certainly can’t keep up with everything that’s happening, the innovation and the growth around it is absolutely staggering.
And at the same time, most of these companies similar to traditional VCs, it’s almost like liquid VC. They’re not burdened with a whole bunch of debt. There’s a lot of yes, risk to the downside, but at the same time, if a handful of these projects or applications or platforms or protocols, whichever layer you’re investing in, if some of these really do take hold, the actual P&L of the protocol in and of itself… I mean, they’re relatively low operating expenses, they’re eventually going to be decentralized by nature. And so you almost have this pure kind of cash flow going to potentially some of these token holders, and you do it in a way in which it’s permissionless and anybody can participate, so you open up to a global market.
That, to me from a kind of growth investor standpoint becomes really, really attractive. Not to say you just throw money at any project that comes across your radar, but that kind of backdrop and that dynamic against the backdrop of a lower growth environment in traditional markets is kind of the perfect storm for bringing more institutional, quote unquote, capital into this market, but really, more capital in this market where people just have a lot of money.
Yeah. Oh, you’re spot on. And I think a couple of observations there is that one thing I’ve been saying since 2015, when I got into this space, is that all this tech is amazing and these assets are groundbreaking, and the products, the apps and services that will have the biggest impact will be the ones that abstract away the blockchain and abstract away a lot of this volatility. So I’m certainly all in on crypto, but I think more global adoption, especially on Ethereum will likely be just interacting with the financial primitives for maybe not real-world assets, but just different assets. They’re not going to be counting on SUSHI token incentives, they’re going to be counting on yield spreads. They’re going to be providing liquidity, not for governance maybe, but more so for fees. And if they can do it in a market neutral kind of way, the way that market makers do in the real-world mostly, they’re going to participate and many already are.
So that’s why I just come back to… I always sort of teased that you can earn 7% on your US dollars, and that usually like, “But how? But what’s the catch?” And yes, the catch is you have to be comfortable with essentially, crypto collateral in some cases, not others. But I feel we have sort of the Bitcoin/Eth exposure, and that’s happening with institutions, it’s happening with 3iQ funds, but I think more importantly to your point, once we have this inclusion for institutions participating in something like DeFi, they’re not going to be interested or counting on gains from asset appreciation. They’re going to be using these primitives to enhance their business. They’re going to be using these primitives for yield, for opportunity.
Here’s another good example, I just thought about this the other day actually. Chris Dixon of a16z, Andreessen, I’ve been listening, reading to so much of his stuff, and it’s so cool. He’s a developer philosopher, and so he understands it. And he made a point where if you think about… Compare tech companies to banks. Tech companies right now are very large silos, they have control, political issues, but what do they run on? They run on open-source software. I mean, Google’s Android is largely open-source. You think about Linux on server-side. I mean, that’s all open-source because that’s the developer talent, but that’s the efficiency. That’s an efficiency and the ability.
So I look at banks and say, “You know what? Right now, banks, they’re built on proprietary closed loop systems,” and I think that in the future, banks will still be banks. They’ll still have a sign out front, they’ll still be successful. Everyone needs wealth management and oversight, but there’s going to be open-source software inside of banks, and that open-source software, it’s AMMs, it’s peer-to-peer lending. The way that they execute their trades and their balance sheet will be in this new paradigm that we’re working on today. And I think it’ll be a lot like the tech companies. They will still have that storefront, they’ll still have that brand.
Another example: Wealth management. We’re crypto professionals. You talk about self-custody. Gosh, it’s so complicated and it’s so difficult, and it’s just a myriad of risk factors. Kraken. I missed this post. Kraken had a blog post in 2016, and it was like, “The 40 easy steps to self-custody,” and one of the steps was renounce your citizenship. It’s extreme stuff. So it’s hard, and that’s what… [inaudible 00:29:43] 3iQ, these funds, it makes it easier for that. So that’s one point. But from managing, just managing my own crypto, it’s difficult. So I look at things like Zapper and there’s Argent, and then even Set protocol for diversification fund management. I need those tools, and those things, those sort of meta-level tools that will interact with swaps and compounds, we need those. So that’s where banks could play that role for the world’s wealth, it sits on top of these decentralized systems.
