The Delphi Podcast Host and GP of Delphi Ventures Tom Shaughnessy sits down with Santiago Santos, General Partner at Parafi Capital, an alternative investment firm focused on blockchain and decentralized finance markets. The two discuss game theory, psychology in crypto, finding that fund-returning play, and more.
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- Santiago Santos: General Partner, Parafi Capital
- Parafi Capital Website
- 2020 Interview with Santiago and Ben Forman
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Hey, everyone. Welcome back to the podcast. I’m your host, Tom Shaughnessy, I help lead Delphi Ventures. I’m one of the podcast hosts here. Today, I’m thrilled to have on our fifth guest for our VC Crypto series, Santiago. Santiago, how’s it going?
Hey, Tom. How’s it going? Great to be here.
Good, man. Love having you on. Tell us a bit about yourself and your firm.
I’m a partner ParaFI Capital. We’re a DeFi-focused fund. We’ve been around for three years. Get really, really involved in projects and be… If I were to succinctly describe what we do is we like to be a community-first fund that is also an active user in DeFi. And I think those two things really encompass what we do here. And yeah, I’ve been around, been investing in the space since 2012, discovered Bitcoin, my background’s in game theory, so to me that was fascinating.
I’m from Mexico and so really a lot of combination of this nagging thing that finance hasn’t been modernized and it’s always been haunting me. And so that has been my… I think my life mission is to make finance better through crypto.
So awesome and I love to hear it. I actually didn’t know your background was in game theory. Were you working in that world or was it more of studying or?
No, this was in school. I remember taking my first class in game theory. I was Econ major and I thought this is great because you don’t actually have to memorize anything. It’s more about thinking strategically and it encompasses a lot of things that I really liked like human psychology and strategy and playing iterated games. And if folks have seen, I guess, the movie, Beautiful Mind, which talks about like Soviet era, like Kennedy versus I think it was Gorbachev about like all these negotiations and I think crypto really is so multidisciplinary and so is game theory, so yeah.
Hell of a movie, man. Outside of [Fembien 00:01:45], having some mental stuff, but I didn’t know it was your background and it’s a great parlay into crypto, because you use it probably with everything you think about.
Yeah. It’s certainly super applicable.
Let’s start right into it, Santiago. I want to start at the beginning. You see a zillion plays all day. I’ve asked everyone this question, but how do you curate what you want to look at, how much time you spend on each project and just filtering, there’s just so much going on?
It’s a great question because most people are surprised to hear that ParaFi is a very small team. Like up until last year, we were a team of four on the investment side and we were discovering a lot of ground. I’ll tell you what has been the most important thing that I think of is having a very clear thesis and focus. And for us, it was just from the get-go is look, we think that the main thesis that I think is the most value in crypto will accrue on financial functions.
And so that is very clear for us, for founders when they come to us, they know that it’s because we’re investing in DeFi and for the most part, it’s all we do and we stay in our lane. I think that’s been difficult. Before ParaFi, I was investing in the space and I think that the ambition of we can decentralize so many things and the use cases are vast that having focus just keeps you, you stay in your lane. And by the time that I talk to a team I’ve already developed a thesis of, hey, here are the things that need to be built on DeFi that have been built, but are not working well.
And I think it really stems from being an active user. So actually using these protocols informs my thesis because if I don’t use it, it’s hard for me to conceptualize how other people will use it. And so I think that really crystallizes my thesis as to once I talk to a founder, I already have a very clear view on the things that I want to invest in. And at that point just becomes, is this the right person? Is this the right team?
That’s a great answer and it’s a unique one, because you’re not reacting to what teams are bringing you. You’re saying, “Hey, I already have a thesis. I know what I want to see built.” But how do you meld that with the stuff that you’re not thinking about? When you see a project you didn’t even think about would fit in your thesis or solve a niche, how do you change your mental graph to say, “Hey, you know what? Here’s my thesis, here’s what I want to see, but this also cool”?
It’s a great question because honestly it’s the hardest thing, because in this space, I’ll give you a trend. Like Metaverse and Play to Earn, huge theme that I think is going to transform at this intersection of DeFi, NFTs. And I think it’s just keeping an open mind. I think like maximalism just is going to be hurtful at some point in this industry. And invariably, I don’t know why people ossify their thinking when the reality is this space, because it is open source moves a million miles an hour. And so you have to always keep some perspective of constantly updating your models.
And it’s a very data-rich environment, so if I see traction, if I see a user is buying a lot of NFTs in Flow or some of these other applications and OpenSea and Punks, then I’m going to join that discord. It’s almost like if you walk into the library. When I was in school, you go to Barnes & Noble, of course, they no longer exist, but the best part of it is you walk in there and you always… You love fiction, so you go to the fiction aisle always, for the most part or you like non-fiction.
But every once in a while, I think you have to make a conscious effort of going to an aisle when there’s a lot of people that you might not even care about and take an interest in and say, “Why are these people here?” Because clearly they’re seeing value here. And I think keeping that open-mindedness has served me well in crypto, in particular identifying NFTs and Metaverse like [inaudible 00:05:15] sequencing and you guys are super involved in or Illuvium, some of these things that I think if you just strictly say “DeFi is just financial functions, that’s how Wall Street exists,” you’re going to miss things like flash loads.
You’re going to miss things like at this intersection of making NFTs somewhat… Like the financialization of NFTs and digital scarcity. Anyways long winded answer, but yeah, you always have to keep an open mind and constantly talk to founders because that’s what ultimately, those guys are at the ground level.
I love your analogy to Barnes & Noble fiction. And I love that you keep it open mind. We’re the same way, man. We’re invested all over the map, bunch of layer ones, bunch of apps built on top. But just to dig in there a little further, how do you actually keep an open mind and practice? Because let’s say you got started when Eth was taking off, you’re investing in all these Ethereum-based projects. You spend most of your day learning more about them, tracking their progress.
And over time, that’s your muscle memory. You say, “Hey, you know what? Actually he’s crushing it because X, Y, Z. I don’t want to talk to a game on Solano.” How do you keep it open mind practice?
My best advice is you always have to think in probabilities, never in binary terms for everything in life. And I think that can be really frustrating in relationships and stuff like that. But-
It isn’t relationships.
But generally speaking, you always think in probabilities. There’s a greater than 0% chance that some other layer one will supplant Ethereum or that it won’t be as competitive. It will be complimentary. And so, look, I think like there’s a natural bias to or confirmation bias of the things that you’ve invested in that you want to protect. And the way I’ve orchestrated and our committee and our diligence process at ParaFi is one where I try to minimize, and I was thinking about it. I try to minimize these confirmation biases.
For instance, no two partners can be in the same call. For the most part is one person in the ParaFi team that will lead the process and will mostly interact with the team. I’ll give an example. So if I’m talking to project X and there’s an analyst in the call. The way that I’m asking the questions will influence his ability to raise questions. Every question, the questions that you ask dictate the kind of answers that you get.
And so if Nick or Andre on my team sees me excited by the intonation of my voice because they’ve gotten to know me, well, the chances are that they’re not going to probably object to the fact that it might be a terrible product. It’s just like how the world works.
That’s an incredible strategy to have. I’ve never even thought about that.
I always tell teams, “Look, it’s not that a partner will not give you attention. It might be me sometimes that I’m going to drive all the diligence beginning to end.” And there’s two or three iterations of questions, of Q&A, so I’ll talk to a team, then I’ll condense my notes in my memo, will send it to the team. They can then ping me for questions independently. They can’t share all the questions with everyone publicly, because I want to see the kind of questions that people are asking also to value independent thinking and defer judgment as much as possible.
So we do maybe two or three iterations of Q&A. I go back to the team, I respond. And then over time we score. Independent scores, submit privately. And then I rank against their curve and the composite curves. So in order to make an investment needs to have aggregate score X and your seven might be different than my seven. So ultimately what all of this is designed to do is to make sure that we do not…
For instance, kind of like quadratic loading, if there is someone in my team that feels really strongly about a particular theme or idea or project, it’s going to be surface to a greater extent and probabilistically, we’re not going to miss that through this process. It’s not perfect, but at least it’s better.
No, I love your process. You’re basically accounting for people that are better salespeople than others here. Like if you’re Santiago and you’re in a call and you love something, who the hell is going to say no? But your way, you cut down leading, you cut down… And you also cut down a lot of partner time. There’s like no need to have 10 people on one call.
No, it’s very clinical too. And people have ownership over the investment as opposed to you don’t… When you delegate and transfer responsibilities when you’re doing diligence, I think it creates more surface area and vectors a bit where you’re going to miss stuff.
It works really well on… I love your process from finding investments because you’re not leading, you’re not pushing your thoughts in somebody else before they have the time to do the due diligence. But how do you get the buy-in for the project post-investment? Because what I’ve seen a lot of times, even at Delphi, we have a lot of people really excited about a project. It really helps them because they follow the story passed the investment.
For instance, if I’m running point and I want to get other people in my team involved in the project or? Is more the question?
