The Dark Side of Token Launches | Arthur Cheong & Sean Lippel

Jason Yanowitz

Hey, everyone, if you have been listening to Empire, you know that Santi and I are fed up with unaffordable fees and frustrating transaction speeds that make the on chain experience basically unusable. So the Arbitrum team reached out and they showed us the platform. They showed us what you can do on Arbitrum. Whatever you're doing, you can experience frictionless transactions at lightning speed on Arbitrum. So head over to portal Arbitrum IO and check it out.

Scary stat for you. The odds of falling victim to online crimes are one in four. Aura provides digital security protection to keep your personal information, passwords, online activity, and technology safe from online threats. For empire listeners, Aura is offering 14 days free plus up to 55% off an aura subscription. When you visit aura.com blockworks, terms and conditions apply.

Cipher details. You'll hear more about aura later in the show. This episode is brought to you by Kinto, the safety first layer two that features user owned KYC and native account abstraction. To solve the two biggest roadblocks to mainstream adoption. One, security and two, user experience.

Their founder, Ramon sent me the onboarding flow. It's engine en g e n dot kinto dot Xyz. I would highly recommend becoming a founding member of their launch program. You'll hear more about Kinto later in the show. Are you tired of high gas fees?

I'm excited to let you know about scale a zero gas fee modular blockchain that's become a perfect fit for gaming and AI apps because of their instant finality and lack of mev. Explore the Skale ecosystem today at Skale space forward slash ecosystem and stay up to date with the gasless blockchain on X at Skale network. That's at Scale network. Big thanks to Skale for sponsoring Empire.

Everyone, welcome back to another Empire episode. We have Arthur Zero X on Twitter, but also founder of Defiance with Sean Lapel, GP of fintech Collective, also poker extraordinaire. So yeah, Sean, Arthur, welcome to the show, guys. Good to be here. Likewise.

Arthur

Thanks for having me here again. Yeah, of course. Arthur, I want to pick on you first. So beginning of this episode, I want to talk about this idea of, like, low flowed high fdv venture market. Seems like it's getting pretty out of whack, at least in the later stages.

Jason Yanowitz

We saw, like, monad movement, bear chain like these. The speed at which I'm seeing, like, you go raise a series A and then you turn around and raise your series B, or you do a strategic round and then you do the series. It's getting very, very, very fast and I'd love to hear, Arthur, you had this tweet, it said the model is breaking. Merlin chain last venture round was 800 million ftv trading at 1.9 billion. Now for safe last VC around 1.2 billion fTV trading at 2.8 billion fTV.

Now a two to three x. Before any investors or team unlock, tell me one more time that valuation doesn't matter. What do you mean when you said the model is breaking?

Arthur

I think there was a lot of expectation among the crypto vc that as long as they get into any good deals and before the token unlock, they will usually see at least a ten x on the investment compared to the last round. For most of the infrastructure or layer one, layer two project, they are able to raise at between 300 to 700 million valuation. They usually start trading at three or 5 billion valuation and then if the market does well, they will trade up to like ten or 15 billion valuation. In fact, that has happened during Q four to q one, we see state network went up to 10 billion. We also see celestial launch at two plus billion valuation and went up all the way to 20 billion valuation.

So that certainly set the expectation very high. Yeah, but I don't think this is sustainable. There is more and more new project launching. A lot of them are definitely high quality projects, but the money that is coming in to invest in these so called altcoins are not keeping up with the pace of the project launching. So I don't think we are going to see so many of them launching and sustaining it between ten to 15 billion on a fully diluted basis going forward, at least.

Even if some of them happen, you'll be more like outliers rather than norm. Yeah. Can you maybe explain for listeners, maybe we can actually zoom out from that question, which is, for those unfamiliar with this idea of low float, high fdv, what does that really mean? I think it really refers to where, for a project that has a pretty high valuation on a fully diluted basis, usually refer to more than 5 billion at launch, where the circulating supply are less than 15 or 20% of the total supply. So there will be five to six times more supply that will be coming into the market over the next two to four years.

Yeah, I think generally these are referred to some of the low flow, high fdv. Obviously, we have seen some of the even more extreme examples in the past. I think some of these projects associated with SVF in the past, they will float even less than 5% or less than 2% when they launch. So I think serum at one point have 100 billion fdv and the market cap was less than 5 billion. So, Sean, I throw this next one over to you, which is.

Jason Yanowitz

Do you think so Arthur's saying that this kind of like high ftv, low float model is kind of like breaking. Do you think that the window for launching a token and seeing that like instant two to three x is now closed? Yeah, it's a really interesting question. I don't think that's empirically been proven to be correct yet. I still think, I mean, expecting a launch out the gate at maybe ten X is probably a bit too ambitious.

Sean Lippel

I still think some of these new token launches are still coming at a minimum of two to three x. A lot of it, as Arthur alluded to, is the fact that just a percentage of the circulating supply is actually out at launch, which creates a whole bunch of perverse incentives that Arthur unpacked a bit. Ultimately, let's actually think about the incentives that are driving these type of outcomes. So for VC's, super helpful for them to get into a deal within a year, have the token launch, the ability to mark up their book and then market to LP's that they've got a three X investment or maybe a ten x investment. The problem is we've seen, and this has been talked about at length on Twitter.

You look at wild a bunch of other names since then, it's effectively been down. Only I think the perverse incentives here is if you're looking to actually decentralize the token, put it in the hands of more people. Really tough for a regular retail investor to buy into that project knowing that 80% plus the supply is the overhang, essentially, and VC's will effectively be dumping on you. So I think something about this needs to be fixed. So until the launches come at something less than three x where VC's are entering, I think the dynamic will remain.

But I'm with Arthur, I'm as concerned about this dynamic as ever. And it's why you've heard prolific chance of bringing traditional icos back where you could get retail in at the same, the same price. So, I mean, it's the market dynamic we're living in today, unfortunately. So why is this happening? Guys, the paradigm we're talking about here is, okay, you launched the token at a high FTV.