Right. So rather than, let’s say, displacing all of what a bank is or what a bank does, the future of banking essentially gets innovated on or improved upon, and still exist to a certain degree, but it’s built upon these permissionless, and, let’s say, decentralized networks and rails underlying.
Right. I mean, we’re still going to have these lines in the sand across countries and regulation and tariffs, and so banks will manage that stuff, but when it comes to the execution, instead of Swift, it’ll be Lightning, and that’ll be a fun time.
One thing I love about… you and I catch up pretty frequently, and one of the questions we’re always kind of kicking back and forth is given your insight into and conversations you have with, again we’ll call it, quote unquote, institutional investors, there’s obviously a lot of discussion in the media, and there’s headlines around what an institutional investor, really thinks about crypto, DeFi, Ethereum, Bitcoin, all of these different things. Is there anything or any conversation you have recently around… Anything that’s jumped out to you or surprised you around what the, I guess, the real behind the scenes conversations look like with some of these institutions? I guess my question is what are these institutions, what do they really care about, what are the kind of biggest concerns, what are the kind of things that are top of mind for them right now as they start to evaluate whether or not to come into this space?
Yeah. No, I mean, that’s a… How much time do we have? That’s a loader. I mean, there’s so many things you could go after, one is really just they want access to global assets, and they can get it. We have prime brokers and Goldman Sachs. I mean, you can get exposure to any asset in the world, whether it’s direct, whether it’s derivative, whether it’s a collateral against… There’s a lot of opportunity out there for people who have that. And so right now, like you said, I mean, there’s just a new generation of growth investors, there are… Maybe we won’t get into sort of global debt and negative interest rates, but the idea that these big institutions have obligations that they’re not currently meeting. And I’m not saying that Bitcoin fixes that. Am I? But they have to look at other sources. I mean, how about this? Who’s investing in Tesla? Everyone. I don’t understand Tesla. I understand Tesla as, “Okay, they make cars and batteries,” but in terms of evaluation, in terms of management… Talk about management. Guy’s obsessed with Dogecoin-
Elon’s playing his own game. He’s just playing his own game.
He’s playing his own game. And so I go back to my days of I put my… I mean, I was investment banking in Bank of America, and I would research these companies. We did a lot of debt issuance, so I was like a credit guy, I would have to know the inside and outs of these companies, and I thought I did, but then something would change and I was like, “Wow. I didn’t see that coming.” And if I have that level of insight into one company and I still don’t have my hands around moving parts, how is the world comfortable with a stock like Tesla with this benevolent dictator, let’s kick that out over to Elon, this sort of interesting cap structure. If the world’s comfortable with something like that, then clearly, they can reach out to something like a potential digital gold, an aspirational digital gold as I think Fidelity Digital Assets coined it.
Bitcoin definitely has that lure of a new asset, and you can slap labels on it all day, store value, future reserve currencies, digital gold. I’m not really sure what to call it, but I do know that it has finite supply, it has interest, it will have more applications, and it’s pretty straightforward. So it’s pretty easy to wrap a thesis around it, especially when you have regulated funds that offer it. But when we get into Ethereum and describing the investment thesis for Ether becomes a little bit more complicated, but it also has a shift in the investor. The investor’s like, “I want to learn more about this new paradigm. I want exposure to this new paradigm, and all the things sort of built on top of it.” So I mean, if we think about if Bitcoin’s this sort of aspirational store of value, digital gold, which is it panning out to be so? I’m not really sure.
But Ethereum has shadow financial infrastructure. It can operate parallel to the existing financial infrastructure and thrive, and multiply from here. And then, most importantly, all those applications built on top of Ethereum, all the things that we’ve been waiting for since 2015, remember identity, remember advertising, remember all this provenance of blockchain, all that stuff. None of those apps really came to market. Those were ideas. And today, we have apps on DeFi that work, that are liquid, that have $60 billion locked up, that are real. And so, you can’t ignore that.