Yeah. I feel like if you only have one person doing the due diligence, it’s hard to get that visceral buy-in on on a hard play right?
Yeah. No, it’s a good question because at some point we do bring the entire team. Before we make any investment, the team comes in for 30 minutes or an hour and presents it to the entire team. And it’s a very much more meet and greet at that point, we know that we’re going to make the investment, they know that we’re going to make the investment. It’s like, okay, here’s the rest of the ParaFi team that’s been on the background, a lot of the questions.
So they get to know us [crosstalk 00:10:21] very well… Yeah, it’s like… Yeah, we definitely do that before we [inaudible 00:10:27]
Let’s say there’s certain people on your team, I think you mentioned four earlier, right?
Now it’s fun a bit, but yeah, it’s six in the investment team.
I didn’t know. I thought you guys had a bigger team. You just really made a name for yourselves. It’s awesome. Does everybody have the same scoring? Because obviously people look at things different ways. The way I look at a community might be different the way you look at a community, how do you guys account for that?
It’s a great question. At the moment we score like aggregate scores. Maybe we should probably incorporate this, but different kind of dimensions to sum up to one composite score. But yeah, I think each person, you have the view that in their mind they’re doing their calculation. They’re seven and they’re factored in and it’s always… A lot of times it’s like, “Hey, how would you compare this opportunity to X or Y that you felt it was seven or was it nine?” And I think it’s on a relative basis, but that’s how we do it at the moment, but it’s actually a good idea to grade more different dimensions.
I’d love to dive into those seven or the key parts you have. One of the biggest things I look for is obviously the founding team is big. How do you size up the founding team both quantitatively, but also qualitatively? Because on a couple of these episodes before yours, everybody loves passionate founders, but there’s always like that ness of someone that might be a passionate founder, but that you just not personally like or might not personally vibe with, but they might also just be crushing it. So how do you deal with those blind spots? How do you size up and get conviction on the team?
It’s a great question because I have encountered those situations. Maybe I’m thinking of an example where I didn’t necessarily love the founder, but I think the common denominator across most founders or all founders that I’ve invested in is that they have some sort of unique insight that illuminates some sort of perception of a particular problem. And they’ve been thinking about it for a long time and they come at you and they say, “Okay, here’s what I’m thinking about in solving X or Y.” And you’re like, “Huh, okay.”
It almost seems so obvious. And so when you see that, it’s like, okay. It’s not always the case, but when you see that it’s like, hold onto it and invest behind that. But there are times where it’s not as clear, and I think it just depends on the opportunity. I think for instance, there might be a team that for instance, I didn’t feel was super, I guess, technical, but they had all the relevant experience for BD and partnerships and integrations and had sort of a leg up that sometimes in this space helps a lot.
You have the first mover advantage, you have some sort of grant or some sort of relationship that is unique. But yeah, I’m trying to give you a concrete answer. A lot of times I love to talk to a founder and just spend as much, much time with him, asking questions about all kinds of stuff. And that is not just… Sometimes I’ll throw stuff that’s not even related to crypto and just thinking about, hey, what have you changed your mind on recently? What is it that interests you? I really want to understand the why they’re doing the stuff, because-
The why is important.
The why, at some point, this industry is going to knock you down and it’s very sometimes demoralizing. I don’t know if we’re in a bear market right now, but we will be at some point. And I think just making sure that that team is going to build through and through. A lot of it is pattern recognition and instinct, which I appreciate, might not be very useful for someone listening to this podcast. But if I were to just concretely say, it’s a unique insight.
The lesson I’ll say is, back and back to this idea of like keeping an open mind, for instance, Hayden didn’t have financial background, I don’t think he was a coder. He learned to code on the fly and built Uniswap, which is like the most successful, I think DeFi protocol pound for pound. Vitalik was like a point Telegraph, I think, or Bitcoin magazine. I think a lot of people want to look back and say, “Oh yeah, I saw that powder is so obvious,” but it’s really not.
A lot of times it’s this idea that if they’re attacking a big problem, they might not be the best team today, but over time, I think they have the values that drive the motivation to just out-compete everyone else. And that might be the winning factor.
I’m with you there. The way I learned the best is taking a non video two-hour call with a founder walking around, not having to stare at them and just listening and having that conversation. Frankly, I’m not smart enough to get it on group calls, I just don’t have to buy-in. I totally get where you’re coming from there.
Shifting gears a little bit, let’s say you’re not Santiago at a VC. And frankly, you have great access, but let’s say you’re the 7,000th retail investor Uniswap, how do you expect them or how should they go about getting comfortable with Hayden the founder? Where do they get the insight to get comfortable when they might not have access to the core team or the core community?
Go going the discord, most founders are very, very accessible, extremely accessible. It’s a mind baffling how very little… I’ve been on SUSHI AMA calls with the entire SUSHI dev team and there’s 10 people in the YouTube stream. It’s sort of crazy, right? Because you think about like traditional markets where like the CEO and the management team presents and there’s like thousands of analysts dialing in and one or two maybe has a chance of asking a very cookie cutter question on a very specific thing.
And it’s always the analyst at JPMorgan or Goldman. And in this case, there’s just an incredible amount of access in this industry. I’ll tell you, I don’t buy this argument that like… yeah, okay, sometimes institutional capital has some sort of structural advantage and what have you. Like people ping us and if you don’t have a reputation where they might not ping you. But I’ve seen over and over again, people that are just early in discord channels and are talking directly to founders.
Even stuff like what time is he logging in? How active is he in discord? How does he respond to heat and moments of pressure? Tom, you’ve been in… How many discourse have you been where things just blow up? It’s either doing launch or after launch and things are never perfect. And it’s how they respond in moments like that that I think you start to understand the moral fiber of a founder and how accessible he is.
Kain, Sternie, all these founders are super active in discord and governance forums, they are always on podcasts, they’re always on like Twitter spaces or clubhouses, you know what I mean? It’s very accessible.
You’re right. And I misspoke with the community. Anybody could access the community, you’re totally right. But getting that conviction, the founders, you definitely can do from retail that you really can’t do in traditional markets. My next followup question for you is the whole goal of crypto is to have community run an owned networks. I think what we’re seeing in crypto is that the traditional corporate structure is actually makes sense because coordination issues with thousands of people is just frankly hard.
But I think the goal is eventually for these founders to decentralize the way to the community and have real ownership. Do you think that that is an actual viability for these founding teams to eventually go away?
I don’t think so. I don’t think so. I am very much a believer in decentralizing and creating structure of nodes, semi-autonomous independent nodes that are processing information and have some degree of autonomy to make decisions. I’m a big believer in that, but I also think that sometimes top-down is very influential and is necessary to create some sort of structure. And I think that’s the way humans coordinate and organize. Otherwise, it’s too chaotic.
I think it like a parabola, progressive decentralization works at different moments. You can’t decentralize out of the gate because then nothing gets done. There needs to be some sort of direction and leader that attracts and builds a community. You talk about building a community, well, if you have a really talented leader like Andre, like Sunny or Kain, these guys have gravitas that pulls in people. And then from there, progressively you start decentralizing and community members step up.
But there is a time where if you truly… Synthetix, for instance, their [inaudible 00:18:46], like great idea. I think Synthetix as a protocol has been probably the farthest along through decentralized, like credibly decentralized, but I think Kain issued a post not too long ago, it says, “I’m back because I need to come back,” and I think that’s helpful at times. And it might be moments of crisis, it might be moments where the protocol needs more direction, more implementation.
And so, I think you can solve a lot of these things with things like coordinate or just mechanism and tooling that I think is super at the cutting edge of like, how do you coordinate a lot of these resources and talent? But I am a believer that you do need some sort of like benevolent dictator at some point to carry the team forward.
I’d say it’s a hot take, but I agree with it. I gave this example before, but I don’t think a smart contract dev on a project really wants to deal with the coordination issues of rounding up people to vote on something. It just makes operational sense. I guess the difference though is when we think about it, if we have these operational hierarchies within DAOs, what’s the real difference for traditional corporate structures?
At a quick glance, I would never have access to Verizon CEO, but meanwhile, Kain is on Synthetix discourse. So it’s clearly more approachable, but at the end of the day, isn’t it just the same thing?
I don’t think so. I ultimately think that the key difference here is like a Heisenberg principle, which is people know that they’re observing. People know that in open source, it is radically competitive. People can fork your code, people can move and you’ve seen that happen over and over. SUSHI is a good example, for what it is Uniswap didn’t have a token. They launched and SUSHI has grown into a credible, what I would say blue-chip DeFi protocol. Some people have theories that it was largely because Uniswap didn’t have a token and then governance has been somewhat underwhelming for a few folks.
I think that the key premise of open source systems is that anyone can come and go. No one’s holding really talented… When talent moves as freely as possible, then it creates this sort of like implicit motivation for when to stay honest and to operate to the best of their abilities. Because they’re sort of like [inaudible 00:21:01]. Like if I start becoming too much of a dictator and too top-down and micromanage, the best guy’s going to leave.
