Host Jose Maria Macedo sits down with Maple Leaf Capital, an anonymous investor and analyst in the space who has quickly made a name for himself with some excellent reports on DeFi and sharp takes on crypto twitter. In our view, Maple Leaf has one of the most cogent, well-articulated theses for crypto as a whole and for DeFi and Web 3.0 specifically. In this wide-ranging conversation, we dive into that and his thoughts on investing in the space more generally, including Maple’s crypto and DeFi thesis, investment thesis, competitive moats, specific sector analysis, decentralised governance, and much more.
The full interview transcript is available below!
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Hi, I’m Jose Maria Macedo, a partner at Delphi Digital. I’ll be co-hosting episodes of the Delphi Podcast with a broad focus on economics, governance, and incentives. With our guests, I’ll explore different, sometimes radical economic perspectives, and how these affect what we value as a society, and how we organize ourselves to achieve it. Ultimately, my goal with these conversations is to expand our perspective in ways that allow us to build better systems going forward.
As a reminder, nothing said on this podcast is a solicitation to buy or sell any security or token, or to make any financial decisions. I or Delphi Ventures may hold tokens mentioned on this podcast, and you can see our show notes for a full disclaimer. First, a quick word from our sponsors before we dive in.
My guest for this episode was Maple Leaf Capital, an anonymous investor and analyst in this space who’s quickly made a name for himself with some excellent reports on DeFi and sharp takes on crypto Twitter. In my view, Maple Leaf is one of the most cogent and well-articulated VCs for crypto as a whole and for DeFi and Web3 specifically. In this conversation, we dive into that and his thoughts on investing in the space more generally including discussions on moats, specific sectors like credits and insurance, decentralized governance, and much more. I really enjoyed chatting to Maple and hope you enjoy this conversation Thanks very much for being here today, Maple Leaf.
Maple Leaf Capital (00:01:44):
Oh, thanks for having me, Jose. I’ve been wanting to talk to you probably for a while now.
Awesome. So, yeah, we’re broadly going to split this conversation into three parts. We’re going to start with an intro to your thesis on crypto and DeFi more broadly. Then we’re going to go into investment specifically, and your thoughts on the idiosyncrasies of investing in the space. And then finally, we’ll just do some sector commentary.
So, to start with could you give us a quick background on who you are and how you got into crypto? I know you want to stay anonymous, so you can keep it as vague as you want.
Maple Leaf Capital (00:02:20):
Yes, I’m going to keep it pretty vague because finance is a small circle. So, if I say too much, I think folks in the space can sort of tell who I am. I’ve been in finance for a while in the North American geography. I think my job today, it’s actually investing in public equity markets globally, and I’m personally responsible for things related to China and software. But I’ve been doing this for a while, and my day-to-day job involves fundamental analysis on stocks for companies.
Maple Leaf Capital (00:02:54):
And how I fell down the crypto rabbit hole is that in 2018, that was after the Bitcoin crash… We’re always pretty cognizant of FX swings in our company just because no matter how good your business is, if you’re in a regime like South Africa where FX depreciates 20% a year, it’s really hard for the business to outperform a broader index, for example, in the US when you translate that through US dollars.
Maple Leaf Capital (00:03:24):
So, always in the back of my mind, I’m very cognizant of what fiat depreciation versus another fiat can do to a company. So, I thought, “Okay. Well, Bitcoin crashed and people have been telling me about this. Let me spend more time looking at it.” And that’s how I got involved. And fast forward to today, I actually felt like the space… I’ve always felt the space is two, three years away always from adoption and scaling, but after digging in and really track the space since 2018 and fast forward to 2020, I feel like we have made tremendous strides in proving out the use cases that the space could bring. And I’m pretty hopeful of what the next 24 months could bring. So, that’s the back story.
Yeah, can definitely empathize with the two, three years away thing. It’s kind of like Eth2 when a brand new space is two, three years away, and it’s still two, three years away. So, yeah. I mean, you dug in and I think one of the things that your report does really well is crystallize the crypto thesis in a way that’s made quite a lot of sense to me. I think it’s one of the most difficult things to do. Everyone’s had the conversations at Christmas or whatever where you’re trying to explain to people what crypto is.
And it’s quite an abstract thing. It touches a lot of fields. So, I’d love for you to touch on your high-level thesis of game-theoretic guarantees, and legal recourse, and yeah.
Maple Leaf Capital (00:04:47):
Of course. And I’m just LARPing most of the time, and as you can probably tell, I’m stealing concepts from people I respect. And then you guys write a lot of research. So, I’m sort of the view that what did the internet bring forth, right? The internet brings forth… If you really abstract and get it down at a very base level, it brings forth a copy and paste of bits. And through the semiconductor technologies, through wireless network technology, we can now…
Maple Leaf Capital (00:05:14):
Starting in the 1990s, if you’re really coming from first principles, you’ll see, “Oh, my God. This is where cost of transferring information, right? This is the cost of where copying and pasting bits would dramatically reduce to potentially zero.” And if you just imagine a world where this premise is the case, you could see, “Oh, wouldn’t it be great that we can shop and have things shipped to us anywhere in the world?” Or, “Wouldn’t it be great if we can just call a taxi ride from a crazy device in our hand, and we have access to all the taxi information.” And coincidentally, that gave rise to Amazon and Uber.