You can’t ignore that. I struggle to sort of frame the exact investment opportunity. It’s really just a participation, and these banks are watching it closely. They’re tiptoeing in with… You saw with Goldman Sachs this week, and what I read in their report a few weeks ago, yes, they’re going to make exposure of Bitcoin and Ether available to their clients, but it’s mainly in a derivative form, it’s mainly in futures and options, and I think that that’s… We can dig into that more, but that’s the starting point. But Gosh, I mean, all the things that are happening that makes sense, lending, market making, derivatives. All these things have such a big market and it’s coming. So the smart bankers are paying attention, I’ve seen a number of them sort of get involved and then bounce and join Delphi Digital or join 3iQ. That’s happening daily, and it’s beautiful.
It’s funny. I don’t know if I’ve come across somebody who’s started to really dip their toes into crypto and specifically DeFi who’s come from the traditional finance world that hasn’t wound up staying in crypto and getting involved in DeFi, and to your point, everybody, once they get a taste of it and once they see the light, they’re all in. They see the opportunity.
The other line I’ve heard is you’ve never… And this is real. You think about the Bitcoin pundits, rarely have you heard a very negative viewpoint from someone who’s done their homework. I mean, let’s leave the Bitcoin ESG stuff aside because there might be something pretty important there, but the pundits, some of the guys I used to talk to about DeFi, “Oh, that wouldn’t hold up. DeFi’s not going to hold up in a down market at all,” and I have two excellent examples of that happening, March 2020 and a few weeks ago.
We have battle scars to prove it.
Yeah. And so, I’m not mocking the pundits of what we’re doing, but gosh, I would love to just hear an educated thesis against not just Bitcoin, not just Eth, but against being involved. Someone saying, “I’ve understood this, I’ve done my research, I’ve read all the Delphi digital reports, and I still think it’s a big waste of everyone’s time,” like Nouriel Roubini and Warren Buffett and some of these others, it’s a narrative. It’s a narrative in support of their agenda, for better or worse. But I’m looking for the educated antagonist. That’s what I want to hear, and I’ve yet to really hear one.
Yeah, I think part of it too, just in conversations I’ve had is it almost seems like it threatens the knowledge mode for some of these people. It’s obviously a brand new type of asset, or call it an asset class. It’s both a combination of you can apply traditional financial metrics to it, you have now, to your point, a lot of on chain data that we can start to build out and quite frankly, we can start to model, and at the same time, there is a lot of risk and uncertainty around some of the tech that’s being built. Yes, it’s been battle-tested at this point to the degree in which I think you could certainly say that the train has left the station and we’re not going back, cat’s certainly out the box, but at the same time, yo your point, I haven’t really come across somebody who’s done their homework, especially that is it that kind of pedigree in terms of influence and notoriety and has turned around and said, “Yeah, it just X, Y and Z reason doesn’t make sense to me.”
Right. I’ve heard it from people who they look at Bitcoin as a real commodity, asset, and then they say, “Ethereum’s not for me.” I’ve heard people look at Ethereum and say, “This is going to change the world, but Bitcoin is something with less interest.” I’ve heard sort of that. And again, that’s coming at it in two, they’re two very different… Let’s get at this, what are your crypto politics? You got to pick one. You got to pick the red one, or the pick the orange one, or the blue one. Why do we have to pick? Why do we have to say… Because Bitcoin and Ether as assets, they’re so different. So, so different. And they’re attacking two different things.
If I were to frame my sort of preference for these assets, I’ll straddle the fence. I think Bitcoin has the attributes for the digital gold. Great. It’s not there yet, but it will be. And I think Ether and Ethereum DeFi can change financial infrastructure. If we put it another way, if we look at it from politics, I’m fiscally conservative, socially liberal. And I get mocked for that too, but it’s in the same sense of I think there’s… I think you can do both. I think you can have your cake and eat it too.
Another one is I’m a big Clippers fan, but I also like the Lakers. Two great teams. Why do I have to choose? Why do I have to pick a side? It was Su from Three Arrows, I was listening to his podcasts, a great one, Uncommon Core I think it’s called, and he was getting into how there’s… Sure it’s divisive, but human nature is competitive, and we tend to think, and the sort of an American view of thinking is there’s got to be a winner, there’s got to be a loser. There’s got to be my viewpoint, and then there’s got to be someone else’s, and that’s not really how markets work, and that’s not how competition works in the real world. One thing, I think you have to wade through the agenda, and I try to put my own agenda aside and be open to what’s out there. But when you hear the voices, when you hear the influencers, when you turn on CNBC, everyone’s got an agenda and they’re going to share that, either all-in or rat poison, or this or that. And I think that’s a fool’s errand.