It happens in traditional world, but in open-source systems, there’s a lot of really smart devs that can make a living and get grants and start working on multiple protocols and have their hands on many communities that I think that is what keeps everyone on the edge. You can never truly be an asshole. Pardon my [inaudible 00:21:28], you can’t be… There’s a difference between power and force. I think in traditional world, in governments, in corporations there’s a lot of force.
There’s like manmade monopolies, there’s artificial boundaries and all this stuff. But true power, I think comes through decentralization where information flows freely, capital flows freely, human capital flows freely and ultimately everything is forkable. So that I think is… Look, you’re never going to be in a perfect system, there’s always friction. But I think the idea of an open source system that is as frictionless as humanly possible, it keeps everyone honest and playing an iterated game. And so I don’t know if that makes sense, but that’s [crosstalk 00:22:09]
No, no, no, it totally makes sense. I guess the thing that scares me or I guess I’m just uneasy about is that long grind back to the traditional world. Like where people are potentially realized less and less in communities, we realize, hey, one person is making a decision, they don’t really care what I’m thinking. But I think what I’m getting out of what you’re saying is that if people feel that they’re not being listened to by these, let’s say crypto leaders, they’ll just leave.
Well, look at what’s going on in SUSHI right now in the forum, very contentious OTC deal and the community has spoken very clearly. There was a long call yesterday, there’s been a lot of discussions in the governance forum. I think anyone would be remiss to overlook that. If you’re the dev team, if you’re investors, anyone that has a vested interest in SUSHI or just an observer will look at that and say, “Hey, wait a minute. This is like a Berkshire Hathaway shareholder meeting and it’s quite contentious.”
And it’s not just people telling you how the company is going to work the next year and where they’re going to invest. No, it’s real stuff and people vote with tokens. And so I think this is where I think the true value of governance tokens comes into effect. And obviously there’s a lot of people that speculate governance tokens don’t have any value, but you’re seeing it very clearly right now. And the units are up like grant giving, all of these things I think are illustrating how at the end of the day, there is a lot of value in governing these systems.
Using your example on SUSHI, the community, if they’re unhappy with the OTC deal, they’ll probably a lot of them will leave, right? If Verizon wireless launches a new wireless plan that I don’t like, I’m not going to sell my stock. I don’t care. Why do you think people have such a financial decision-making process based on decision the protocol, whereas in the traditional world, if there’s a decision people don’t like, they don’t really react, they don’t really care.
Easy, they have skin in the game. That’s it.
That’s true, but what if I own Verizon stock though? I wouldn’t care… If I had 10 grand of Verizon stock and 10 grand of SUSHI, Verizon release something I don’t like, I really don’t care. But if the SUSHI deal goes bad, screw it, I’m out. I’ll just buy Uniswap in two seconds. Maybe it’s the ease of transfer or I don’t know. Maybe it’s the more buy-in, I don’t know.
I think so. It’s a good question, I haven’t thought about it much, but it is a very competitive system. It also attracts at the moment, it’s sort of like… Crypto is relatively small and so it is attracting these sort of like hobbyist fanatics that feel really passionately about things. Who knows how it will look like in five years or 10 years. A lot of this might just be like proxy voting and people just not even noticing or caring about these things. But there will be protocol governors that represent their constituents, whoever they may be.
And yeah. My appreciation for crypto, forget about DeFi, forget about Bitcoin, just at the very, very core, I think as this, open source systems attract smart people and smart people want to work on difficult problems. And they also have strong views and they want to be heard. And anytime that someone can be heard and there’s a platform, there’s a forum, it’s very empowering for people. Again, it’s this idea of power versus force.
And so I think ultimately it creates an environment where people are more comfortable to voice their opinion and to act on their opinions because they have a thing called a token that they can exercise and very clearly vote on snapshots or allocate resources, and it is very empowering. It’s pretty crazy, but DeFi is not a small industry anymore. Look, I’ll be critical, some protocols, there’s a lot of idea that it’s decentralized and it’s community, and the reality is it’s not.
It’s very centralized and the team controls and exercise a lot of power. And look, that might be the case early on, but I would say, my thesis is, if a team is not really focused on transferring some sort of autonomy and power and voice to the community, it’s never going to be a successful protocol. In fact, I won’t invest in behind that. Because people, I think given the choice, Tom, between being in a protocol that takes you in mind and consideration and incredibly gives you a platform to voice your opinion versus one that doesn’t, well, you’re probably going to pick the former not the latter.
No, I totally agree with you. And to go back to my question, you answered it great. The reason why I would want to quickly sell SUSHI versus sell like Verizon stock is because I have not only… I have ownership in both financially, let’s say, but the point is that I’m a part of this story, I’m a part of this community. I’ve seen it built from the get-go, so you have that, this is kind of really mine. Whereas a corporation is just like it’s somebody else’s, I’m just a small part of it. So that does make a lot of sense.
And I guess Santiago, just switching gears a little bit, a lot of what you do is you spend a lot of time in the projects that you invest in, you spend a lot of time in the space. I’m assuming that you’re pretty concentrated with your investments, but I would love to get your take on concentration versus diversification, I guess, one from a sizing perspective, so your portfolio, but also a time perspective because you need to spend time on the products you own because that’s what will affect your performance. But you obviously want to obviously be aware of everything new that’s launching.
I think it goes back to the initial idea you asked me about. I think you always have to keep an open mind of making certain investments while they may be relatively small in the aggregate that give you a total position to have an incentive to learn about something. For instance, this is how I think I’ve approached investing in crypto early on. Initially, it was like, hey, a college course in America costs $2,500. I’m going to invest that amount exactly in Bitcoin to learn about it.
And you extrapolate and you extend that further and you say, “Well…” In many instances, you want to have seed bets in things that are more exploratory, experimental on the fringes that may or may not work. But over time I’ve observed that maybe we invested in something, it was too early two or three years ago. But that experience may have not worked out well, but that allows us to identify a better founder with a better idea morphed into now.
I’ll give you an example. I passed on THORChain for a number of reasons. And I’ve now invested in a different protocol because I think it has a better team, has a better structure. It has a more credible path towards credibly decentralizing and creating more security in the nodes in the system, and has a better front end because… And so to me, it’s always been nagging me, it’s like, “Well, shit I missed out.” It would have been a fund returner for all I know.
But I remember that and then I apply that to saying, “Okay, well, I’m going to constantly be looking at something and observed that.” Because a lot of times when you miss something, you don’t want to look at it. It’s like, oh man, this is really, really painful to look at your misses. But to me, I obsess to some extent about them.
Santiago, since you’re so easy to talk to, I’ll push back on one point. I’m a huge fan, obviously investor of THORChain in the community as you know. But we’ve also made other bets in competitors like Chainflip is a team I love, right?
There we go. Yeah, we invest in Chainflip.
Exactly. Just zooming back out, how much of it is playing catch up though? If you lose on an investment and I’ve lost and missed plenty and I found something that will take its place or be better, how much of it is back-filling like, hey, you know what? They’re going to crush then I’ll do this? Versus, you know what? Maybe I should take the money and just invest in the one I missed. They have product market fit, they’re launched, they’re live. How do you revisit that without like the bit of skepticism or the bit of bias there?
Great question. I’ll say one thing and then… From first principles, I’m a big believer in making multiple bets in a particular category team.
Full stop. Some teams take object now, I’m very upfront, I’m like, “Look, I’m going to invest in a theme and it’s A, not winner-take-all, B, this space allows me to do that, it’s open source and it’s very competitive.” In traditional VC, you can only invest in Uber or Lyft. Fine, okay. But I think in crypto, I’d be remiss not to make multiple bets in a particular team because A, it’s so early. I know over in 1980, 1990, 2000, 2008, I just don’t know.
And look, some teams are like, “Look, this is too close to home. You have multiple investments in options protocol. I don’t want to be third option protocol.” I said, “That’s fine. We won’t invest in you.” Ultimately I’m not sharing insights between portfolio companies, that’ll be sabotaging my reputation and my… And I mean, the last thing I do is I call Robert to come, “Hey, look, this is what I heard from Sternie.”
It’s like, no, they are each in their own way A, memes that are attacking, I think and taking a different approach. And that’s fine. I guess I’m very comfortable doing that and I think as a fiduciary, this is what I do. I want to make the best risk adjusted returns in my portfolio. So at the end of the day, yeah, I’ll make multiple bets in a particular category.
To your question around playing catch up, I’ll push back and say some of the best investments are the second or third wave of a particular idea right in sanciation. Look at Instagram, my God. There were so many picture-sharing apps before Instagram. It was just the right time. It was very nuanced features that just made Instagram so cool. The filter, no one had filters, just Instagram gave you filters. And you’re like anyone that had a crappy phone that is a terrible photographer could turn crappy photos into, wow, this is share-worthy.