Jason Yanowitz

You've got, I don't know, ten to 20% of the token supply circulating right out of the gate. You have oftentimes no public sale. And the strategy right now is oftentimes big airdrop in this cycle and we can talk about the points meta in a little bit. But yeah, you saw, I don't know, Arthur, what's a. Or Sean, what's a good example, like dimension maybe it was like 8 billion FTV out of the gate, 16% circulating, no public sale, like over 100.

I think it was like 100 million airdrop to folks. And I don't know what the price has done, but I'm not sure what it's done, but I would assume it's gone down. Why is this, why is this happening? Like, why is this the strategy? What does this accomplish for either the VC's or what does this accomplish for the protocols?

If it's such a bad model, why is everyone doing it?

Arthur

Yeah, I think it's really about the way that crypto does the anchoring, which I think is you have a classic duration mismatch where you can't really just calm liquid stuff immediately with private market stuff. But I think that is something that a lot of projects have done. So that you look at, okay, let's say some of the liquid stuff has been trading at 10 billion fully diluted basis, but their circulating is way higher, like seven or eight. And you launch something like a competitor, you think that they should have similar FDV, but the circulating are way smaller. And I think the market just shouldn't work that way.

But unfortunately, this is how comparisons are being done because you have avalanche Aptos and Swiss are like a proper l one are trading at ten to 20 billion valuation and it just lead to the anchoring of another very high performance. Good team, good project should also trade similar to that valuation at launch with a way lower flow. So I think that it doesn't really give that project enough chance to grow into that valuation, which a lot of these older projects have a chance to get into. And another thing is, I think there's a lot of these like private bilateral agreement between the market makers and the projects, and probably within the exchange, then we're not privy to. But in a lot of the traditional.

So like a listing of any token is very similar to IPO, right from market structure point of view. But in traditional IPO, the market makers are usually the investment banks and the investment bank. They usually need to underwrite a certain amount of the initial offering. So they are taking some risk with their balance sheet if they are pricing it too aggressively, if it's down, only they will be actually be forced to like buying back. They are actually getting dumb on if they are pricing the IPO incorrectly but in the crypto space, I do not think the market maker has such a risk.

A lot of times they probably are risk free. Either they do a pure servicing model where they're getting paid a retainer every month and this is provide liquidity, or they get a token loan to market make. But I don't think market makers suffer from financially, from being pricing the anchoring the initial trading price too aggressively. They don't take the downside. But Arthur, there are some incentives.

Jason Yanowitz

The way I understand it, and I've never been a protocol pricing a token working with a market maker, but the way I understand it is the market makers do get incentives for being able to keep the token above a certain price. Can you explain that dynamic? Yeah, so this is something more well known, which is like a token option. So let's say a token launch at initial was like $1 price. They will give a market maker token option like a strike price of three or $4.

Arthur

So if the token went above that, the market maker able to exercise the options to buy certain token at $3. Obviously it's like a free call option to incentivize the market maker to contribute to the growth of the project. But I don't think I've seen any kind of contract where the market maker actually being penalized if they are setting the price on the wrong, because they do play a pretty big role in setting up the initial listing price and anchor price. I think generally three parties play a role in this, the projects, the market maker and the exchanges, and obviously the market demand. But let's be honest, like the first minute, no, retail is like setting the price for that.

It's obviously always market maker. Probably Sean, have a different color to add on this? No, I think what you articulated is pretty correct. I want to not be as finger pointy as say it's all incentives and I think Arthur's right and saying sort of the reference point when you launch in building the imminence around the protocol, attracting more dev interests, retail interests, all that flywheel works much better with a higher token price that is indisputable. So you understand incentives for both VC's to mark up their book at launch, plus just attracting retail interest and protocol devs to build on top of the project or the layer one.

Sean Lippel

So it makes sense while you're setting the price super high.

Thinking through the second order effects I said about just retail effectively getting dumped on, I do think the market structure that Arthur alluded to also is part culprit. I think regulatory as well. I think most teams feel comfortable in the current regulatory apparatus, especially in the US, of doing an airdrop because there's not an actual exchange of monetary value for token. And I think unless we see a change in that regime or stance by the SEC, where teams feel comfortable doing that public sale, I continue to think this dynamic will probably remain in place. We've not entered the mature market structure with investment banks taking risks and underwriting.

Market makers are very mercenary and projects want high token price to attract interest. So I think you combine all that in the pod and we kind of are where we are. Yeah. Two really good points there. One is I hadn't thought about the regulatory, the regulatory reason.

Jason Yanowitz

So you used to go on like. So it initially started with icos. Right. But ICOs, obviously, if you did an ICO today, Sec is knocking on your door tomorrow, and then the other way was coin list. A lot of really good projects actually launched on coin list, but I imagine maybe, I don't know what's happened with coin list.

I think they're still around. I saw their CEO tweeting about hiring crypto native folks, or lack of it. But, yeah, if you think about how a lot of the most, the best l one's launched, it was like low ftv generally, actually a pretty fast unlock. So you didn't have these venture token unlocks coming that people were worried about retail, I remember you could buy some of the best l one s at 200 million ftv or 300 million ftv. Even less.

Yeah, less, yeah. And then no airdrop and pre uniswap. I think there wasn't really like a thing of an airdrop. So what do you think the, what is the better model here? Like, if you were advising a protocol, what is the better?

Is an ICO the best model, but just don't do it in the US. Like, what is the best model?

Arthur

Yeah, so I think it's a combination of both. I think that the initial object reasons for doing an airdrop is actually very powerful. You're rewarding the power users that were experimenting, taking the risk of using the protocol before it become more widely adopted. But at this point, it kind of become like a different game where there's industrial scale farming, highly anticipated protocol. So the point of being able to have a genuine airdrop to early users has probably passed.

In many cases. I think it's still a very good mechanism, but in many cases, that probably should not be the only way of distributing token initially. I think combining both is actually the best way. And I think that coinless is still a pretty good platform. They are still conducting public sales, but obviously the exchange are also still doing it, the binance launch pool and launchpad.

But obviously, these are not enough to support the number of tokens that want to launch. And this is where we are ending up with right now. Sean, what's your best. What's your best model?