Has this concept of maximalism that you’re hitting on here, have you seen that deter, let’s say, large sophisticated institutional investors who were once maybe looking at this space and then saw somebody who’s very, very one-sided, kind of a Bitcoin maxi, some of the commentary that comes out of that kind of turned them off from this because it can almost seem… I don’t want to say cult-like, and there’s certain arguments for that being one of the reasons why crypto is so resilient because at the end of the day, a lot of bitcoins built on a belief system, one that you and I both very much believe in. But people ask me, “What is the biggest risk of Bitcoin and aside from some broad-based regulatory head?” When it’s honestly something that could derail the commitment and the enthusiasm from the Bitcoin community that believes in this new type of digital asset.
And for me, at least, it’s this kind of [inaudible 00:44:56] change around communities and this whole movement away from the corporate incumbents towards a more kind of collective or community feel where tide lifts all boats, but at the same time, the people who come in and say, or from the outside say, “This isn’t worth my time,” I challenge them to come in and look at some of these communities and get involved in some of these communities and tell me that you would bet against an asset class that has that much enthusiasm and that much commitment to this longer-term vision. Do you know what I mean?
Yeah, I do, but I think that’s more of a retail issue. I don’t think pension fund managers are reading Twitter with Peter McCormick talking about the world’s reserve currency. Let’s zoom out. Let’s be open to the world, let’s talk about reality, and crypto Twitter is just not reality. It’s where things are being built, it’s where ideas are being shared, it’s where alpha is being discovered, but it’s not framing the global narrative for Bitcoin. It’s just not. I think people like Michael Saylor tend to have a bigger voice, and that might dissuade some people because he is very sort of… Even he said he’s open to all new technologies, and this is the right one today. But he has an agenda, the biggest balance sheet of Bitcoin, right? So I don’t think so. I think some of the bigger issues, like… Gosh, you think about Aave or Compound, and just lending, Uniswap market making. I wish those could be elevated and featured, and some of the others are washed away because then it becomes…
I’ll give you another example. In my class, I teach adjunct professor at Pepperdine. My class is called Digital Asset Finance, what I find a lot is the students, they’re like, “Hey. Great, Bitcoin. That’s great. Ether, okay, but what’s next?” And I call them the treasure hunters. They’re looking for the next big thing, they’re looking for the undervalued thing that’s going to pop, and look no further than Wall Street Bets crew and even some of this NFT stuff. So they might go into Twitter, and look at Iron.Finance and be like, “Let’s try a yield farming,” and we see how that wound up.
I don’t think it’s about narrative. I don’t think the narrative is tainting global adoption of Bitcoin because, to be honest, the world doesn’t go on these Clubhouse chats. A lot of the narrative is in a silo, and I’m sort of thankful that that’s happening. The issue becomes when we have these bigger blow ups, and then Mark Cuban starts talking about regulation stablecoins, and like in Canada, there was the QuadrigaCX and lots of people lost money. I think that’s the biggest risk factor. It’s real loss of money. It’s not a cult-like sort of influence. It’s dollars and cents.
Something you just said that I definitely want to come back to is you talk about with your class and your students, and Bitcoin and Ether, and now they’re looking for what’s next, and it sounds like it’s almost Bitcoin, Ether are old news. They get it, they want to move on [crosstalk 00:49:03].
Right. They want to find the next big thing. Have you found that compared to… Because I think you sit in a really interesting position where you have conversations on one hand with institutional investors, on the other hand, you’re teaching a class on digital asset finance to students. Do you find that the, I guess, reception or ability for digital assets to really click is a lot quicker with your students versus some of the institutional investors because maybe some of them have grown up, they’re more digitally native, or is that not something that you see?