But you have a distribution channel of Facebook and you had all these platforms to share. In a similar manner, I think like Auctions for instance, is a category that hasn’t taken off. For whatever reason, Auctions, no one has cracked that nut yet, someone will. So I’m looking at that and saying, “Okay, well, there’s different versions of it. Let me make different bets in the category.” And so some of the best investments I made are the second or third wave of that. And I think [crosstalk 00:32:22]
That’s a really good point. No, I totally agree with you. I’m the same way. We did Zapper and DeBank. We did a bunch of protocols because they’re launching in different altitudes. They have different target markets. They have different pricing [crosstalk 00:32:33]
DeBank’s is much more focused on Asia.
Zapper is much more Western, you look at the demographics. So you call someone and say, “Hey, look, I’m an investment in DeBank. Any problem with that.” Yes. Okay. Well we don’t. That’s it.
The other question I have for you, you brought up a good point. Sometimes it is the second or third wave of an idea that takes off. Why do you think that is? Do you think it’s because the first mover brought the idea about and got people comfortable and the second dominated? Is it specific per project? Is it they’re tweaking features or is it that the original teams just can’t adapt fast enough and the second one is a complete rebuild that addresses everything that the first one’s screwed up?
It’s a little bit of everything, it depends on… But I’ll give you an example. For instance, Maker. Maker is like-
… it’s the central bank of DeFi. When you talk to the guys and they’re like, “You know what? Because we were first, so many other teams have learned from the pitfalls that we’ve had.” And Maker’s not a perfect system, and they would be the first ones to tell you probably. But in conversations, they’re like, “Yeah, it’s sort of…” I sympathize with founders because they build a lot of stuff and you hard code certain things in the protocol. It goes back to the idea of mutability.
Synthetix early on when it was… I was hoping like the Havven team then from Synthetix redesigned their token [inaudible 00:33:52] and staking. This is like the new frontier and we didn’t really have examples. Now when I talk to a protocol, it’s like, well, you borrow a lot of elements from so many different protocols, from Aave staking module and Maker and Synthetix staking and the liquidity mining of compound and how it’s attracted TBL, but maybe hasn’t been the best, best in schedule.
I think it’s both the beauty and the curse of open source systems, because as a founder, it must be really difficult to go first, launch, get traction. And then someone come in and say, “I like this piece of your code. I’m going to borrow and I’m going to borrow from all these different elements and construct a better puzzle to attack different opportunity.” I think you just sort of like take the… It’s easy for me to say, it’s obviously not easy for a founder, like the Isaac Newton approach, which is everyone ultimately is standing on the shoulders of giants, easier said than done.
Because you must piss everyone off that someone comes in and forks and does a vampire attack. And I understand that, and it might be really difficult. I think there’s ways of doing and borrowing stuff, but going back to Maker, I think there are a lot of different experiments in decentralized stablecoins with liquidity, what’s it? The Quality, like Rye. You have obviously the ESTP, ESDs of the world and Fe.
And so I think to me, that’s just a testament of we’re very, very early and ultimately everyone’s going to keep borrowing stuff. But it is difficult, I guess, the more difficult and challenging thing of all of this is that sometimes you’re required to codify your monetary policy, your inflation curve, certain things that you can change as easily and you may make a mistake that could really handicap your ability to grow.
Santiago, that’s an excellent question… Sorry, excellent answer. Still processing. It’s incredible. Another question I have though for you on that topic is a lot of investors, including myself like to invest in new code, new ideas, new things. But to your point, a lot of the new projects are basically copy and paste of old projects put together. Where’s does the line blur between copy and pasting old things that worked and then actually having a new idea?
Great, great question. So topical too, because you’re seeing it in Solana right now. A lot of ideas that have been tried in Ethereum, they were not viable because it’s just a different environment when you think about the three different trade offs that you make in a protocol, security, decentralization, and speed or throughput. I might’ve got one of them wrong, but I’ve seen… I’ve been a Hackathon judge in the last like three Hackathons in Solana. And it’s incredible to see like the… A lot of it is…
I remember the discussions like, “Should this project win? Well, it’s just a copy-paste of X that exists in DeFi Ethereum.” I was like, “Well, wait a minute.” My question is always, well, what are the applications that have been tried in Ethereum, haven’t worked because of structural reasons to be a one that will work in Solana? Maybe prediction markets, maybe auction protocols, maybe more retail-facing stuff, maybe games, maybe what have you. And so I think that’s fine. You borrow things.
The nice thing about crypto and software in general is that you don’t need to build and reinvent the wheel for everything. This is problem with crypto, a lot of times we try to get too complicated and nerdy about investing schedules and we just totally blow it out, it’s a total screw up. It’s like, guys, investing scheduled exists in traditional world, in traditional startups and they work. You don’t need to reinvent the wheel on that, focus on things that matter the most.
Yeah, and Solana is a good example of that, I think where you’re seeing a lot of innovation, a lot of free experimentation and borrowing kind of like we invested in like Jet Protocol, which is like a money market. They’re one of the devs work at Maker and so he has a lot of experience there and we just said, “Look, I made this decision to build in Solana for X and Y and I think this will work better here.” I was like, “Okay, that’s good.”
No, that’s a great answer. We’re the same way, we’ve made a bunch of bets on Solana, we’ve made a bunch of bets on Ethereum, on specific L2 just to build within that ecosystem. My other question for you though, is how do you make that bet or how do you make bets on Solana for instance, or other layer ones when there are answers on existing L1 to solve that? And I’ll give you examples.
We did DYDX with MCDEX, we did Vega. All PAPs and more complex financial derivatives on L2 on Ethereum Vega is its own chain, but we don’t have to really get into it. But if you’re investing on Solana, you’re attempting to solve that niche, but it’s already being addressed on Eth on L2s, but they’re not really launching it. How do you handle that layered risk because your thesis on Solana is faster, but the thesis on Eths, it can also be solved by L2s of the [inaudible 00:38:45]
Oh yeah. Good question. I don’t have a perfect answer for that. Certainly you can say, “Hey, look, I invest in for instance, Arbitrum and immutable X, which is using Starkware and diversified because you guys did too.” Hey, in some capacity, L2s bring much more throughput and speed and lower costs. And you have the more hardened battle tested security of Ethereum, whereas Solana still has a decent validator set, but it’s not fully there, I would say.
I know some people might take optics to that and fire back. But ultimately, I think back to our first episode, I remember you asked me this question. I said, “Look, I think the world is just going evolve and it’s going to be a multi galaxy world, multichannel world.” It has to be, like gaming and NFTs. Not everything needs to be suited in one type of environment. Not only that, but I think, for instance, a lot of developers in Solana are not solidity developers.
So you would think that most people are like, oh, it’s tracking talent from Ethereum to Solana. No, it’s actually a lot of financial guys that know… that just build income from Solana like a lot of guys from Chicago. And I think the [inaudible 00:39:59] and share them. I think like ultimately super net positive. But I think, yeah, ultimately the games and there are different types of applications that are better suited for other protocols.
Or just to your point, it might attract different users. Like the onboarding funnel that you might have the smartest is much different. Hey, can you run a smart chain? I’m not dismissing any of this stuff, but ultimately, crypto is a second DAPS in any sort of industry, so you almost want to have a million funnels. It doesn’t matter where they come from. Just hook them, bring them in.
And whether it’s central bank digital currencies, Facebook’s coin, whatever. But once you open that door, it’s really hard to go back. It’s really hard to get your mind off of it. So when I take that view, I was like, “All right, I’m just going to…” I think, invariably, you have to make these investments because, look, I think like in game theory, a lot of people in traditional… The traditional operating assumption and way to operate is that most things are win-lose.
And that’s just like a really bad way to, I think, approach life in general. It’s like most things are win-win. Technology has created so much surplus, so much surplus that it is win-win right. Facebook doesn’t dominate the entire world. Of course, it’s like perhaps the best social network, but you have the Yandex in Russia because Russia… People love Yandex and that’s fine. And in China you have all different social networks.
Ultimately the keyword here is consumer preference. You’re creating a lot of consumer surplus with crypto, with technology and invariably people want the freedom of choice and they’re going to maybe use one or two or three different applications, not just one.
I love your answer. And the way I asked the question was a very narrow simplified phrasing of, will financial services win on Solana or Eth L2s? And basically that’s just a rush for whether Solana can launch them or whether Eth L2s will support them. But it doesn’t the game theory work in Solana’s favor in the scenario in a way? I’m not trying to pit Solana against Ethereum, I’m just trying to talk about communities here.
If Solana is able to attract all of the top tier financial talent from Wall Street from Chicago, from around the world, these guys… Don’t get me wrong. The guys in Ethereum and the girls in Ethereum are incredibly smart people. But if they’re able to attract the smartest traditional financial people in the world, the game theory means all the next waves are all going to follow them in build financial apps, plugin with them.
Doesn’t that mean that you would want to just invest in financial apps and Solana? The game theory on the communities has to be very different.
Possibly, but I’ll tell you why at the moment I still remain much more bullish on Ethereum, because… When Binance marching was happening, you saw that chart from, oh, wow, there’s more users now on PancakeSwap than in Uniswap. You’re like, “Well, shit, no one cares about decentralization.” This is taboo to talk about, will people ever care about decentralization? I don’t know. There’s a credible version of this universe where most people are just like, “You know what?”