Sean Lippel

I think we're still in the trial and error phase of this. I think the pendulum has definitely swung too far. Like, think about all the slack that we gave Sam about the Solana launches with this same dynamic, and it feels like we've taken it and now repeating it at scale. So I think, decidedly, we could say the pendulum swung too far. We're currently in a paradigm that isn't working for really anyone.

So I think it is probably right to think about a combination that is both some sort of airdrop. But I am actually a proponent of the points schemes. And it's been pointed out, like, at least from the lever respect, you can certain type of activity that is not beneficial to the protocol, like, in real time, you could course correct for that.

The type of activity you want to incentivize, you could also incentivize it based on the point scheme, I think a point scheme, but I don't think a one point in time airdrop, and that is it. I think that leads to industrial air farming. So you want to have an approach that kind of combines all these things. Maybe it's a coin list, and it's folks that have been involved in the community have contributed to the protocol in some way that kind of, like, secures your seat in the coin list offering. And maybe you do, like, five to 10%.

That way. You do five to 10% upfront in an airdrop. And, Jason, you also alluded to, like, what you're seeing is these large unlocks that the market has pretty good visibility into that come over time, and they're stair step functions. I think probably the deals that we've done that I probably feel most comfortable with are almost like, daily vesting over maybe a four year period of time. It smooths out that curve in which you don't get this precipitous drop in price and a huge unlock happening at a specific point in time that can be gamed in many respects, which I think actually lead to even bigger drops.

So I think aligning both the team and investors, which usually are about 30% of the total supply, having a more linear supply schedule, plus an airdrop that's more points based, that similarly maybe doesn't unlock right away all upfront. I think some sort of combination of that. Like I said, I think by trial and error, I think we will arrive there. But unfortunately, it's this mix of incentives and probably the regulatory side that puts us in this current paradigm. Yeah, Sean, the other thing you mentioned a few minutes ago is just that folks want to get the highest valuation possible.

Jason Yanowitz

And, I don't know, it feels like what's happening right now is like, whenever I see a founder maybe raise, like, their series A, let's call it 10 billion or 5 billion or something, like, you got two things come to mind. One is dfinity or ICP, right? And two is some of the SaaS multiples that we saw in 2021, where they were. Where SaaS companies were raising it 100 x valuations, which, I don't know, it feels really frickin good in the moment because you're like, oh, my God, I just created this $10 billion company. But it is, I don't know, like nine and a half times out of ten that's going to end horrendously.

So I'd be curious how you think about, like, maybe, Arthur, I could pick on you for this one. Like, if a founder comes to you and it's like, let's say they raise it 300 million valuation back in January, they're like, Arthur, I've got a term sheet from Andreessen 5 billion, and it's like, three months after they raised a 300 million. What are you advising them to do there? No, I think from a founder perspective, they should definitely take it from. From their perspective.

Arthur

You know, they can. Obviously, there is always a big risk of raising and evaluation you don't deserve. I'm saying this from a perspective that the project probably are quite close to deserving that valuation. They should definitely take it, give them more cash to do this. But it's really about how they should manage to launch.

I don't think that they should raise at five and then immediately start to launch at five as well. I think at least the current market structure is not receptive to, and it happened in the stock market. So the public market and the private market price things in a very different manner. So if you decide to do that, you are going to get a lot of issue in the public market. So the founder will need to pay attention to how do they balance how the public market will price this versus how the private market is pricing it right now?

Because right now the gap is big. Arguably. Maybe just continuing with the valuation conversation we had. Kyle, from Multicoin on the podcast the other day, and we were talking about just different ways to value a crypto asset.

Jason Yanowitz

The way that they think about this at Multicoin is a lot of it is based around MeV. Actually, Kyle was on the podcast, but Tushar had a great talk about how MEV is the only way, or the best way to value a crypto network, which is a controversial take. I think would be curious to get your guys take on just how you think about valuing a crypto asset. There's the DCF way, fundamentals with, like, fees and emissions, there's Mev, there's like, none of this matters. And it's just what the narrative is.

There's like, you could play it based on comps, you could play it based on, like, where we're at in the cycle. There's like, actually a lot of different ways that people think about valuation. So would. We would love both your takes on this. Yeah, I'm happy, happy to kick it off.

Sean Lippel

I completely understand the logic of thinking about Mev, and I do think that squarely fits Jano into the capital asset way of valuing crypto assets. I think it's correct. If you play this out to its steady state and you believe that there's infinite block space and all block space is inherently created equal, then probably at that state, MeV is probably the only thing that matters. I think empirically what we see is that block space is not created equal. Block space on bitcoin is valued differently than block space on Ethereum is valued differently than block space on Cardano.

So I think it's tough to make that attestation that MEV is the only thing that matters. I think even with things like Solana, the blocks are now almost completely full with increased activity. So things like priority fees and base fees do get you squarely into a capital asset way of valuing things that are more DCF, that take into account things other than just MeV. But more importantly, I think the overarching point I would make is, I think the vast majority of value creation, when you think about layer ones and even layer twos, don't really come from just the capital asset way of valuing, of just looking at, like, discounted cash flows of MeV and, you know, fees, both priority fees and base fees. I think it really comes from the commodity way of looking at the asset.

I think there'll be three to five big winners in the layer one space that get valued as money. And I think the tam of just like, m two and money. And even if you think about gold in that respect as well. So m one, m two, like that ten is much more sizable. And looking at it as sort of a store of value and a commodity, I think is probably the more correct way of valuing this, as long as, like, blockchains are not homogenous.

And I think we're a long way from, you know, block space being homogenous. So I think Mev is an input into the valuation model. I just don't think it's the end all, be all in its current state, or for a while, for that matter. And I think just one point to add, like, just look at in aggregate, what the totality of mev is across all blockchains. We're not even talking in the tens of billions yet.

The total value of layer ones is many trillions. You can't apply a multiple to me today and arrive at any sensible valuation. So that indicates to you there's at least one or two other factors at play that are commanding a different valuation multiple.