Maple Leaf Capital (00:05:56):
I see crypto and Web3 and blockchain as something similar, which is you now have a information transfer mechanism where bits of information are now guaranteed by the nodes in the network where it’s copy and pasted or you can know that it is not copy and pasted, right? And when you have that kind of quality, that bit of information can now harness very specific characteristics. Namely, the line item on a ledger or some information of tremendous value. And naturally, it could be monetary in nature.
Maple Leaf Capital (00:06:38):
So, we’re at such a beginning stage where that is the case, but if you really extend it out 20 to 30 years, you look at this technology and say, “Well, gosh, I wonder what the world will become when value, in this case, can be transferred in a almost frictionless and cost-free fashion.” And then your imagination goes wild.
Maple Leaf Capital (00:07:04):
But back to the point of the game-theoretic guarantee, and why this is so novel and interesting is because I think it is a new infrastructure, and it is a new way of how this best can be cut and pasted. Usually, when you transfer a bit, there is a cost associated, and it can be hidden, it could be obvious. And especially, who get to log that transfer or a cut and paste or lack thereof, and how those servers or actors are compensated was pretty rigid in the past.
Maple Leaf Capital (00:07:38):
It is you’re submitting a query to a centralized database run by maybe one actor or one node in a J.P Morgan database in New Jersey in United States. And you are deferring the judgment and the action to those people, right? Or you are transferring some bit of information to the download server in San Francisco.
Maple Leaf Capital (00:08:01):
What the infrastructure of blockchain really brings forth is let’s actually abstract away and not delegate that responsibility to one node or one actor, right? But in turn, we are creating a token to compensate and let those nodes compete against each other in some shape or form to fight for the right of logging my transferred value. And by the way, this is a very clever game design mechanism where how do I guarantee that they will compete against each other to fight for the right to log my information, but at the same time really do no evil, and not allow my information to be misplaced or what have you?
Maple Leaf Capital (00:08:42):
So, it’s really a combination of a lot of fields coming together, and allowing this kind of logging rights or transfer rights of info to be safe in a way. And the cost of which is made incredibly apparent. So, it’s a very novel design, I think, and put it pretty well. It’s like for the first time in history, we now have computers that don’t have to trust each other and can make commitments.
That was great. That’s pretty much our thesis on crypto as well. We see it as a social technology as well as just a technology, and we take it back to you had tribes and then you had, obviously, at the beginning credit was enough as a favor tracking technology. But then to scale past tribes, we needed an abstraction of favor tracking, and that was money or how it started. And then you had religion that helped enforce cooperation.
I see it all as scaling of human cooperation, and I think crypto is the next frontier of that in that it’s global, natively digital, and has all the characteristics that you said as well. And I think one of the sentences we talk about is the idea of network effects without market power, that you can have these giant networks like Facebook, like the dollar, without yielding power to a centralized authority to enforce the rules, which you always needed previously.
But yeah, one of the things that struck me there is skeptics will say that crypto value transfer is not cheap at all right now, right? It’s-
Maple Leaf Capital (00:10:21):
It’ll definitely get cheaper over time, but it’s hard to see how it ever gets cheaper than a centralized ledger. So, what are people missing when they make that criticism?
Maple Leaf Capital (00:10:32):
Yeah, I think people should think of cost as a multidimensional item. It is an all-inclusive function, and it could be in various different ways. Let me expand a little bit. Simply thinking that… I think people who make that criticism are thinking in the simple terms of A is sending one unit to B. One unit of monetary value to B, which in one country in a specific facet of time. And that’s a very singular dimension, right? That’s one.
Maple Leaf Capital (00:11:04):
But what about more complex instructions across space and time? It could be a very complex profit-driven transaction scheduled for a later time between multiple actors across multiple jurisdictions. In my mind at least, I think that kind of cost, the cost to transfer that value in this new blockchain-enabled rail or paradigm may not be that much more expensive. But it could be exorbitantly expensive in. So, that’s one point I would make.
Maple Leaf Capital (00:11:34):
The second point I would make is we should think a little harder about for what purpose and where is the friction today of that cost function. And what I mean by that is certain things can be virtually impossible before no matter how much money you spend on it, but now it is possible. For example, transferring information instantaneously across continents in the 1600s is virtually impossible even if you’re a king or you have all the resources in the world. You simply can’t just put a cost function to it, and in that case, the cost is infinite. There’s great benefit to it, but the cost-benefit function never made sense.