It’s a great question because I’m going to go the other way on this. My students, they’re smart, they’re eager. I think 80% of my class is already invested. I had two students who are already working in crypto. I taught the same exact class last year. This year’s class was oversubscribed. I had five people auditing, which they’re not getting credit, they’re just listening, and then last year’s class… Maybe this is a new index of investors’ sentiment? I’ll do my Zoom polls of my class, and it’s like last year, it was half of the classes invested, which I thought was still a lot, but they were mostly green when it comes to knowledge. This year, 80% of class invested. I’ve got two people working in crypto. I had two guys who were hacking something together in DeFi. We’ve come a long way. And this relates to the last question, so here’s what I find: I find that the students are very much crypto to the moon, coin-flipping, Robinhood pumping, news chasing investors. Maybe that’s a wrong characteristic because it’s a very broad characteristic, but they are typical of the crypto Twitter pundits. They eat it up.
And that helps me because it helps me with what are these… They’re very vocal on what they’re thinking about. They think about NFTs, they’re thinking about Dogecoin for better, for worse. So when I start with them, I have to come back. My first class is entirely spent on what is money and monetary systems and the Federal Reserve and the payment systems. I don’t even say, “Bitcoin,” on the first class, and I think that took a lot of people by surprise. I have them read this year was Saifedean’s The Bitcoin Standard, which is an excellent book, and everyone that’s what… If you meet an institutional investor and they want to learn more, give them that book because it is the backdrop, the macro-backdrop, the history, and then you sort of pair that with the history of technology, and it just makes total sense.
So I have to zoom them back out into the macro picture. And not just for Bitcoin, but for DeFi. It’s like how do these financial primitives work today? How do derivatives work?, and where do you get leverage? And then once they have that baseline, then we can introduce what the better version looks like. I’d say half of my class is just typical fundamental economics and finance, and then the other half gets more into crypto. So that’s where… And Joe Rosenthal from Bloomberg, he’s sort of all over the map as well with his sentiment, but I think that he’s getting into this narrative that, “Stop pumping these coins and start looking at how it can affect the world,” and I think ever since you had Hayden from Uniswap on their podcast, I think he’s really looked into… Because he’s a Wall Street guy. He understands it all. And then he’s like, “Coins are great to the moon, but holy crap, look at this $40 trillion derivatives market. It’s the largest hand in the world.” I like to zoom people out to that as well.
I guess it’s a double-edged sword too, right? It’s almost like you want to have your cake and eat it too with permissionless networks and decentralized networks in these systems, the ability for anybody to launch their own token, and put whatever design or, quote unquote, intrinsic value behind it or value you try to build into it, the fact that you can do that in a much easier way than obviously going to the stock exchange and saying, “I want to list on your chain and have my asset be tradable,” you have to almost expect that you’re going to get a lot more noise in that type of market, but at the same time, the trade off is you have a lot more innovation and composability and new ways of doing things that is… People obviously often compare this movement to the advent of the internet and early 2000s tech, and for us, obviously, it’s an acceleration on top of that because, one, you already have those primitives built for you, but two, these concepts of composability just by nature makes that innovation happen that much quicker because the feedback loop is so, so fast on crypto.
It’s so fast. It’s faster than any other industry we’ve ever been. Let’s say crypto in general is driven right now by open source software and greed, and the largest addressable disruptive market in the world. Those three things, to iterate on open source and new projects, to… I say, greed. I mean, you’re incentivizing people to participate, and I think that’s a big driver of this. You’re going to have casualties, you’re going to have billionaires, but what other market in the world has had that lightning fast pace of innovation because a lot of other… I mean, you think about autonomous cars, and… Autonomous cars. Right there. It’s expensive to build those things. It’s expensive to research, and then largely, it’s happening inside of Google, Uber, and whomever else. So how fast is innovation going to happen with those sort of central players being the key innovators?