Arthur

Yeah, I think that's extremely good point. And actually, after spending close to seven years in crypto and in crypto investing, I've come to realize that actually valuing crypto is actually an alpha in itself, because there is no universally agreed valuation framework. So who, whichever investor they are able to best figure out the appropriate valuation framework for different crypto assets will be able to generate excessive returns? Because I think that is actually what happened to the market for the past six, seven years, is every different kind of cryptos are being valued in the different manners, like bitcoin. Obviously, a lot of the ETH max, they have always said ethereum generated more fees to the token holder, ultrasound money, we have negative inflation, all those things, all better than bitcoin every manners.

So why is bitcoin worth four times more than ethereum right now? Because the valuation framework people use to value ether and bitcoin are different. People see bitcoin as largely a monetary asset. People still do not view ether that way yet. Can ETH get there eventually?

Very likely, yes, but it's not there yet. So people are not applying the same valuation framework. People used to value bitcoin to ether, yet it is the same thing with d five, with layer one, layer two, and also other tokens. So I think that we actually have gotten big enough as a space that different sector of crypto are being valued in a different manner. And obviously, unfortunately, Defi is the easiest to value because usually the protocol produce some sort of revenue and cash flow to the protocol, and it's the easiest to apply, kind of like a traditional valuation multiple to DeFi protocol.

And I think that actually unfortunately set the ceiling on the valuation of most DeFi protocol. It's just because it's so is the easiest to value. That also means that it's the hardest to put like an extremely aggressive assumption on it. So I think that for meme coins, I do subscribe to the theory that it really should be valued as so called attention theory of value that you revalue by attention. It's really not about the cash flow or whatever.

For layer one, it's a combination of the growth of the network in the future and how much user is the user base. You can use a combination of map caf law plus the monetary premium. The layer one token is gradually accruing for bitcoin is probably 95% monetary premium. And then you have other governance token that probably like the value, the cost of attack. So I think different category of token.

You need to use a different valuation framework, at least for now. All right, I'm going to play a little game here. I'm going to make you guys do a. I want to see how I'm going to pull up two charts of one is Etherfi and one is Lido. Are either you guys investors?

Jason Yanowitz

Neither. We are invested. Lido. Yeah, same here. Okay.

Sean Lippel

Not Etherfi, but Lido. Yeah, no, Etherfire. All right. I mentioned them in the pre roll. Now I'm going to bring them up again.

Jason Yanowitz

It's arbitrum. Santi and I are really fed up with these high fees, and we're really excited to have teamed up with arbitrum for the next couple of months on empire. As the leading ethereum scaling solution, arbitrum now powers hundreds of decentralized apps across defi, herps, nfts, gaming, and a whole lot more. The team has showed us everything in the ecosystem, both now and what's to come, and we're really, really excited about it. Arbitrum allows both daily users and developers to interact with Ethereum at scale with low fees and faster transactions.

The way the team got me excited was through portal arbitrum IO. So my call to action to you is to get started by visiting portal arbitrum IO. Go experience on chain like it was meant to be. This episode is brought to you by aura. Online crime is growing at an alarming rate, and cyber criminals continue to find crypto investors like the empire community lucrative targets.

We've all heard of someone who's fallen victim to some sort of online attack. Aura helps prevent against that for example, if your online accounts or your passwords were leaked online, or if someone tries to open a bank account in your name, you'll get notified in real time. About that. With twenty four seven Us based support, Aura's team will be there for you to resolve fraud issues, even. Even if it means getting on a three way call with your bank at midnight.

Not saying I had to do that, but I might have had to do that. So aura.com blockwork sign up for the 14 day free trial. Terms and conditions apply. CSIP for details Aura is the new standard in digital safety. Check them out.

Aura.com blockworks free 14 day trial this episode is brought to you by Kento Kento is a safety first layer two, that features user owned KYC and native account abstraction to solve what are probably the two biggest problems in crypto. One, security and two, user experience. I'm an investor in Kinto. I've known their founder Ramon for a long time. Ramon the other day sent me a message on Telegram and said, you got to try this onboarding.

I'm super proud of it. Please just go ahead and try this out. Tell me what you think. It is the most magical, seamless onboarding experience onto an l two that I've ever had. You can.

You can try it out. It's engine en g e n dot kinto dot xyz I would really recommend going through the whole onboarding flow just to see what the future of crypto can feel like and what it probably will look like in the future. Go on board Engen dot XYZ let me know what you think and if you want to chat with their founder, Ramon. Happy to make the intro everyone. Jason here.

I know you've been hearing a lot about the intersection of crypto and AI, and that's why I'm really excited to share our newest partner and sponsor at Empire Skale, a high performance modular blockchain that's revolutionizing gaming and AI. With zero fees and instant finality, Skale's unique architecture allows for massive scalability and has already saved users over 6 billion in gas fees. The five main takeaways that you need to know for 10 gas fees. Two, Skale has instant finality and lack of mev. Three, the zero gas fee model of scale is really important for blockchain gaming adoption, as gamers don't have to pay transaction costs or have the SKL token.

Four, scale is multi chain. This design allows for nodes to be combined to create chains and for individual sub nodes to actually be removed and relocated, which creates greater security and collusion resistance. And five, Skale has become a really good fit for AI Dapps because they're fast, automated zero fee transactions. Big thank you to Skale for sponsoring empire. We're excited to partner with you guys.

Bridge over to scale. If you're listening to this at scale space forward slash ecosystem, follow the journey along with scale on x. At scale network. That's at scale network. Big thanks again to scale for sponsoring empire.

Okay, so I'm going to pull up two charts. I'd be curious for the. Maybe for the retail investor listening or for the venture investor, whoever it is. How would you think about. So here's, how would you think about, like, valuing these and comparing these?

So this is Etherfi. FDV is 3.8 billion, market cap is 440 million. So this is maybe kind of what we were talking about earlier, like very high fDv, but like a lower float to the market cap is 440 million. Lido, on the other hand, has a smaller fDv. So their FDV is 1.9 billion and their market cap is 1.7 billion.