Look at stablecoins, most people use USDC. Crypto has always been a world of double standards. It like, yes, [crosstalk 00:42:57] decentralization, but even everyone I know, most… It’s like you use USDC and you become complacent and you look… I think that’s the state of the world that we’re in. And so what I’m trying to say is back to the Binance example, to me, it was, well, one, would people care about decentralization.
Two, I think ultimately the criticism was, look Binance marching’s telling you most people don’t care about decentralization and security, they just care about lower fees. And if they’re going to get it in PancakeSwap and Binance marching or Solana, that’s it. It’s a consumer wins. Users win and that ultimately is what matters most. It’s like the VHS Betamax model. Betamax was a better technology. Ultimately VHS won because it was better marketed.
Now, okay, Binance marching, huge distribution of Binance. The problem that I have with this is this, in finance, in money, you the end user might not care about this stuff, but most, most users, like in a stage two, three years down the road where you have like broad adoption because you were here [inaudible 00:44:01]. If you assume that, then you say, “Well, hold on a minute.” Most, most users are never going to interact directly on chain. They’re going to come from aggregate.
Even JPMorgan’s of the world. They may not even know that they’re using [inaudible 00:44:15] They might just, every, every application [inaudible 00:44:17] is going to use DeFi. Okay, fine. Let’s just assume that’s the state of the world. Well, I’ll tell you who’s going to care about security, JPMorgan. The aggregator is going to care about security and immutability and strength behind that. And so that begets more liquidity and liquidity begets more liquidity and it’s more efficient.
And so that is the flywheel that Ethereum is on at the moment. You look at why PayPal or why Visa is settling in USCC on Ethereum. And that’s the reason, because they don’t want the egg in the face. And security becomes super important, ultimately for the big players that are aggregating users and going to interact on chain. That’s what’s going to matter. It’s going to be interesting, Aave pro markets, compound chain.
These things I think are being built on, I guess not by chance like a substrate fork, and Facebook is a fork of, what is it? Cosmos Tendermint. But yeah, at the moment, most of the users on Ethereum… Sorry, most of the users are on Ethereum, most of the developers are on Ethereum and it has a high security, like the most Lindy. Now the last criticism I’ve heard is like, Well look at what’s taproot in Bitcoin. It could in some theory that you move more towards like Sovereign and all these different applications and build like… It’s possible, I’m not dismissing it.
It’s a long-winded answer, but I think security gets more liquidity and it’s a very virtuous flywheel that we’re in. It doesn’t mean that it can’t be disrupted, but at the moment, I think you want to play in both ultimately. No maximalism in Ethereum or Solana is going to work. I think you just need to be open-minded and playing in both fields because you’re going to interact a lot. There’s going to be a lot of value transfer between both chains I think.
No, no, it’s a fantastic answer. I never thought about the security from the aggregator first type side of things. That actually is a really interesting answer. And I guess, how do you think about investing? Obviously you don’t want to just invest in Eth or Solana, right? You want to invest in like the app layer here. How do you think about the sizing bets? How do you think about concentrating those? I already asked that question, but it is a really tough balance, man, because there’s there aren’t…
Even though you have five niches that you might want to fill, you opened with, they might not be available on Solana yet. Maybe you have to build them, maybe you have to find the teams, maybe they’re available on Eth, but not at the right valuations. It’s just such an art to craft your portfolio.
Yeah. Look, I think I won’t talk specifically what we do at ParaFi because that’s a little bit proprietary, I guess. I’ve talked about it before, I got in trouble. But hypothetically, I would say that money market’s going to be built on Solana, so you look at who’s going to build it and I found yet. There we go. Auctions portal are going to be built on Solana. So replicate a lot of the components that have been built and successful in Ethereum and say… Reasonably speaking, you need to have certain core backbone like money Legos in layer one to function.
That’s what led me to a column, for instance and poke it up. To your point around, how I think about investing in layer one like Eth or so versus applications, I tend to skew more of the application layer. I think it’s a levered bet on a particular L1. For instance, like I wasn’t as gung-ho on DATS, but I do like for instance a color. By the way, none of this is financial advices, so this is like giving a hypothetical example.
But in terms of sizing, I think in categories. Like in themes, I think pillars of finance, users and like gaming and I have the sort of different maps in my mind that I think, okay, this should be at least two or three or 5% of the portfolio. And then I’ll make bets accordingly. I may make one bet, I may make five bets, I may make three bets. It depends. But yeah, I think it’s ultimately an exercise of triangulating to how big do I think this opportunity is? How big do I think like an Options protocol, how much demand is there at the moment?
And it’s all very relative, it’s like, do you, for instance, in Solana. It’s relatively early, do you want to invest in noxious protocol right now or would you rather invest in money market? Because I think you need one to get the other.
That’s a good point.
So there’s a sequence of things. So like you could look at Synthetify and Mango, which is great, which I think two good teams, but then you can also look at Jet. And so I think one has less risk than the others. Because it worked, they’re very proven. That’s what led me to Aave early on. I’ll give you an example. I met Sunny at DevCon and I said, “Well, you have an example of compound that had raised a ton of money, great team.” They’re like, “I just don’t think that there should be one money market.”
Because there probably going to be still onboarding collateral, there’s going to be a number of reasons. There’s an opportunity to create. It’s not a winner-take-all market, and then so invariably, you go back to the drawing board and say, “Okay, it should be sized, the whole money market should be executing on the portfolio. And then within that, I’m going to slice it with one or two or whatever.”
No, that’s a good answer. I want to switch gears a little bit and talk about token incentives. How do you think through, and it’s a very broad question, but how do you think through token incentives, I guess for the team, for users, for projects using their token to incentivize and maintain a community and help promote the actions that they want to grow the project? We’ve seen so many examples of projects mess this up, we’ve seen so many successes. How do you think about this from an investor lens and maybe also as a user?
Look, I’ll give you a very concrete example, Yearn, perfect example, I think. Yearn bear launch is fascinating. I think it feels like, wow, you literally created what is perhaps the purest community since Bitcoin, not even Ethereum, Bitcoin. It was just remarkable how the community coalesce, because it was super powerful to see so-and-so. I don’t know what the right word is, but like Andre just really like gave a protocol to the people and everyone like was like… It ties into so much that we discussed.
It’s like people rally behind it in a way that you didn’t… I thought that was like this is super special. And to me that was like, we’re early in Yearn, I was like, “This is really powerful.” I was in this one I was like, “You’re seeing something here that is not found somewhere else.” But of course, it wasn’t perfect because you exhaust your tokens and they were all distributed. And I was fortunate to be in the doers group. I am in the doers group, which is like a small group of core contributors in Yearn.
I first proposed on chain to change the structure to do T20 kind of model where more value would accrue to strategists and to the team. And of course it was like, Andre is not… He would be the first one to tell you, is like, “No, I’m not a business person. I just want to build cool tech and that’s it.” And I’m like, “Yes, but you need… For me and what I was worried about was like devs.. Look, if you don’t have skin in the game, you don’t have skin in the game. At some point will want to go.
He is an outlier of somebody that is extremely altruistic beyond incentives.
That’s the word I was looking for. I admire that, but at some point you need to build a team and at some point people need to put food on the table and be valued for their contributions. It’s just human psychology, anyone that… I’m not a believer that people just do things out of the goodness of their heart.
I think humans are good species, but at some point you have an opportunity cost. It is. And so I was there and saying, “Look, guys, we need to restructure and mint more [inaudible 00:51:44] to give to the team.” Because they started losing devs to another protocol.
That was a big decision. That was not an easy decision for those [crosstalk 00:51:49]. It was not an easy.
We met at 6,666 [inaudible 00:51:55] which was not a small number and creating investment packages and incentive structures. But I will tell you, immediate change. Well, you could just sense the energy in the group was very different, very, very different. And I think look, was it perfect? No, probably not. I think TBD, like can we improve the investing schedules? Maybe, nothing’s perfect.
But I think we constructed something that borrowed a lot of elements from traditional investing packages in startups in the traditional world saying, “Look, if you leave, you’re not going to earn all of this. You’re going to get clawed back and you need to earn it.” And so it’s very simple parameters, but it’s been great because Yearn has been able to, I think, attract more strategists to build more products and a lot of the teams, it’s just the energy’s way different. So that’s just one very concrete example.
That’s an incredible example. Incentives are absolutely key. Incentivizing people to bring good strategies, which drive alpha is the core of Yearn, so that makes a lot of sense. Do you think though, that it’s… No project now is they’re token econ from day one, because you never know what tokens you’re going to need for future needs, future incentives, things like that. So a lot of this comes down to the ability for a community… Oh sorry, the ability for a team or a project to communicate this to the community in such a way that they’re able to react and change things in real time.
Yearn and had a very straightforward need. Hey, we have a token cap. We need to print more for incentives. It’s very straightforward. People know that the alpha dies if they’re not incentivized, but do you think a lot of communities have the ability or the buy-in to do this. Because you do start to teeter on our original point was, is the founder just printing more tokens or does the community actually want this?