Maple Leaf Capital (00:12:16):
But now when you can put a cost on that kind of transfer, now you can run the math and you can work hard to lower that cost. So, I just thought it’s pretty fascinating I think in those two ways. I think those who say that “Well, it’s really expensive.” It’s kind of like a.
Yeah, I think I absolutely agree, and I think another cost that people often don’t talk about is the censorship cost. And I think that’s seen quite different. It’s seen in the wrong way. People focus on the users that are actually censored, but it’s less that and more so the loss of permissionless innovation from decentralized ledgers. Throughout history, technology has shown that people want to build on open innovation platforms where they own what they build, right? They don’t want to build on a platform where whoever controls it can arbitrarily and unilaterally change the rules and impose additional costs or whatever dimension of cost as you called it.
I think that’s a huge part of this, right? Because we’ve seen, I think Chamath says in R&D Facebook and Google and the FAANGs spent over the last five years more than what we spent to go to the moon, and what do we have to show for it? And I think a lot of that is down to this loss of permissionless innovation that comes from these centralized ledgers. And I think crypto by creating an internet of finance in the sense that people can… We’re seeing it right? Developers coming in and building stuff, owning it, having it used straight away can unlock a bit of that.
Maple Leaf Capital (00:13:46):
Yes, I think there is a lot of design primitives that are regulated under a tight leash today. The barrier of entry of creating something novel financially has certainly dropped meaningfully. So, I would agree with that.
For sure. And right now, I guess DeFi… I mean people often talk about DeFi one day banking their own bank or whatever it might be, but right now what we’re seeing mainly is democratizing financial services that were available to the ultra-rich. You have a great chart in your report that I’ll link in the show notes, which shows this idea really well, and describing charts on a podcast is always pretty tough, but the X-axis is monetary value, and the Y-axis, complexity or fixed cost, and you show how these high-complexity actions are only available for people who have a lot of money basically. Can you expand on that a little bit and what the use cases are that we’re seeing? And also, where you see this going.
Maple Leaf Capital (00:14:40):
Yeah, and by the way, the joke I always have is today DeFi is also their unbanked bank if you’re not careful. But to that point, it’s fascinating. If you really look at 20 to 30 years and you would say, “Okay. Well, it seems obvious that the value of transfer costs will be lowered significantly, and it’ll be seamless and frictionless. What we really get is the previous rights of feudal lords and kings now becoming common rights of people.
Maple Leaf Capital (00:15:13):
Now, imagine a world of financial items as a long tail similar to books. The most popular books, and then there’s a long tail of random books. Some financial instruments are very popular like Apple stock or like gold, right? It’s a financial product. But some financial instruments are simply too high dimension to be properly financialized that kind of long tail, it’s a bet between you and me, or it is a very complex OTC bespoke agreement between two financial parties in some random parts of the world.
Maple Leaf Capital (00:15:48):
I have a hunch… Well, there is the issue of discovery. There is the issue of enforcing those contracts. But there is also the function of overarching thing is I think if you think about the long-tail curve, there is a certain point in time where in the current paradigm, the cost function simply does not allow those long-tail financial assets to be financialized.
Maple Leaf Capital (00:16:11):
Now, by changing the cost function on how value can be transferred, all of a sudden, I think some parts of that long tail, the cost of transferring those values or financializing them becomes less prohibitive. Some line items or some complex logics suddenly become possible, right? The infinite costs become the finite cost, and now you can sort of enable these line items to be financialized.
Maple Leaf Capital (00:16:38):
Let me give you an example. In the information age example, it is the printing press that now transfer info and knowledge through generations reserved for kings, but now that becomes so commonplace that a peasant can afford it. And semi-instant transfer of information used to be just doves for nobilities, and now people with iPhones arguably they have better access to it.
Maple Leaf Capital (00:17:03):
Now, similarly, in value transfer rights, my hunch is this probably complex mechanism-based cleverly designed interaction of line items across space and time can now be tranched out and sent and received and carved out within one’s pocket. In the iPhone or in your brain. And we could imagine in that world where every line item of any person in some shape or form can be spliced out and retranched.
Maple Leaf Capital (00:17:38):
And actually, that empowers a person with incredible sovereignty. Imagine a world where a sovereign state loses significant control already today in one’s informational flow, but imagine a future where a sovereign state loses control to one’s value flow, right? I think the control over that person really diminishes.
Maple Leaf Capital (00:17:58):
But also, in that world, that person will enjoy the complete sovereignty that you can only imagine today with the 0.1%, which is freely exchange line items, which kind of is exorbitant privilege. For somebody who’s really high net worth, the world is that person’s oyster in terms of where he wants to live, and how much leverage it’s going to take on a financial instrument to access the financial products. The kind of financial deals he’s able to strike because of the hoard of lawyers that he has.