Today, we have key innovators from all over the world. I mean, you listen to podcasts. I’m learning new accents from Eastern Europe and Asia just because those are the pioneers in crypto, and that’s amazing. Another thing I want to address too, and I struggle with this a lot, and this is another one from Su, Three Arrows is… Gosh, recency bias is so hard. And I will tip my hat to the Bitcoin maxis with the time preference thesis. I think that could work in all different parts of your life. What is your preference for your immediate need? And these little supercomputers in our pocket, they’ve made us to be lab rats, and we respond and we think, and we… We don’t think, we just respond. Maybe that’s it. But the recency bias is so powerful in crypto because we have these ebbs and flows. And Kev, you’ve been in it long enough in your career in crypto where one day, you’re like, “I’m Jamie Dimon. I’m going to take his office,” and then the next day, you’re like, “Why did I ever leave banking?” That happens and that’s a reality, and so this recency bias around…
I mean, ICOs is a great example. I was in the thick of it in ICOs and I was drinking the Kool-Aid, and the world was going to change that year. And it didn’t happen, and it didn’t happen. And then it was like, “Okay, this is all a scam.” Come back to where are we today? We’ve had a big run up. We’ve had adoption. And Bitcoin’s its own thing and Bitcoin’s fantastic, but DeFi, you have adoption with real-world applications. I think we’re trending down in terms of the market price and I absolutely expect the narrative to go back to, “DeFi’s a scam, it’s Ponzi. All these things are worthless. Let’s get back to work.” I have mentally prepared for that narrative, and that’s that recency bias, which, it’s so strong in crypto. I don’t know how to fight it. You just sort of have to elevate back up and just say, “Here’s the addressable market. Here’s what’s happening, and the real things that are happening.”
And there’s a lot of things that feel very different today, obviously, versus your post that blow off in 2017, early 2018, but one of the big things for me is directly your point of not only do you have adoption today, I at least personally can actually see where or at least think I can see where this really goes mainstream and actually changes the world versus 2017, Bitcoin, I think I got a little bit early just because, again, I was more familiar with macro and that’s actually what turned me on to Bitcoin was I thought it was very fascinating and more macro context. Some of the more crypto rabbit hole-type things, you’re diving into DeFi in the very early stages.
I kind of saw the writing on the wall what it could look like, but it really… I won’t say didn’t click for me, but I wasn’t entirely sure that this would actually become something. I wasn’t sure if this were just going to be a fad or if this is really going to be something that that took off, and since making that full-time plunge into crypto a few years ago, and now sitting here today, I mean, I honestly can’t imagine being anywhere else or doing anything else because you know what I mean? It’s that conviction keeps your head down during these types of times, you have big sell offs and a lot of volatility, and you say, “Listen, we’re building for the future,” and I really truly believe that that’s kind of where we stand.
And some of the best… Another thing I think relevant here is the Lindy effect, the longer around, the more powerful it becomes. I mean, look at Dogecoin. It just sort of sat there and no one cared about it, and then all of a sudden, boom, it’s back because it was there. That’s one sort of, I think, shallow example, but another good example of OpenSea. OpenSea was building NFT platform when no one cared about NFTs, and they were hard at work, and they were heads-down. I wouldn’t take an investor meeting with them just because I’m like, “There’s no market. Good luck.” And so they’ve built a marketplace that when that tide turns, they’re right there. I think that’s the… You as a venture capitalist, you probably have that mindset as well around like, “Okay, what’s here today, but what’s around the corner?” And you may not have that conviction.
This is where I come back to Chris Dixon because I don’t think like him, and that’s why I love reading his stuff, I love his podcasts and because he’s 10, 15 years out, and I can get five years out, especially with just the financial stuff. But gosh, I think that’s where special things are built. Uniswap is another example. It was just sort of tinkering around with this new primitive when crypto was in a bear market, and then it just had its moment to shine. One thing I would say, I kind of went through this thing with NFTs. They first came to market and I was like, “Oh, wow. That’s cool. Let’s look at it,” and then it got abused. There was so many out of work graphic designers are like, “Hey, I’m going to upload my entire hard drive to this thing, and see how it does,” and no one bought their JPEGs. The cream rises to the top. But now I’m thinking, and I had a meeting yesterday with some Hollywood types and some big investors and they want to get into NFTs, so I’m the NFT guy apparently.
But it’s like I’m kind of peering around the corner to what the promise of NFTs hold in the mainstream. Let’s get out of crypto for a second. And I think it’s going to enable a lot, a lot of interactions, especially with marketing and incentives, but on a mainstream basis. Great example of… So I think the NFT sort of arts investment thing, that’s a thesis, but when we get into DAOs and second level engagements and even the Turing-Complete Smart Contract can basically do anything. So imagine what Fox Studios, who just raised $100 million to create an NFT studio, imagine what they’re going to… Who knows what they’re going to dream up, but in my own mind, I think we have to abstract away sort of crypto from NFTs and it’ll just become ownership. It’ll just become a world with obscene levels of digital redundancies and distractions will now have this scarce level of ownership of a lot of things.