So much tighter market cap to FTV relative to Etherfi, Sean. And I don't know who to pick on for this because you're both invested in Lido, but yeah, what do you guys see when you see these charts and these numbers? But then you also have to consider the narrative and where we're in the cycle and the restaking narrative. How do you guys think about this? Yes, I think there's multiple parts, this question that involve that really, you know, force us to kind of like, look at to the sum of the parts and really break down, like, like first, starting with, like the business model before we even get into like a valuation framework.

Sean Lippel

Right. I think you, like, I kind of pushed the team and here internally, like, let's just like, think about this as you would any other traditional SaaS business before. And like, what does Lido do before we even get into, like, how to think about valuing it, right? So if I think about Lido, there's 30 billion total ETH staked via Lido. Obviously, there's 28 operators plus behind that.

So think about it as a $30 billion asset manager. To me, as a former fintech investor, I look at betterment wealthfront as the parallels or corollaries to what Lido does. And think about of that 30 billion, look at the ETH staking yield, which if you include MEV priority fees, call it somewhere between three and 5%. So when I'm walking through effectively is the DCF calculation for Lido. You look at that, you say about 5% times the 30 billion in total assets under management.

You arrive at maybe somewhere like $150 million of total earnings. That goes to Lido, as we know, because they take a 10% fee, right. Of that 10% fee, only about 5% goes to the actual DAO, right. And in that like, that goes to pay expenses. Effectively, if there's more retained earnings, that could go to something like distributions or dividends or effectively what maker does of buying back the token.

So here you have like a pretty simple model as it exists today, of what Lido does. It's the leading liquid staking protocol of total liquid staking assets. It's got about a 70% market share. It's something that we look to and are excited about because we think, effectively what's happening within DeFi is what's emerging is effectively the magnificent seven, or monopolies with real moats around their business, around things like liquidity, et cetera. That's the very straightforward way I just gave you about valuing Lido.

I think that's one piece of the puzzle. But as we know, market prices, that's what's priced into the market today. But what effectively moves markets is inflection points or changes versus expectations. I think one of the things I think about with Lido, a lot of things happening under the surface, that gets me excited about the next catalyst for Wido. To me, I think you pull up the Etherfi chart and you see something at 5 billion.

How is that trading that way? We don't know what avss are live today. There's some sort of base staking yield that Etherfi will have. And maybe on top of it, there'll be some avss live and stakers will receive some percentage of that security budget. You're basically betting on the future.

The current price of this anticipates that the shared security budget and the amount of rewards being generated by those ABS will be large. Now let's go back to Lido. I think it's pretty obvious to me that at some point in the future, I don't think they will create a direct competitor to Eigen layer, because I do think the projects are pretty close. But I think it's pretty simple for them to turn on an LRT or three different types of lrts. You're taking on much more risk.

Maybe your medium term risk, your low risk, depending on how much slashing risk you're willing to take, or what type of ABS is, you feel comfortable getting involved with. To me, what excites me about Lido is they have a really dominant market position at 70%. And thinking about the inflection point highly likely in the next year or two, they don't need to disrupt themselves. They have a market dominant position, but they will turn on an LRT in some form and you'll get this effective. Rerating that, to me, can move light of two to three x higher.

From where we currently trade today. What you're seeing is a bit of the fundamental analysis and value, like a traditional asset, but also the expectations of the future and what moves prices on a go forward basis. And the last thing I would say is just also thinking about capital flows. To me, it's like fundamentals only matter to the extent in which they show up in capital flows. It's like you could talk about fundamentals all you want, but until the protocol is effectively buying back its own token and it shows up in capital flows, or other investors are also circling around your valuation methodology and start buying the token based on it, it just doesn't matter.

So, you know, I think that's one thing you've got to be like, super, super thoughtful on when thinking about entering these positions. Arthur, before picking on you for the same question. Sean, what is the magnificent seven that you mentioned? Yeah, so thinking about, just like when I kind of zoom out and think about businesses, especially on chain businesses, I'm biased. I run a Defi fund.

To me, I think about businesses that have durability and defensibility around their business model, whether that's things like liquidity, moats, like staked ETH, it's the predominant pair. It's been accepted almost as much as ETH itself. We look at companies that mimic what you've seen in the magnificent seven. In the traditional equity market are companies that have very high margins, are very profitable, and have big competitive moats around their business. So I know it's been talked about before on Empire, and what's referenced is like smell.

I think we have a different variation of what we put in that, of businesses on chain that have big competitive moats. But I think about things like maker things like uni, things like DyDX, things like Lido, which to me represent the web, three versions of the Magnuson seven in sort of the web, two world. Smell being synthetix maker. I think this was actually Vance, maybe, who coined this. I think it was synthetix maker, Ethereum, Lido and Link.

Jason Yanowitz

Yeah. Yes. Yeah. It's a good narrative for the. Yeah.

Sean Lippel

I would just add, like, we, I kind of would say, like, we need that version of things to kind of work out for have to like a rise under trade for fund managers to kind of exist. Because if not, it's like, why not just invest in bitcoin? Like, you've got a form factor in the ETF effectively, you know, eventually the Ethereum ETF will come as well. Like, if there's not outperformance and, you know, moats around some of these business models, then it's super tough. Then we're just playing the, like, we just need to be early game and just get an early launch at a high valuation and get out.

Jason Yanowitz

I mean, I've brought this up on Empire numerous times, so listeners are going to be sick of hearing me talk about this. But, like, this is what we think about it. So we have this, like, we have blockworks research platform, right? So, and you can see like, these metrics that you can't find anywhere else in the industry. Like, we have the full p and l of maker with like, where all the revenue comes from, like, entire income statement.

And we're like, oh my God, this is like incredible information. You can look at, like, Dimetrix, you can look at like, all the real, you can look at, like, all the RWA information, you can look at spark protocol, like, we've got all this amazing information. The question is, does it matter? Does it move? So, like, maker today is doing something like 40% of the fees in Defi are going to maker.