Yeah. No, perfect. No, it’s a really good question. I think my advice is to new teams thinking about token structure is, do not codify everything all at once, because you just don’t know how your community will evolve, how the protocol will evolve. And so directionally, the team should retain 20, 30% maybe. Investors, if there are, sometimes they’re not like 10, 15%, and then you leave a lot of room for the DAO.
And then I’m super bullish on DAOs, and then ultimately, you bring on more people from the community to administer the DAO and to create pilot programs of liquidity mining, for instance, or incentives or referral programs or whatever it is your protocol is. If it’s more consumer-facing, you might want to have referral programs with distribution channels like Revolut and Wirex or whatever, or even like exchanges or other protocols. Protocol, protocol referral programs.
You might want to have different liquidity mining process. So for Aave, we proposed the first liquidity mining program and it was a beta for 90 days. The good thing is Aave, initially when I was constructing like the Aavenomics, and I think you guys were part of it too with Sunny. It was like, let’s leave some room to use this as a war chest to adapt and for user acquisition, for strategic reasons, for acquisitions, whatever, right. It’s sort of the treasury and that’s super valuable.
Another protocols is just codified all one is like this is going to be for X and liquidity mining Y, and that’s it. And so they really have very little maneuverability malleability in their token structure. Ultimately you want to have the ability to test different programs like UMA is doing some really cool stuff with options, milestone-driven, liquidity mining programs like fantastic.
I think the way UMA has done their, they retain a lot of tokens in the treasury and they’ve done all these different experiments like AB test. And I think that’s fascinating, that’s what you want to be doing because you can do all these really cool experience to say, “Hey is this the right structure or liquidity mining program?” And then you test it for three weeks or you test it for six months, you test it for three months, and then you go back to the drawing board.
And I think that’s probably the more sensible way to structure these things, leave a lot of room for the DAO. It also allows like Index has been a great protocol to where you’ve seen the community grow and you pay contributors out of the DAO and people rise to the occasion and creates really good community. So all of these different examples, but I think ultimately, yeah, it’s very tempting to try to codify the community when you’re reading that medium post that’s where [inaudible 00:56:10] here’s the liquidity mining program or here’s the token structure and economics.
Yes, yes, there’s a continuum. People want some certainty on monetary policy, but absolute certainty is probably going to hinder and handicap your ability to be in a position of strength over time.
I’m with you. Putting anything in concrete terms to me feels like you’re agreeing to maximalism from day one. I feel like-
… you have to be malleable. Yeah. The other question I have for you is, we work with a lot of teams as you know, but how have you changed your process for working with a team? When I first got started in crypto, I had so many opinions, I’d hop on a call, I’d talk for 60 minutes or 59 minutes, I would talk for a minute. Now I feel like it’s totally reversed where I’m just listening.
When you work with Sternie, for example, what’s your process? Why do they want to keep coming back to work with you? Do you listen? Do you give advice? How forceful are you? Walk me through that.
Well, you have to ask. It’s funny that, but I quite simply want to be the first person someone calls when [inaudible 00:57:15] or whenever. I want to be the first call, first person they talk to, first person they think about, and it’s ultimately building trust. Because I want to make sure that they know that I don’t expect things to be perfect. We’re all humans we all have… there’s going to be fires to put out at 3:00 in the morning. And I think just being responsive, being there.
I’ve built a great relation for instance, with Kain’s brother, Kieran from Illuvium. I don’t know, man, he just call me and Kain was like, “Hey, my brother’s building something,” and I have a good relationship with Kain, and so it’s just being there. I think founders, it can be pretty lonely at the top, it can be pretty lonely being a founder. A lot of it is listening. You’re right, I think the best life advice that I’ve thought is don’t give advice, just listen. Don’t be prescriptive.
The doctor writes, “Hey, you need this.” That’s the worst thing you can do. Because to me, no path is the same and what’s worked for one protocol might not work for the other. It’s totally different situations, totally different market environment, totally different stage of the protocol or whatever. And so the worst I think you can do as an investor or just generally is to go in there and say, “Hold on, guys, this is how it’s going to be done,” because it’s probably not the right approach. It’s more so…
I think the founder, ultimately I want to be investing in someone that is really talented and just need some guidance and some kind of a rebound, like a sounding board to help. And then my approach is they have a whiteboard with stuff that they can’t get to, they don’t want to get to, they’re panting. I want to know what that is and I’ll go to work there. Sunny at one point calling to say, “I want to get the Elon Musk,” I was, “Well.” I said, “Well, this is a little bit tricky, but let me get to work.”
And somehow, somehow, I don’t want to say if I got him or not, but that’s the kind of stuff, there’s like, I don’t know. I was like, “Sunny, you really outdone yourself here. You’re putting me in a tight spot.” You know what I mean? Having that confidence to be like, “All right.” The other thing I’ll say is most times a lot of founders don’t ask for help or ask for help too little too late. So it’s an encouragement to use your investors. We’re here, we’re part of the community.
I know there’s a lot of criticism around VCs and just tracking value and all this stuff, but I’m not [inaudible 00:59:27]. I think you guys are very helpful. Not to be a shadow or anything, you know this, whenever I talk to founders, I like club deals because I don’t want to be taking the entire location. Now, this is perhaps the best advice I’m going to give right now to a founder, don’t do around with one investor only. It’s the worst thing you can do.
Oh God. I could agree more.
I understand there’s just a Sequoia model. And Sequoia, for instance, is notoriously just blocking the ground now. In crypto, A, it’s a very founder from the environment and two, any investor that thinks that they can provide all of the value is hallucinating.
Oh my God. It’s so dumb because your VCs, investors are your users. I’ll never send… Perfect example, the optimism team is fantastic. I’m an investor in Arbitrum. Where am I going to send a project build on L2, I’m going send them right to Arbitrum all day long.
No, I’ll give an example. Look, I didn’t get an allocation in [Optum 01:00:18]. I like the team, like the opportunity. I think they’re not [crosstalk 01:00:20]-
Fantastic team. Fantastic team.
You know what? I invested in Arbitrum. And guess what? Every single protocol that I’m an investor in, most of them are deploying in Arbitrum.
Oh yeah, yeah. Same. And there’s nothing wrong about the team or the projects building optimism, but it’s just a bias that comes into play when there’s not a party round. Why would you help… It’s not, to point out a specific example. It’s just that if you’re taking all the round, it’s not a community-led project.
Yeah. It’s not a threat. It’s not to say that if you don’t give me an allocation, I’m going to sabotage your protocol.
No, no, no. No.
No, absolutely not. I don’t want it to come across like that. I think that, look, ultimately the worst in crypto has always been this tribalism bullshit that ultimately everyone outside is looking for excuses to put down crypto. “Oh, you know what? This founder went away with all the money. It was a rock pool. Oh, this fund blew up.” And people always looking for excuses to minimize crypto and its potential. That’s still the state of the world that we’re at, most investors are critical.
You know what? That’s great because I love that because that’s the people that I’m betting against. And that’s to this day, it’s like, what are you believing? The others don’t but will in two or three or five or 10 years time well, it’s this. Because it creates all this tension, and that’s great. It’s a very contrarian, but it still is. But as an industry in crypto, I think we can do a much better job just supporting each other, and that’s my philosophy.
And this goes back to a lot of the questions if you ask me is ultimately I want to push innovation forward. And that involves investing in people and founders, wherever they may come from, whatever they look like, whatever problem they’re attacking. If it’s a passionate founder and a good person, I’m going to invest behind it. And I think anyone that takes object to that, I’m sorry, but that is just my philosophy, my principle. But yeah, I think founders should really select and curate their investors and use that to their advantage.
It’s sometimes saddening to see that this… I won’t name funds, but I think we all know who they are. They’re just a little bit more sharp-elbowed and I’m not one of those. And I think ultimately I like collaborating with you guys, with the framework guys, like a lot of people because it’s not competitive. Ultimately it’s so quite early and the competition really is outside.
Oh, man. If I get on a community call and I don’t see like the funds I love on their scoring. I love seeing it with a T. It’s fun, man, because it’s just like, it’s collaborative, it’s exciting. You share stories, you build together. It’s not just like you and a team. It’s like you and the community and then you open it up and hell, man. I get on calls and I am definitely not the Delphi guy that should be on the call, so I don’t join them anymore. And I drag someone else that that is, and they’re excited about it. That’s the whole point of the community-oriented approach.
Santiago, other questions for you. This is fantastic. How skeptical are you when you’re doing due diligence on a project? I know that you form your thesis, you know that there’s holes you want to fill, but how hard do you go in that first call? Do you jump right to problems red flags or do you start off with the rainbows?
I don’t know. I think I’m all over the place to be honest. Sometimes I tend to be really critical and admittedly, sometimes it’s because it’s very competing protocol and I was just like, “Why X or Y? Or why this or that?” When it’s more frontier stuff, I’m not as critical because a lot of times it’s just an idea, it’s just the thesis and how critical can you be of something that doesn’t have a lot of substance behind it. It’s more like getting to know the founder.