Maple Leaf Capital (00:18:28):
But in that future world when the long-tail financial assets could be unleashed through lower-cost function, maybe you and I could easily draft up some of those really complex financial functions, sorry.
For sure. Could you give an example of maybe something that right now someone that isn’t an ultra-rich can’t do that you see blockchain enabling them to or this technology enabling them to do?
Maple Leaf Capital (00:18:53):
Yeah, I think a really good first example is actually Bitcoin. I know it’s kind of a cop-out answer, but the joke about Bitcoin is that it is the first time where a human sovereign right of wealth preservation is inviolable by a valid actor. It is a iron bank of storage of wealth that is created in the ether, that unless the person is really tortured and being forced to give up the private key, it’s incredibly hard for governments or any violent actors to seize that wealth or to attack it.
Maple Leaf Capital (00:19:32):
If we were to go back to the world before Bitcoin… And by the way, that wealth can be stored anywhere. It can be accessed anywhere, and it is virtually costless to carry it across the border. Now, imagine the world before Bitcoin occurred. How do you get something with that kind of property? And maybe if you’re really, really rich you can have your own private bodyguards, you can bribe politicians, and you can through a private jet, fly anywhere. And you have a hoard of lawyers and armies in your gold safe or something.
Maple Leaf Capital (00:20:10):
But even then, it’s really hard. You get scared like, “What if the Mexican government seized my wealth? And can I still get it back? Where can I…” Well, you can retain that privilege in the old days, but that’s millions of dollars if not billions of dollars to achieve it. But today… And by the way, that right is not afforded by a normal person like you and myself. There is no way for us to escape that kind of tyranny if it were to happen.
Maple Leaf Capital (00:20:38):
But today, everybody has access to it, and the cost is incredibly low. So, that’s a really good first use case of enabling something that was safe for the ultra-rich in a way, but now available to all.
Yeah. No, that’s cool. I mean, in the hero movies of the past, there’s always a treasure map, right? Where someone buried their gold, and the story is they’re trying to deconstruct and figure out the treasure map to see where the gold was buried. I guess in the future it’ll be people’s private key clues.
Maple Leaf Capital (00:21:14):
They’re kind of already doing it with the guy junkyard in the UK or some poor guy.
Yeah, I mean, people will struggle with mine to be honest. I’ll struggle with mine, so good luck. But yeah, okay. And so, what do you say to people that say that DeFi’s main innovation right now is actually a form of regulatory arbitrage, right? Circumventing these burdensome regulations that banks and also fintechs to an extent have to abide by, right? Whether it’s KYC or transfer rules, taxes evasion for a lot of people. What do you say to that?
Maple Leaf Capital (00:21:53):
I would agree it’s regulatory arbitrage, right? I think there’s no question. I think the industry needs to lace up itself over time. But by the way, that kind of regulatory arbitrage is no different when Amazon is going after the booksellers, or Uber going after taxi drivers, or Airbnb going after hotels. And the second thing I would say is does it have this part of false marketing and Ponzi schemes? Or is there small intention offering of potential securities? Or is it feeding into gambling addictions? Yeah, there is a great part of that.
Maple Leaf Capital (00:22:27):
But those three things also already exist in TradFi, and actually, those things should absolutely be punished. I think the industry could do a better job working with regulators in that regard and going after really bad actors. It really feels to me that there are a vast great majority of honest actors trying to build something really worthwhile here. So, that’s what I would say.
For sure, and I think this leads nicely. This talk of regulation leads nicely into your three types of value nets, right? You’ve done a lot of thinking around how regulation will affect this space, and the open permission list, the open permission, and the closed permission. Could you explain those three and also talk about how you see them interacting in the long-term or medium long-term?
Maple Leaf Capital (00:23:10):
Yes. I think the difference ultimately comes down to who can use it? What kind of barrier it is, and that’s how open and closed it is. And then who processed the transactions in terms of are the nodes hand-selected or are the nodes self-selected via game-theoretic market-based pricing for ticket transfer. For something that’s open and permissionless, anybody can use it for the ticks, right? You don’t need permission for that, and the guys that process it are anybody can spin up a node.
Maple Leaf Capital (00:23:50):
Whereby for open permissions, I think you need the nodes are… Like Libra, there is no self-selection of the nodes, they’re handpicked, but to a great extent, everybody can still use it. You have to register yourself, but there’s good ways around it similar to how Facebook registration works today. And then the third piece, closed permission is you have to be a citizen of China, for example, to use the CBDC. And oh, by the way, you know that the nodes that process those transactions are central banks of China of various flavors. So, you know you’re being watched.
Maple Leaf Capital (00:24:30):
I think there will be bridges that cross all three in the future, and here’s what I think. I think you’re going to see significant merchant potentially digital and native-first volume on open-permissioned launchings. The reason I say that is because you just imagine a Swiss Bank immediately available through Facebook Messenger app or Instagram and billions of users on day one. In that case, you have an iPhone-type App Store immediately whereby now billions of people all of a sudden have potentially access to financial primitives and can use this financial rail to do things, and a bunch of active loggers could hop on it and start doing things.