Does that move the token? Arthur, what do you think about that? Yeah, so I think that this one unfortunate big picture situation is the last ten years, the market as a whole generally like growth a lot more than value. And people see DeFi, especially the DeFi, so called DeFi blue chips, as more of a value play than growth play. I mean, there are exceptions.

Arthur

There are some DeFi protocol that show a lot of growth, but those are the exceptions. So I think for Lido, most people see as a value play. And the problem of value play is people do not assign a very high multiple to it. While ether five, because they are still at a relatively low in terms of the market share and everything else, they are perceived to have a higher growth potential. So people are willing to assign a higher multiple to whatever revenue and the TVR they are having right now.

And obviously, again, we mentioned that the float is a lot lower. So it's a lot easier for market to support, like a four to 5 billion valuation for ether five versus like four to 5 billion valuation for Lido where more than 90% of Lido supply are already circulating. And another thing that I think is also like, I think Matt Levine in his newsletter have also mentioned that we can't enter into a situation where fundamentals set the floor for a valuation, but that actually doesn't set a ceiling. So that creates a situation where for certain asset that the market is super excited about, the people are willing, the ceiling will go up. So we can argue that the ether five will have a lower floor in terms of the valuation than lido.

But people are not looking at the floor right now, people are looking at the ceiling of ether five. So in the short term, until more and more supply of ether five is being released to the market, you might see this so called mispricing sustained for a pretty long period. And also I think that in general, this market doesn't have that much liquidity to support more than 50 assets to trade at more than 10 billion circulating market cap. I think at least this is an empirical observation. The market simply doesn't have the liquidity to support that.

So adding that one month ago, somebody also pointed out the observation that the peak of the valuation ceiling, even including the new launch, can go recently, it's like 25 billion, excluding Worldcoin, because of the flow is even less than 5% or like 2%, 3% kind of flow. Yeah. I think that at least empirically, the market right now, beside bitcoin, Ethereum, Solana and probably some of the legacy dinosaur coin and XRP, we do not have the liquidity to support any new coin to go above 10 billion in circulating market cap and above 25 billion in fully diluted valuation. You agree with that, Sean?

Sean Lippel

I think that's probably right. I am worried about the amount of unlocks and inherent token emissions coming into the market over the next year to two years because of this dynamic that we're talking about, where only 20% of supply is being released. And I do think just given, if you look at the total aggregate amount of institutional capital in crypto, I would say it's 10% or less of proper institutionally organized capital. And you could argue retail and crypto is generally smarter than retail and other markets, which I think is correct, but it tends to be more mercenary, not long term capital. So I think it's really tough in that backdrop to support valuations north of what Arthur alluded to.

So I would say loosely, that's probably correct. And it's a function of one just how early we are in this space and people are still figuring out what valuation methodologies to be using as we talked about varies depending on the asset. We're talking about whether it's a layer one, a defi protocol or an application. So there's just confusion around that, but just more retail capital and then just fragmentation of just interest. And it's really tough when you're seeing the proliferation of more and more projects launching.

How many lrt's do we have? I've probably seen a very similar pitch between kelp, puffer, etherfi, swell. We have ten plus lrts that are launching to the market. Can the market support ten plus $5 billion ether? Five.

That feels like very ambitious to me. I think it's tough. So I am worried about not just the launch dynamic, but the emissions that are coming to the market over the next one to two years because it just doesn't feel like there's enough new capital coming in to support it. Yeah, and also I want to add that I actually pointed out this issue two years ago. Unfortunately it hasn't changed.

Arthur

The crypto capital market have actually front run the phase of market development. Why I refer to this in a traditional financial market, the emergence of private capital came pretty late actually. It was the last bunch of players you actually started with. Obviously every market started with heavily retail dominated market as its us stock market 70 years ago, 50 years ago. Then what happened?

You have the professional investors that come into place. Who are they? They are the mutual funds. They were ever active in the public market. They were doing the stock picking.

If you look at the legendary investor 30 years ago, 40 years ago, they are all the public market ledgers, like Warren Buffett, Franklin. There's a few others as well. They're all stock pickers. And the success of VC and private equity came last. And obviously you also have hedge funds that came after the mutual fund becomes successful.

But in crypto we actually completely skipped over the formation of mutual funds. So there was a very under allocation into public market investor, pure public market investor, except for retails. You obviously have a couple of hedge funds here and there. But hedge funds are not long term holders. They usually trade in and out.

The average holding periods are like weeks to months. Nobody's holding a position on months to year. I would say yes there is. We are seeing more of them coming out. But if you talk to any institutional investor, they all overwhelmingly invest into venture fund than to a public fund.

More like what us and Sean are doing more medium term, like a public market focused fund. I would say that the split of allocation of capital is probably 80 20, 80% are going into VC and 20% are going into public market focused fund like us. And even, I mean granted we know that some of the big VC, they all, they also buy from a private market, but they do not look at it from like a public market guy. Land cycles. They do as a kind of deal by deal basis.

Okay, I like xx and Z. They bought a tons of lido in 2022, but they don't really like, you know, actively manage the position. They would just done the deal, put it, I'll look at it three years later, five years later, whether I should sell or not. So you don't have. It doesn't have to encourage this kind of efficient price discovery in the public market.

You have retails versus the hedge funds, some smart money and the VC's selling on the market to cash in their ten to 50 x returns. That's it. And the founders. Yeah, yeah. I do think we need more and more of these public market focused professional investors so that market can become more efficient.

I think it is happening, but I think the ratio is still not at the level where we can catch up compared to private capital. Stig? Yeah, I mean I just think it's a sign of a growing industry. There are a lot, I'm seeing a lot of market neutral or delta neutral hedge funds launching in the industry where they're traditional capital markets. Guys coming in just saying this is an inefficient market.

Jason Yanowitz

I don't give a damn about crypto assets. Like Im just going to try to launch a market neutral fund. And at first I was like, man, that is about as left curve as you can get. That is just, come on guys. And I still actually kind of believe that.

But also its a really good thing for the industry to have folks like that coming in, trying to help the market find more of an equilibrium price. Now would I be in crypto trying to make like 15% a year? Probably not, but yeah. What else? I don't know.