But yeah, in the first call I tend to just get to a state where the founder is doing most of the talking and then I can go back to them with more perhaps like targeted clinical questions. But yeah, my degree of skepticism, I don’t know. That’s a good question. Maybe I’ll ask founders, it’s like how skeptical I am on a relative basis relative to other founders or other investors?
Well, I guess my-
I don’t know. How skeptical are you? Over time, like over the last two years, do you think that you’ve grown in the first call or just generally in your DD process, more skeptical, less skeptical, neutral, no change?
I’m glad you threw it back. I’d say I’ve grown way more skeptical pre-call and less skeptical on the first call. So way more curation, and then once I’m on the call, I’d love to meet them dive in. Because frankly, I like talking to people, I love making friends, but who the hell is going to tell you their story if you just get off the bat and hate the [inaudible 01:04:54]
That’s so true. I think you’re right. Two things, I think. One is, they’re sometimes to T, it’s like, oh, you’re looking at the 10th option protocol. It’s like, “Oh, okay.” And you see, that kind of implicitly just makes you a little bit more skeptical, I think naturally. The other one is like you have these trusted nodes. Like you, Tom like hey, you introduced me to NFT protocol list. So I was like, okay, it’s coming from someone that I’ve built and have like a working relation. I know you, I trust you. You’re like a trusted node in my group-
… that if I get a deal from you, it’s much different, and so I’m much more open to that. And maybe it’s a good point, it’s like, how do you solve for when it’s not coming from your trusted node? Because there have been really good investments that just don’t come from your trusted X or Y. But-
No, I’m glad to be node, man and you are as well. Santiago, a couple of minutes before we close out. Let’s get to some fun stuff. What’s the best advice that you give other people?
I think I mentioned it before, but one is think in probabilities, everything. You just can never think in absolute terms, and the minute you think that you understand something or that it’s too obvious, it’s probably not. It’s probably carved out. So you always, I think constantly… Because I think thinking in probabilities does two things, one, it always… A probability changes over time. I think it’s not static and I think that forces you to constantly processing information to assess the state of that probability.
And I think that’s the kind of thing that touches on a lot of things that we’ve talked about. So that would be my best advice. The second one is and I know I’m cheating because you said one is, I love these books that are out there, and it really is just this idea that like no path is the same. And crypto can be difficult because you look at very successful people, and it’s noise and it can be troubling. I remember my first time when I moved to San Francisco, Silicon Valley I’m like, “Oh man, I’m getting a coffee.” Like the Googles guys are next to me, ordering coffee.
And you’re like, “Wow, like this guy is not too dissimilar in age and is just incredibly more successful and done incredibly so much more things than I have.” There’s two approaches. One is you get frustrated and you get somewhat like, I don’t know, it just puts you in a bitter state and paralyzes you. And the other one is, no, you know what? Through osmosis, I’m going to be a part of this community, which is Silicon Valley or crypto and try to contribute to the best of my ability because something good will come out of that.
And I think that’s just like being a piece that, I don’t want to say your time will come or the harder you work, the luckier you get. I don’t know. There’s lots of things. There’s skill, there’s luck, there’s timing, but just being at peace that somethings fall outside of your control. And when you understand that certain things will fall outside of your control, then you focus on the things that you can control and really, really drive those. Whether you’re investing in the protocol.
There’s things that just you never will control. When I make an investment, I always know there are two or three things that I can control and I’ll drive maniacally, like maniacally to that to drive through the wall and make it successful, like a self fulfilling prophecy. And I just know that there are things that I won’t be controlling. So I direct my energy to the things that I can control and being a piece that the path towards success is very different for everyone. And so you can’t try to copy other stuff because it’s just going to be I think like a fruitless endeavor.
I love that focus. It’s hard because there’s people in crypto that you and I know the worth zillions of dollars. Waking up everyday and try to work when you know that they’ve reached that level of success is hard. But to your point, if you worry about that all day, you’re never going to be successful in what you’re doing.
No. Yeah, never.
I love that. That’s fantastic advice. And flipping this on its head, I guess what’s the best advice you’ve ever been given?
So many, because I’ve made a number of mistakes in my life.
It’s not an easy question, because it could be life, it could be crypto. It’s not an easy one.
Yeah. I vividly remember, this is the first thing that’s coming to mind. I don’t know if it’s the best advice that I’ve gotten, but I was getting ready for a super day. I was at JPMorgan at the time and I was interviewing at this like venture shop, VC shop. And it was super day, I was nervous and I had prepared so much. I hadn’t been sleeping for three days, I was doing investment banking, so really sleep-deprived, was really eating at me that I was like, I don’t… There was like this impulse of like, I think I could be doing more to prepare because this is like a once-in-a-lifetime opportunity. I felt at the time.
So I was like, “Am I doing enough to prepare myself? Because if I don’t win, I will never forgive myself.” You know what I mean? That state where you’re saying, “I can always do more,” and you’re not sleeping. There comes a point where actually it’s hurting you, right?
I’ve been there, man. That Wall Street atmosphere is toxic.
Yeah. But even in crypto, like a lot of founders, you’re always on 24/7. So the advice that I got was from a good friend of mine, an analyst with JPMorgan, his dad was like super successful private equity guy. Says, “Look, come down. They are not looking for someone that knows the answers for everything. They’re looking for someone that is not going to wait when he gets asked the question… They’re going to ask you questions that you’re not supposed to know the answers to.
What they’re testing you on is, are you going to be the person in how you respond and say, try to come up with the answer or are you going to be saying, ‘Look…’ Have the confidence to say, ‘I don’t know, but this is how I will do it.’ Or just say no.” And to me, it gave me a lot of peace of mind and it has to this day because crypto is so multi-disciplinary and just things in general. The world at this moment in time through technology and dissemination of information is moving at a pace that I don’t think your brain is… You cannot compute and process all the stuff.
And it goes back to having focus and saying, “I’m not going to know everything. I’m not supposed to know everything.” And so I think that the conduit to that is just having more intellectual curiosity of being at peace that you’re not going to catch them all, it’s not a game of Pokemon and you’re not supposed to know the answer to everything. But what you can do is reach out to people that are more knowledgeable than you and focus on a process of acquiring information that becomes more efficient over time.
Because I think that’s what you can do because you’re never going to be the supercomputer. It’s not going to work. There’s going to be overload of information. So it’s that comfort and peace of saying no. No to certain things, to, I don’t want to take this call, I don’t want to take this meeting. To no, I don’t know the answer to that, I’m sorry. I’ll go back and find it. So it’s that. We’re so conditioned with yes, yes, yes. There’s times where it’s just no.
Again, incredible advice on not getting jaded and caught up in others and focusing on you so that you could outperform what you’re good at, and two, not having to know everything, and that also allows you to focus on what you want to do and solve problems, I guess-
You know what I mean? What I’ll say is so many people focus on the outcome. Focus on the process because a process you can control, the outcome there’s a lot of variables that are outside of your control, there’s a lot of noise. And so the process you can most definitely control.
No, process makes perfect, man. I love that. And I guess on this deep question topics, mental health, taking breaks, not getting burnt out, being here for the long game, how do you get away? How do you disconnect? How do you make sure you don’t burn out?
Honestly, it’s a great question because I think it’s super important for everyone. For me, it’s exercise, I love running and swimming and cycling and so like a triathlon or whatever. But it’s just important to… Or whatever it may be. I’ve taken an interest in like walks, but there are certain things that you know like we do that just spur a creative part of your brain that when you’re in the job and day-to-day doesn’t. So for me, it’s exercise, it’s swimming or I’m running. And I know you love house music, I love house music too.
Love house music, so [inaudible 01:13:11] a good playlist. DM me, put it on Twitter. I’m not popular enough and cool enough to be on Tom’s private Telegram [crosstalk 01:13:18]
Oh man. I didn’t know you’re not in there, man. I’m adding you right now. Damn, I can’t [crosstalk 01:13:21] you’re in there, man.
No, I haven’t made the cut, but it’s fine.
It’s fine, it’s fine.
No, no, I’ll add in. This is a good way. I like it.
I’m just putting you on the spot. I was saving this to the very end.
I can’t believe you’re not in there, man. I’m shocked actually.
I know. I even tweeted at you about this, but anyways, I’m not holding you accountable. But yeah, there are a few songs that just put you in a state that is just amazing. They conjure up memories, to me, that’s awesome. It’s not so much about like taking… Tom, in Europe now, I think these people take all of August. Everything in Europe stops around August, which I guess we knew, but I think like more frequent breaks of Saturday or Sunday or Wednesday. To me it’s just more useful. You can’t be off like the best for a month, I guess.
No, no. Those are great points. The biggest thing I wrestle with is just the hour or two of my day where I wake up to 9,000 messages. In your opinion, how do you deal with that? Have you noticed that it’s actually worth automatically you’re replying to everything? How do you deal with that influx?