There’s big money paying attention to NFTs right now. Mattel’s launching stuff. I think this stuff today is just like… I don’t want to own a JPEG. That doesn’t work for me. What is Maroon 5 that just launched this week, and I was kind of excited. I don’t like Maroon five. I don’t know who does. Adam Levine, he’s a big personality. They did their campaign, their NFTs on YellowHeart, and it was, “Buy this JPEG, great. But if you buy this, it unlocks that.” Okay, now we’re kind of if that, then this. That’s sort of the premise of a smart contract. Interesting. And then it was like, “DAO. We’re going to create a Maroon 5 DAO that’s going to do ESG and… Buy the seed unit, and there’ll be different phases,” and I was like, “Wow, that’s really cool.”
So I went on and bought one for $25. I checked back four hours later, there were seven people that bought it. Seven. And I think today, there’s 40. So unfortunately, this whole campaign with Maroon 5 is a complete flop. So what does that tell me? It tells me, one, they probably don’t have the cult following that like an NBA Top Shot has, but two, gosh, it was just so early in what’s possible and what people want to do, but what the market right now… NFTs is largely surrounded, with crypto and crypto, and then speculation. And I think this is a good attempt, but this is that moment where that’s like this is where the world is moving, but we just need better experiences, we need better on-ramps, we need all this.
I wholeheartedly agree in the sense that I think tokenize communities, and committee tokens with the DAO at the center, and then complimentary NFC strategy is kind of built off of that, I think that is very much the future of how a lot of this starts to pan out.
Yeah, and it’s the present too. It’s the present. One more example from this meeting is that I was talking to them about… They’re like, “Oh, Maroon 5. Artwork, cool. Next level. Wow. DAO,” and they were like, “Huh? What” And I kind of talked them through it, and they were like, “Okay, fun, but I don’t know if that’s going to happen.” I was like, “Guess what, guys? There’s three and a half billion dollars locked up in Uniswap’s DAO. There’s a billion dollars in Aave and Compound each in their DAO. This is already happening. This is already reality. This is already being battle-tested,” and for me, that’s setting the stage for something much bigger. It’d be different if Maroon 5 had no precedent for creating a DAO, but now there’s billions and billions of dollars locked into these organizations that are just so, so creative and so enterprising. Same with the NFT apps. They’re here today. So it’s just what’s the application features?
Yeah, and that’s I think that’s a great segue into the final kind of question I had for you, which is, and to put you on the spot a little bit, based on all the things we’re talking about, what do you see as, or what do you personally think is the most interesting part of crypto that you’re watching today, or the most interesting development that you think is going to happen within crypto that you are, let’s say, most excited for in the future?
I think there’s some near-term risks, and there’s some near-term risks within regulation. So to kind of back up too, I’m in Canada. I’m an American. I moved to Canada from California last year, and I sort of call myself I’m in regulatory exile. I’m not leaving anything, but guess what? I’m halfway to Seychelles. Canada is regulatory-friendly to Bitcoin, crypto investment funds, and so I’m going with that opportunity is. I probably won’t go all the way to Seychelles, but I think that there’s opportunity nearby. Canada has cleared the way for these crypto investment funds. They’re regulated, they’re audited, they have oversight, but they’re also cracking down on crypto ownership by corporations, and by… They went after Poloniex recently, and there’s been a lot of guidance as to how public companies can use and manage crypto. So it’s a bit of a push and pull. But I think in the US, I think we recently heard VanEck approval has been again postponed, kicked down the road.
And the $50 billion question in the US for crypto funds, the SEC asks, “Are these funds, quote unquote, designed to prevent fraudulent manipulative acts, one? Two, do these funds allowed to protect investors and public interest?” They’re holding onto those two things before they open the floodgates to crypto in the regulated venues, and I don’t have an opinion either way on that, but I’ve met Gary Gensler before… I don’t know if anyone… Bitcoin MIT conference, he’s been there almost every year, and I kind of go back to the example of when I worked in investment bank, I knew so much about these companies, but what I really knew is how much I didn’t know. The more you learn about something, the more you realize you don’t know, and that’s alive and well in crypto. So I look at Gary Gensler, and he taught at MIT, he knows about crypto capital infrastructure, he knows about leverage, he knows about incentives, he knows about all these failures and all these hacks. So he’s seen how the sausage is made inside and I think that maybe he’s become a vegetarian.