Can you guys share what else you're invested in right now? Is that like a thing that you can talk about publicly or. No, I'll take the deafening silences and. No, no, we can't talk about it. Yeah, Sean, you probably.

Arthur

Yeah, you can go first. We can talk about it with the caveat obviously, that you always put in every show, y'all know like nothing, nothing here is financial advice because we are a red shirt SEC investment advisor here in the US. So obviously my compliance officer heavy, heavy disclaimers on like Sean talked about so. Well on that podcast until you just had to go pump makers bags. Just kidding.

Jason Yanowitz

None of this is financial advice. You know the deal. Yeah. All right. How, how do you know about the position I was about to talk about?

Sean Lippel

So what's most interesting, because we straddle both worlds, I do do some early stage pre token launches, which I would say today are mostly focused on burgeoning defi ecosystems outside of Ethereum. Because when I think about Ethereum and DeFi, the core building blocks of stablecoins, borrowing, lending, perps, decentralized exchange, to me, there are ossified winners within those spaces. And yes, we're invested in many of them, like Uniswap and Lido. And I could give you our maker thesis, I would say, on the pre token launch side, I am a believer. Despite everything we talked about, there will be.

I think it's indisputable. We are in a multi chain future, and DeFi is the lifeblood or lubricant behind all these other ecosystems. And I think about just more types of assets coming on chain on other layer ones. So I am excited actually about the bitcoin layer two space. I do think that will usher in new DeFi protocols like things like bitcoin potentially having a stablecoin on its rails, things like native yield on bitcoin, the ability to borrow and lend in the absence and collapse of Genesis, there's still a big gap to be filled that was $100 billion plus market.

I think we could do it better using the power of smart contracts and what Ethereum has done. We're way further in the scaling roadmap and being able to import some of the learnings around ZK proofs and optimistic roll ups into the bitcoin ecosystem is very real and I think there is actually tremendous demand you're seeing with ordinals and runes to have activity on bitcoin. So I think about a robust deFi ecosystem developing on bitcoin as some of the earlier stage stuff I'm interested in. Yeah, I know. I've talked to you at length also about the filecoin ecosystem.

When I think about probably one of the leading deep in architectures, supply side for storage has been built out with the advent of the FEM. So the ability to actually have smart contracts on top of Filecoin. We're investors in something called glyph with multicoin, and I'm very excited about the ability to connect storage providers with idle filecoin holders who are looking for yield on their assets. So very efficient capital markets in filecoin. So we think about basically solving first order problems of these new ecosystems.

Similarly, on Avalanche, I personally am the belief that avalanche is a more actionable version of what cosmos is trying to implement. So we're investors in something called Gogo pool, which launch, which is another liquid staking primitive, which just makes it much easier to spin up your own sovereign subnet without the same level of capital cost upfront. And like I said, liquid staking is proven like it's just a much more efficient use of your capital. It allows you to then do more with it after. So replicating that playbook of liquid staking across a bunch of different ecosystems has been something that's very interesting to us.

I would say, like I said on the earlier stage front, very interested in the burgeoning ecosystems of Defi and other ecosystems. I am actually, I know this is something that's been talked about at length, but also we haven't seen demonstrable evidence of it working, but I don't think it means it won't work. I do think there'll be permissioned versions, whether that's layer two permission versions or permission protocols of the same things. We see work in permissionless, open source defi. Yes, Aave had to run at it, compen had to run it.

But actually the view is probably pretty early. A lot of the tooling was not yet in place. And I do think even it may be heresy to say this, but things like rollbacks on a layer or two in a more institutional version of a DeFi protocol actually might be the right way of doing things. So a permission KYC version of a layer two and why now? To me, it's like we didn't have the building block of stablecoins here before the proliferation of stable coins.

How widely they're used, 12 trillion in settlement. And we just have way more yield bearing stables. We have more real assets coming on chain with things like bittle and what centrifuge is doing with some of the private credit. So there's just more assets to trade today that potentially can be traded on a way or two. And I do think, at least if there's KYC AML in place for the vast majority of institutions, they will actually be able to play in that sandbox or begin to explore today without some version of KYC AML.

Super tough for definitely no bank is going to get compliance approval to participate in DeFi, and only those who are playing on the forward end of the risk curve. Some of the more Chicago trading shops are willing to experiment with Defi. I do think that is a narrative that will come back despite people having a run at it to varying degrees of success. Yeah. Arthur, I'm going to adjust the question a little bit for you.

Jason Yanowitz

So when I think of defiances, like, actually when I think about the wealth of a lot of the venture firms in the industry, a lot of them were made on the back of like two to three bets. Like there's. I don't, you know, there's one or two venture firms that made most of their money on near. There's a few. That made a lot of their money on synthetix and chain link.

There's a few. And when I think of defiance, it's probably just correct me if I'm wrong, Aave, synthetix and Axie would have to be my. Like, the overwhelming portion of defiance as wealth and aum at one point in time came from those three bets. So a, I mean, correct me if I'm wrong, but b, when you like, what, what maybe two to three public market investments do you think could have that same impact for you in this cycle?

Arthur

Yeah, that's a tough question.

We've been thinking very hard as well, and I think you are largely correct. I think that three investment was one of our best investments in the previous cycle, in the previous fund. And I think this cycle is harder. And I think that's the honest answer. I think that the market have gotten a lot more efficient during the 2021 cycle.

We attracted a lot of the spark and bright people in other space. There is a lot more. Every different sector. There are very smart people paying very close attention to it right now. So I think it is a lot harder to find like 100 x, like a 50 x public liquid play right now.

So we actually, a lot of our time right now, we are actually spend on help thinking there's something that we think that is actually undervalued by a factor of five to ten times. I think that is a lot more achievable. And I think this is really where our liquid venture thesis come in, that we are actually a lot of VC. They probably wouldn't really care if they can only get like a five to ten x return from the point of investment. Unless you're like a big fund because it's not enough to carry the loser you have on other investment and go to zero or just like breakeven basis.