You don’t, I guess. Here’s the problem, that if you don’t respond, you think that your reputations can go to shit. If you don’t respond in a minute, you’re like, “You’re not going to be as much of a value at a VC.” And it’s like, “What have you done for me lately?” I don’t have a perfect answer for that.
No, that’s perfect.
There’s like 1,000 unread Telegram. If I haven’t responded to you, I’m sorry. I’ll plan to get to it. We’re the team of four, so haven’t been sleeping the last night [crosstalk 01:15:11] I don’t think you have either.
But no, I think… Look, airlines give you the best advice, you got to put your oxygen mask before helping others. And I think like if you get to a point where it becomes… Crypto is a lot of fun, a ton of fun. There are moments where you say there’s a lot of and you’re like, “I don’t like this. I don’t like this behavior. I hate rock pools, I hate all this.” But you know what? I look back and say, “Well, shit, I don’t know what I’ll be doing.” I have other option of course, but I always go back to crypto because I think the smartest guys are here. It’s the hardest problem.
It truly is like the most powerful social economic transformation to the Industrial Revolution, I believe it, this one here. Is not perfect, and so ultimately I zoom out and I say, “Okay, I just need to prioritize certain things because it’s always…” Otherwise, you start feeling that it’s very much like pool and people are… You start being bitter and people become needy. It’s never about them. I think people in their good heart reach out to you because you’re a beacon of light, you give them insights, people like talking to you.
And I think if you’re going to respond and just be quick, it’s better to just hey, look, it’s I think better, calm down, go for a run, do whatever. Come back and respond with mental clarity and a disposition [inaudible 01:16:27].”
That’s a great piece of advice.
If you’re not, then just don’t respond. Just don’t respond. I’m not responding to you because I’m doing other shit, I’m doing other stuff. Just know that I most likely see your message and I will respond at the right time that I feel is where I can help you the most. That’s it. And if you don’t believe that, then I’m sorry. That’s on you, not me.
No, that’s an incredible heuristic for when you get inundated when you should respond. My last question for you, you’ve already answered throughout the interview a couple of times on like misses, why. I’d like to take the other side of that. What was a winner for you that gave you a sense of accomplishment beyond the monetary gains, beyond the percent gains? What’s a play that changed the world, changed your life, change someone else’s life for you?
It was Aave for me. I met Sunny in DevCon in Osaka. And I looked at the booth, I said, “Not only do they have the coolest gear, it was a ghost.” I still have it. [inaudible 01:17:18] I’m a rocket fan. I don’t typically get gear, but I saw the book and I said, “There’s something here.” It [Ether 01:17:25] at the time. And to me it encompasses a lot of the things that we’ve touched on, which is having a thesis on money markets. Having got a senior team that had been building through a brutal bear market, not giving up and just candidly human capital loan was valued more. [inaudible 01:17:39] is a 10 million market cap. I was like, “The value-
… of these guys was worth more than that.” I flew back from Japan, I was like a typhoon, got back to the San Francisco and said, “I just need to buy as much Aave as I can possibly get my hands on.”
And look, Sunny has become one of my closest friends because we’ve worked so closely together. He’s a great guy, the entire Aave team, I think is remarkable what they’ve done. And it really shows you that… Look Aave was zero TBL in January of last year.
God, damn. Wow. That was [crosstalk 01:18:15]
It has 23 billion now.
18 or something. And it really encompasses the… Is it going to be the dominant money market? I hope so. I think we’re doing everything that we can, but it encompasses a lot of probably like the work with teams, get really close with them, build trust, iterate experiment, and have an open mind. And I think they’re building incredible… This is not a shelved Aave. I think there’s so many good protocols, but to me personally, Sunny personally has become a very close friend of mine.
I love that because ultimately I think when I make an investment, it’s like my family. I’m going to do everything in my power to make it a success. Not get in the way, not be like an imposing micromanaging father that it pisses you off. No, just be there, help them. And it’s been remarkable to see their growth. And I think, look, they’re doing some really cool stuff that-
Santiago, that’s an excellent answer. And not to cut you off, but do you think you can ever get that again? Because at the size of ParaFi, at the size of your weight now, a 10-mil valuation means you could only really inch in 10 grand or 50 grand of liquidity if you’re lucky over time, you can’t build that big of a position. Do you think like you can still get that level of feeling and success and accomplishment out of taking a position in something that might be a billion dollar in valuation right now?
There’s an Aave out there right now that I’m not catching and I’m looking for it. There is every year, you have to make one Aave, every year.
There was one out there, you know it. It was actually for you guys. I know it was multiple, right? There are out there. And it’s just Aave, I think there’s a number of examples. I feel pretty excited about a couple of investments I made this year that I think have the potential to be that Aave-like. More on the frontier, more on like out of favor, not so much, they have a really good team.
Hey look, maybe it could be this plate around stuff like [Elgil 01:20:06] Fascinating. I think it’ll be even more explosive than an Uber. Like shit, you’re transforming game structures and the problem with half-life and engagement. It’s massive in gaming economy, it’s like you’re changing the way people relate to money and entertainment and labor. This is why I think again, there are some mega trends that people, I think haven’t truly opened up to and I think Play to Earn is one of them.
Not because actually it’s like super popular now, but you would have seen it, there’s a lot of engagement. It’s not just the narrative of like, oh, you’re giving people employment. No, not just that. It’s like you look at Fortnite and what it’s cranking out, and then you’re seeing certain metrics in these protocols, they’re saying, “Wait a minute, there’s kind of a disconnect here because there should be a rerating.” There’s always an Aave out there, always. I think that’s what we’re here.
The funny part, the life-changing investments have these groundbreaking mythical thesis, For us actually Play to Earn, THORChain, Crosschain. I’m just bringing it back to me because it’s what I know. But do you have that level of thesis before or after you make the investment? Because obviously in hindsight, it’s easy, but you know, the 98th investment for ParaFi, is that going to move the needle? I don’t know.
But having like a very concentrated bet, I think Play to Earn is going to reinvent the fabric of gaming, it’s going to bring people in from all over the world. Having that level of a thesis early on will change, will return fund.
I’ve been surprised how quickly Aave has grown. I don’t think in my wildest upside pace did I envision it growing as it did. I structure an investment having to put myself in a position where I can be very patient to see the ultimate thesis. But of course, the hardest thing that we do I think it’s a liquid venture and so things don’t move linearly or in a simple trajectory. And yeah, I think in many ways I think of like what would the first investor in Google have done if it was a liquid or Amazon.
The venture is easy because you kind of have to hold the bag until an IPO or a secondary, but it’s difficult. It’s very difficult. How do you manage risk? How do you size the position? How do you ongoingly manage a position? How do you manage risks? But yeah, it’s-
Do you take money off the table as you go? Something like Aave incredible little, literally hockey stick growth. How do you decide whether or not to cut part of that position? Is it just a fun other play, is it a risk metric? What is it?
The very clear one is if it becomes too big of a position. Naturally you just have to size down, but otherwise, unless constantly reprocess beyond the rate and ingesting information. But yeah, I know it’s difficult, it’s very difficult. And look, I think sometimes you selling some of the position to manage risk doesn’t mean that you’re going to be less involved in a protocol.
That’s a really good point. Santiago, I fucking loved talking to you. And I’m saying that just that I have to mark the explicit thing on iTunes.
There we go, yes. No.
I love talking to you, I learned so much.
I love it too.
I’m so glad we met and we’re friends.
Yeah, man. It’s great.
Last question, more personal one. What’s your favorite book on game theory that I could read?
Oh yeah. Infinite and Finite Games by James Carse.
It’s Finite and Infinite Games or Infinite and Finite Games. I always be confused. But it’s James Carse. It’s a very short book. It’s like The Little Princess, it’s a very short book. And it probably encompasses some of the best life lessons around playing iterated games or finite games. And I think in life and in business and relationships, you always want to play the long game and an iterated game. And so, yeah, that’s a really good book. I think you’ll enjoy it.
Long games, long people, man. Santiago, thank you so much for being part of the series, man. Really appreciate it.
No, Tom. Awesome. It’s always good to be here. You’re so thoughtful and I love your questions, so I really enjoyed the discussion. Thanks for having me again.
Of course, man.
(2:33)- First Question: Santiago’s Background and Parafi Capital overview.
(4:04)- How Santiago allocates his time for projects.
(11:02) – Getting buy-in for a project post-investment.
(12:55) – Sizing up the founding team quantitatively and qualitatively.
(15:58) – How retail investors get comfortable without access to the core team.
(26:28) – Concentration vs. Diversification.
(28:45) – Investing in themes.
(34:15) – Copying and pasting old things that worked vs. actually having a new idea.
(36:25) – Making bets on other L1s despite existing L1s.
(46:26) – Token incentives from an investor and user perspective.
(53:04) – Santiago’s process for working with a team.
(58:56) – Skepticism when doing due diligence on a project.
(1:01:16) – Santiago’s best advice.
(1:03:56) – The best advice Santiago’s ever gotten.
(1:11:08) – Plays that changed Santiago’s life / the world / someone else’s life.
(1:17:02) – Santiago’s favorite book on game theory.