Maple Leaf Capital (00:25:13):
Now, your app need to be permissioned by Facebook nodes so it can work, but we could see a Cambrian explosion of different type of applications, and commerce can really happen. Whereby for this kind of closed-permissioned nodes, I think it’ll be very much government-induced stuff first, and what I mean by that is potential subsidies, payment of taxes, and various things you can think of like how does an individual interact with a different power?
Maple Leaf Capital (00:25:46):
It could be a much more sort of one-to-many type of relationship versus the many-to-many and open permission network. But I think for some companies like USDC, it’s quite possible that their product would span various type of valuenets. It could be on permission, it could be liberal, it could be whatever. And we could see applications that span all three, but some functions on some blockchains would be neutered, and some would be not.
Maple Leaf Capital (00:26:13):
Back to my original point is that if you want to hop from a closed permission blockchain to open permissionless one, you probably have to go through these bridges where it’s like the bodyguards sort of check yourself on the way out, or you have to really verify yourself on the way in for instance. And that’s the future I see ourselves going into maybe in the next three to four years.
And so, do you think the closed permission networks are actually good for the open permissionless ones, and they’d drive adoption, bring more users into the ecosystem? Because it seems like the bridges there will be tougher as time goes on, and governments… Once they have their closed permission network, they probably want to force people to use that, right? Rather than the open permissionless one that they can’t track and-
Maple Leaf Capital (00:27:01):
Maple Leaf Capital (00:27:01):
I think it’s certainly possible that the valuenet world becomes something similar to that of the internet today whereby China had to create a firewall, and access to information from the outside could be challenging. But the other way around might not be true. If you’re on Ethereum, and you want to go on board into Chinese CBDC, it might be a pretty simple process.
Maple Leaf Capital (00:27:23):
I think there will be gates and barriers, but here’s what’s cool, Jose. I think the presence of the first two type of open networks create tremendous competition for the last part of the network. Because the last part honestly is really using blockchain as a module, but there is really no different… It’s greater ease of buildup and usage, but it’s really no different than the current sort of centralized system.
Maple Leaf Capital (00:27:54):
So, it just creates competition that you can now have a bridge, and maybe the closed-permission networks would become more and more open over time. It’s just a guess.
Yeah, interesting. And I guess there’s also some Nash equilibrium of open permissionless seems like it will drive more innovation, and so, it seems like the equilibrium where all states have closed permission isn’t really stable in that defecting will attract all the innovation.
Maple Leaf Capital (00:28:27):
Yeah, I think it’s really hard to bank on the government creating something of great value, and it’s going to look pretty similar to the internet where I think you have all these puzzle pieces where people freely collaborate on both information and value. The open permissionless network may actually evolve much faster. Like the curve of iteration, adoption, and Cambrian explosion might actually be faster than of internet because the infrastructure is already built.
Maple Leaf Capital (00:29:01):
Now, you have this multiple level of forces working together to make this a reality. So, I actually think this is where the cool stuff. This is going to be a black hole of talent such as yourself and capital, which I don’t know, it’s pretty exciting. I think it probably should beat the closed-permission networks nine out of 10 times.
For sure. And just the last one before we move on to investing in this space. If I told you that I’d come from the future and three years from now crypto had failed, what in your view would be the most likely reason for that? Basically, cumulative market caps under 50 billion or something like that, and no adoption. I probably should have defined failure better, but something along those lines.
Maple Leaf Capital (00:29:50):
Yeah, I’ll give you three potential things that I can think of. One which is more of a cop-out answer, I wouldn’t define as fail. I would just say it’s too early. We can’t find any good business use cases beyond speculation, and people just get bored, right? It’s a bit of a leap of faith at this point, but you have to trust the new primitive enough to believe. But I will assign that a smaller probability to it.
Maple Leaf Capital (00:30:20):
I think the more likely case is either we have a nuclear winter where modern civilization breaks and the internet takes a big hit. And the way I view it is, yeah, blockchain’s great. The game theory value network’s great, but it’s organic in a sense to the analog and inorganic goal that we have. It’s organic because I think blockchains have a lifespan. It decays over time as it gets more and more centralized, and if it’s not actively maintained it could actually die if we’re not careful. So, in a nuclear winter where internet infrastructure is shot in the gut, it’s not impossible to believe that the organic value, how much we have today, take a huge hit.
Maple Leaf Capital (00:31:05):
The other thing I could see if we really fail in three years is let’s say we go into a bear market, right, and the flood starts happening, and it might be uneconomic for miners to mine, for example. Through really hard work in the part of China let’s say, or America, I don’t know, they secured enough hash powers from the global foundries, TSMCs of the world. At the same time have a very concerted attack to seize the miners, for example, in China. Assuming at that point hash power is not decentralized, and at no concern of cost, attack the Bitcoin network with 51% attack. Alongside banning it through the One Belt One Road countries.