I mean, does that hurt or help to get, for example, an ETF approved? I don’t know. I don’t know. It’s a bit of coin flip. And then I think a lot of these big hacks, rug pulls, bank runs like Iron, I think those are bad. We got to get away from those, or at least, if they hit the press… This whole Bitcoin, ESG thing is a near-term risk. But what am I saying is the opportunity. I mean, the opportunity… It’s funny. Someone else was saying the same opportunity, sometimes the best thing in investing in crypto is to just do nothing. Don’t trade. You get in, you allocate. It’s like one of those slow cookers, set it and forget it. Sometimes that thesis has worked, where I think when you divert from the large caps, historically, it didn’t pencil as opposed to just staying firm. So I think staying firm with assets that, again, not really investment advice, but go with the large caps. I guess I just gave it.
What’s exciting, I think, is just more involvement of what’s already here, what’s already here, and there are other things that need to be fixed, custody is still not there on an institutional scale, even on a personal scale. So that needs to be fixed. And then user experience. My whole thing around when Facebook Diem, I think it’s called now, I was seeing that as not like, “Okay, I can make payments,” but, “Now, the world has a Bitcoin wallet.” For me, that was a huge catalyst, and I think for the market, market ran too. We have to have those user experiences that are just easy, and unfortunately, those are held with big tech, big banks, and a lot of cases, big funds to allocate. So we need those easy user experiences. And so what does that mean in terms of investment? Sort of stick around.
It’s the Lindy effect. The longer you’re in crypto, the more battle-tested, you become. I’m not getting too invested in NFTs, I’m just sort of observing, but that’s going to have mainstream adoption. Look at NBA Top Shots. I mean, here’s an example: My sister-in-law, she’s a nurse in surgery, and the doctor there was supposed to do surgery, and the doctor was in the break room, and they’re like, “Doctor, let’s go,” and he’s like, “Hold on.” He’s on his phone. He goes, “They’re about to drop. New Top Shots are about to drop.” He was delaying surgery to get his Top Shot. So for me, that was like, “Okay, this is real.”
So I think the NFT will do all the things that we all know, like allow artists and curators to sort of come closer together, but the marketing applications of user engagements, understanding the user relationship. Back to the dYdX, right? Knowing which investors were liquidated and providing just those people incentive, take that with NFT and say, “Just those people that join the Katy Perry fan club are going to be entitled to X, Y and Z.” Once you have those marketing applications in a form that’s just off your Facebook account. It can be any static. Sprinkle on a little speculation, I think that market will be excited.
Yeah. No, 100%. I often joke that anybody new who’s remotely curious by crypto, whenever I get a conversation with them, I’d probably say, “The coolest thing about crypto is,” followed by something. I probably say that a dozen times, and I also think that probably the coolest thing about crypto is something I might not even know about crypto, and I find that also fascinating too. So it’s seems like it’s really a matter of when, not necessarily if at this point, which is nice.
And then the one I mentioned before of yield on dollars. That’s disruptive, that’s available. You look at what Circle’s doing, Coinbase is now offering loans to their clients. I mean, there’s going to be a large sort of lending and borrow landscape within dollars inside of crypto. There’s yield there, there’s significant yield there. And so this is where it’s like abstract away the memes, the dogs, the food tokens, and come back to borrow, lend, be a market maker, be a funding rates. These traditional primitives are 100x improvements in DeFi, and participate. And I think if we’re doing it, then it’s only time until bigger balance sheets do.
Yeah. No, completely agree. I think that’s a perfect place to end this one. Really appreciate the time, Tom. For anybody who is interested learning more about you, learning more about 3iQ, where should we send them?
Yeah. I mean, 3iQ, Canada’s largest digital asset manager. You can go to 3iQ.ca, but you can always get in touch with me. I’m on Twitter, @tomlombardi. So looking forward to it.
Awesome. Well, Tom, thanks again. I really appreciate it, man.
Yeah, that was fun.
Looking forward to the next one.
Have a good one.