But as a liquid fund, because we are able to turnover the investment within like less than two years or even less than a year, we are happy with like a three to five times or even like between a five to ten times return is actually good enough for us to underwrite the risk. So we are a lot more focused on these return sectors where we get like a five to ten x within a one to two year time frame. Those kind of opportunities, I think, is a lot more available in the market right now. And in that sense right now, I think there's the two sectors that we think that will continue to surprise to the upside. One is web three gaming.

The second one is DP, decentralized physical infrastructure network gaming. Because it's still controversial, I think that there was a lot of information asymmetry, a lot of misunderstanding, but it also has been proven to be the sector that can generate one of the most cash flow and also are able to bring some of the best onboarding tools for masters into crypto. But I think the game that take off probably would not be what we have imagined in the past. I'm leaning more and more towards that you cannot be skeuomorphic in your product design principle in crypto, like, you can't just because I think that historically have worked very well in the web two world. Whatever works in the west, in Silicon Valley, you copy paste it, put it into India, put it into China, it all works, right?

They all make a ton of money. But in crypto, a lot of very bright people have attempted that. And somehow most of them actually, it doesn't work. I mean, just to give an example, no finger pointings or whatever, but I think that we have seen actually at least five extremely high profile, successful Webtree entrepreneur trying to do a Webtree startup, crypto startup, in a skeuomorphic way, and it doesn't work. And it ended up in a disappointment.

Like for example, one of the pretty high profile Solana NFT marketplace. I shall not name it. I don't think anyone is talking about them anymore. And it was the co founder was one very famous webtool entrepreneur that exited a billion dollar startup. And obviously that's not the only example.

You also have Moonbird. I don't want to go into the details as well. Essential. There's so many of them. So I am getting more and more bullish on web three gaming that is non skeuomorphic in terms of the design.

Like something like a pumpbot fund fantasy talk, this kind of thing that's really applied to the small growth of extremely enthusiastic players and users and expand from there. I think that is something that will create more success in the medium term. But most of these are still in the private market side. We are not seeing enough of that in the public market. But on the public market side, we see some games that have, I think, have proper traction actually playing out exactly like what we have described in our web three gaming thesis described two years ago.

I think Pixel is actually doing very well. I'm not sure why market is not paying enough attention to them. They have consistent 700 to 800,000 daily active users. There's some incentive component, but it's not like Axie last cycle. You can't really make a living out of just playing the game.

And I've known a lot of the non crypto native people playing the game just for the sake of playing the game as well. These are the factors we continue to be excited on. And I think this is something from a non us perspective that is a huge push factor in Asia right now to asian gaming entrepreneurs to build on crypto. Because, for example, the China side is ultra competitive. They are restricting from publishing a lot of the game for various reasons.

They cannot get the license or the content, censorship, etcetera. So to them, coming into web three, where such restriction doesn't exist, might actually be a better area for them to focus on. And actually this is like a thesis of foliars ventures. A very good friend of mine, Jason from foliars, that is most of his thesis. Bright asian entrepreneur are going to build something in web three because they can't do it in web two space.

I think this is something that a us centric guy usually won't observe because you don't really have that issue there. Another side I think deep in is I think when it comes down to first principle, this is actually what crypto economic incentives are best fitted at to bootstrap a network that would otherwise not exist because of the existing incentive structure or market structure like what helium does. I think it's been well popularized. You use a decentralized peer to peer network to bootstrap an infrastructure that would otherwise be too expensive for many centralized single party to bootstrap. But you use token where everyone can participate in the upside.

So most of the dpins are using the same principle to bootstrap certain network that would otherwise not exist just because the incentive structure doesn't make sense. But obviously we are going to see a lot of failure there. But I think some of the winner there are going to bring like $100 billion. Outcome. Arthur, I have a game pitch for you.

Jason Yanowitz

Here's the game I want to see built, which is I like old games, chess, and I'm not a big player of Call of Duty or anything like that I like Tetris and chess and games like that.

What I want to do is be able to wait to play a friend online. I want to be like, sean, I'm challenging you to chess and be able to bet, like, I bet one of my pudgy penguins. He bets one of his pudgy penguins. And then you let everyone on crypto Twitter watch that game, and the crypto Twitter crowd can bet on us. They're like, they can bet on, like, me winning the chess game.

They can bet on Sean winning the chess game. Whoever wins that game wins the NFT. That's my pitch for you. Honestly, if anyone's listening and wants to go build that, I would probably fund that. I really like that idea so it fits in.

Sean Lippel

It's not skew morphic, Arthur. I think that's quite, quite novel, for one. Yeah. And I think that actually, instead of betting, just create a meme coin, because. Meme.

Arthur

Why? Why meme coin, take off is you have limited downside. You lose all your money, but you have unlimited upside. So actually better than count. Like a, like a strict count betting game when your payoff is actually limited.

So meme coin take off because there's no limit to the upside. Yeah. All right, guys, I gotta jump. This has been awesome. This is.

Jason Yanowitz

I feel like there's a lot that we didn't. I wanted to talk about, didn't get to talk about. So we'll have to have you guys back on for round two. Um, but this has been awesome. Arthur, Sean, appreciate the time.

Arthur

Thanks for having us. Yeah, cool. Thanks, Hannah. Hey, everyone. Jason here.

Jason Yanowitz

Thank you so much for watching today's episode. Wanted to take a quick second to thank today's title sponsor, arbitrum. We know you are tired of on chain experiences that have unaffordable fees and frustrating transaction speeds, and that's why we partnered with arbitrum. You can experience frictionless trades, lightning speed, and lag free transactions, all for pennies per transaction. Explore arbitrum's expanding ecosystem at portal arbitrum IO.

That's portal arbitrum IO. See you for the next episode.

The Dark Side of Token Launches | Arthur Cheong & Sean Lippel

Primary Topic

Episode Summary

Main Takeaways

Episode Chapters

1: Introduction

2: Current Trends in Token Launches

3: The Problem with Current Token Launch Models

4: Regulatory and Market Structure Influences

5: Closing Thoughts

Actionable Advice

About This Episode

People

Companies

Books

Guest Name(s):

Content Warnings:

Transcript