Maple Leaf Capital (00:31:46):
I think one attack could be enough to significantly dampen that enthusiasm, and I’m actually not sure if a Bitcoin network that the one it is today could be recreated in the same fashion. It could take multi decades, multiple generations. So, that’s how I see the blockchain space could die in maybe three years’ time. But here’s the thing, it’s a very dark future. So, if that happens like nuclear winter, my God, bigger things to worry about.
Absolutely. And on the speculation one, just a quick follow up, what do you think is the most likely first use case outside speculation for some of these primitives.
Maple Leaf Capital (00:32:22):
My hunch is it’s going to be a Web3 business. Using the Web3 value transfer module as a enabling technology. That significantly increases user adoption, and makes the platform a lot more attractive or profitable. What I mean by that is the internet Web2 business today, user contributes content, user contributes the time and in turn to get a free service, for example, and they’re monetized through ads, for example.
Maple Leaf Capital (00:32:57):
Those network effect businesses seem primed for disruption if you have a similar type of network, but through very clever game-theoretic mechanisms you empower stakeholders, for not just free service, but better and more compensation for the value they drive to the network. I don’t know what that business could be yet. Could it be a OnlyFan-type thing, right? Could it be a Twitter-like service? Could it be a LinkedIn and a Fiver and a Kickstarter kind of hybrid? I don’t know, but I think someone is going to probably crack the nut there and make this pretty fascinating. So, that’s one potential use case I think could break out.
Maple Leaf Capital (00:33:41):
The second thing I thought could be something to do with gaming where-
Yeah, that’s what I was going to say.
Maple Leaf Capital (00:33:46):
Yeah, I think a potentially solid game developer… And actually, it’s a similar type theory. Well, it’s not Web2 business per se, but it’s something that’s very digital native, and you use Web3 module that all of sudden… I think Dark Force is actually a great example. It’s a really fun game, and all of a sudden you monetize your users and incentivize them a lot more. So, I think those are the really fertile grounds I see maybe in the next three years hopefully something pops out.
Yeah. No, 100%. I agree, I think the gaming is really interesting, and I think it is very similar to Web2 where a lot of these games, the value is created by the users. There’s user-created universes, user-created worlds, the interactions are what create value, and so, I think finding a way to reward that and let users own it in a fair-launch video game would be a super interesting concept.
But yeah, digging into the investment side now, what would you say… You’ve kind of presented your thesis for crypto. How do you see at this stage the investment landscape? What’s your investment thesis for this space, and what kind of projects and businesses are you looking to invest in?
Maple Leaf Capital (00:34:55):
Yeah. So, personally, for me, I think it’s pretty hard to really leap into the layer one, layer zero, and then stablecoin business today just because I think that’s a game of giants, and you need a lot of capital to win. I almost view it as working capital for what I want to invest in.
Maple Leaf Capital (00:35:23):
I think the ideal candidates, for me, they have to fit a few characteristics, right? I think there are maybe three. One is it’s enabled by as a business, and enabled through value transfer, and it’s ideally 10 times better. Ideally, it is layer one agnostic, which means it could sit on Ethereum, but when push comes to shove, it can move to Polkadot, it can move to the Diem network.
Maple Leaf Capital (00:35:51):
And then the third thing is ideally it’s a business that has network effect where users empower it. And basically, this is basically further upstack. It is something that uses Web3. It is something that uses DeFi. It is like business segments that exist. So, it would be potential Web2 plus real businesses, and by the way, that’s just one sector. Potentially select DeFi protocols because I sort of view DeFi as similar to how financials are as part of the S&P 500 is because one industrial sector.
Maple Leaf Capital (00:36:30):
So, it’s like DeFi protocols I think are still very interesting. And then infrastructure and tools that push us forward. And of all those three, if they fit the characteristics I just laid out, which is enabled by blockchain, not just only in blockchain better, layer one agnostic, there are some network effect businesses. I think it will be very interesting.
Yeah, that’s interesting. Could you give some examples there or if you had, let’s say 100 million, how would you look to deploy across those teams right now.
Maple Leaf Capital (00:37:04):
Yeah, so the first thing, Web 3 businesses for example, if you can imagine a LinkedIn/Fiver or Upwork/Kickstarter type hybrid where all the programmers use in the space… Right? It’s like a social network, but for programmers doing jobs. And they can also cross-finance each other and donate to each other’s work. I think that kind of business could be very interesting because it’s already network effect enabled. It seems to me it would cater to Ethereum developers today, but there’s no reason why Polkadot developers can’t work on it. And it is already a very successful Web2 concept.
Maple Leaf Capital (00:37:44):
But I think enabling Web3 value transfer on this native platform where people already aggregate, the users would get a lot more out of it than be monetized by ads. So, that’s a really interesting example, I think. I would be very interested in investing in. In terms of DeFi, I’m sure we’ll go into it to great extent. I think something that ships fast, and become more of a conglomerate could be interesting. So, I think Aave and Sushi fit that criteria pretty well, and it seems pretty obvious to me what they do can also be a layer one agnostic.
Maple Leaf Capital (00:38:20):
And the last part on infrastructures and full side… Now, I won’t have access to some of these deals, but something that is like chain analysis, or something that is like Nansen that deal with data analytics could be highly interesting because they are, again, layer one agnostic. They serve a great purpose. You can only imagine their business will boom as they broaden the reach to governments to customers to businesses. I think those kinds of businesses would do incredibly well. I think Graph is another good example, but let me just pause there with names.
Maple Leaf Capital (00:38:56):
In terms of where I would allocate, so $100 million is actually a lot of money. I think if it’s actually that much capital, I would actually allocate quite a bit, maybe more than 50% to potentially infrastructure and Web2 plus type plays. And the reason I say that is because, A, I think we’re still in the stage of 1980s and early 1990s in terms of crypto infrastructure, right? The development infrastructure, and it’s actually worse through the stage of building the foundation.
Maple Leaf Capital (00:39:28):
So, the DeFi and Web3 primitives today may not be able to take that much capital. You’re kind of shooting flies with cannons, and overcapitalizing those teams could actually be a detriment. And the second part I would say is you can probably allocate a lot more capital to these plays, and actually, they probably wouldn’t need it. In reaching billions and millions of customers wouldn’t require a lot of capital, right? Building a sound infrastructure that is ready to service millions and millions of people would require a lot of capital. So, you can just deploy more.
Maple Leaf Capital (00:40:03):
So, if it’s 100 million that’s how I would do it. If it’s like $20 million, for example, I think it becomes very fluid. I think then you go where the opportunity is. I could see a third, a third, a third in each, right? Web3 businesses, infrastructure, and DeFi, but yeah, that’s how I would do it.
Makes a lot of sense. Kind of similar to how we think about it. In your first answer, you mentioned network effect. That’s something we think about a lot especially in the context of competitive advantages in the space because this is obviously a space where all code is open-source and forkable and forked quite often. The teams are anonymous and quite fluid. Most skilled developers are contributing to several projects, and they move around. So, how do you think about especially in DeFi and Web3 where I think this is a bigger issue, how do you think about building a defensible moat long-term?
Maple Leaf Capital (00:41:06):
Yeah, I think the three things going for a project would be if they do this really well, I think they’ll be okay. One is through hard work iterate towards a feature set where there is a lot of plumbing to replicate. So, through laziness and habit, users stay, and a good example there, not in crypto, but in real life could be like Microsoft Word. Microsoft Word, it’s not really open-source, but it kind of is. You cannot recreate it, but there’s just… Or Excel, right? There’s so much work being built on top of it. You’re so used to it you just don’t want to switch. You’re just too lazy to do it. I don’t know what the equivalent could be in crypto. Maybe it’s I just open up Swap when I want to swap things. Maybe that’s one.
Maple Leaf Capital (00:41:55):
The second thing is really own the relationship of customer unit count, and capital unit count. And that basically means you need to be that first touchpoint the customer interacts with this whole space. And it could be one inch, it could be a swap, or better yet it could be a fiat on-ramp where regulatory-wise you are that first relationship that customer has. So, I think spending time and effort and capturing that could be very useful, and in fact, MetaMask I think does a really good job. It’s actually very valuable because that’s the first touchpoint most Ethereums have.
Maple Leaf Capital (00:42:32):
The third thing I would say is actually doing the hard stuff. What is very capital expenditure intensive or regulatory burden intensive. Then maybe that’s worth doing because that gives you an edge where your competitors won’t be able to catch up even with capital and some time. And the last bit is I think this isn’t necessarily competitive advantage per se, but this space is so new and the is so large where… I talk to our team and my analyst is like, “Well, look. Yeah, this is commodity industry, for example. DeFi could be pretty commoditized because look at banks in real life. What’s the difference between taking out a mortgage from this bank versus the other? There’s probably no difference.” It’s like relationships and it’s like the regulatory is set up.
Maple Leaf Capital (00:43:22):
But banks in emerging and frontier markets could be a good business. And why is that? Because in any businesses, when the growth path is so high, there is a tremendous whitespace when everybody’s sprinting to capture that whitespace. There is tremendous economic rent to be extracted, right? There’s nothing that beats being early and staying early until the space gets commoditized.
Maple Leaf Capital (00:43:48):
So, to that extent, iterating fast with your community and with your devs to get to product-market fit faster and have features that jump your product into product-market fit and value capture, it’s a tremendous asset. And if you can keep doing that, I think that’s a competitive advantage and you can argue maybe the team has.
That’s interesting, yeah. That’s really interesting. I also think from our perspective it’s like an individual… It’s a project-by-project analysis, right? Of very specific network effects and even sector network effects. One interesting one that I covered in a daily was the exchanges versus insurance, right? And the differences of the network effects there, where with an exchange you definitely have a network effect in terms of liquidity and to an extent brand.
But liquidity, it’s a very linear network effect, right? As you get more liquidity, you get better execution. Whereas with something like insurance, as you get more liquidity, you don’t just get better execution, you can actually underwrite new types of risks, right? That smaller capital pools can’t underwrite. And at the same time your pricing is not just based on liquidity, it’s based on diversification or having a diversified enough set of risks that you can use leverage.
And then I think brand also plays a bigger role in insurance than it does in exchanges because you care more about who’s insuring you than who you’re trading with. It’s a longer-term relationship and it requires more trust. So, I think it’s interesting there, and even within exchanges. Then you have AMMs on Ethereum, which I would argue are less differentiated than something like THORChain, right? So, yeah, it feels like it needs quite a specific kind of analysis to figure out.
Maple Leaf Capital (00:45:30):
Yeah. I think even with insurance, and it goes back to my point about this space is so new, and you’re sprinting to the finish line. I think this would have edged there today as you have a proprietary algo or you have a different view of the world where you are comfortable, so is your capital base underwriting to those risk, and coincidentally, you’re there long enough.
Maple Leaf Capital (00:45:49):
But I guess eventually, if you look into real life, underwriting insurance could be pretty commoditized, and sort of compete the cost of equity down to zero. Yes, but we’re so early like you said. Yeah, that’s a pretty big advantage and you just scale faster than your peers because you’re doing all the things right.
Absolutely. Yeah, and I also think the underwriting will definitely be commoditized, but I think the insurance protocols themselves where underwriters underwrite on can be a bit more defensible potentially.
Maple Leaf Capital (00:46:24):
Yes, it is two-sided in a way.
Maple Leaf Capital (00:46:29):
You do want to go to a trusted platform to take it out, and if you’re a capital provider, you do want to go to a platform you probably have the best underwriters and the best risk metrics. So, I can see that. I can see that.
Nice, yeah. And what about valuation? How do you think about valuation? Right now, and in general, obviously these things a lot of them are in the billions now, or at least in the hundreds of millions. How do you grok that?
Maple Leaf Capital (00:46:55):
Yeah, so there are a few things I would say. I think DeFi as a sector is underrepresented in terms of market cap versus overall crypto market cap. I think it’s 4%, 5%, or something. It’s still very small. So, that’s one, I would say. The second thing I would say is private rounds are generally underpriced versus what the token could get in public market liquidity, but overall, the private rounds, and potentially the public guys are overvalued for what they have delivered or can deliver.
Maple Leaf Capital (00:47:30):
I don’t think you can justify on a 12-month rise in something that has code, and you don’t really have a product worth $500 million, for example. But here’s what I would say, it is a golden age to attract talent with that kind of valuation and capital into the space, and also, when we’re in a bull market like this driven by the capital flowing to BTC pulling everything up, and traditional capital that are looking for the diversification edge allocating to very smart Web3 funds and venture funds, and the conduit forcing it that way.
Maple Leaf Capital (00:48:05):
Valuation is secondary to narrative, liquidity, and capital in a bull market. So, you can extrapolate this sort of narrative far down in line to justify any type of valuation, which is what I see happening today. But they’re still cheap on a very relative basis. So, are they expensive absolutely versus what they have delivered? Probably a little bit, but I don’t think it matters as long as we’re in this wave of potential adoption and then scale up.
Interesting. Yeah, makes sense. And digging into a few specific sectors now, credit’s a super interesting one right now, I think. Obviously, we work closely with Aave they’re an incredible team, move really quickly, and they’re also building… Not many people know or think about, they’re building a neo bank at the application layer with their e-money license in the UK.
And then you have Compound, which innovates, I’d argue, less quickly at the protocol level, but has these cross-chain plans, which are pretty interesting and go towards your narrative of chain-agnostic infrastructure. And then you have Cream that’s in the Yearn conglomerate doing this Iron Bank. Lending directly to protocols, and with a partnership with Alpha and Yearn, it seems like that could be pretty interesting. What’s your general view of the industry and how things will play out?
Maple Leaf Capital (00:49:25):
Yeah, this is specific to lending, right? Lending-
Maple Leaf Capital (00:49:30):
The first thing I could think of is I think the guys like Sushi and Uniswap and the perpetual protocols, not but the future, they’re also going to jump in the ring because I view lending as you’re just reaping additional rewards on the liquidity that is bestowed upon you. So, I think those guys are going to start facing competition actually from angles they wouldn’t have imagined. Anything with the massive TBL could actually be a lending protocol, so that’s point one.
Maple Leaf Capital (00:49:59):
Point two is I think it is a very valiant attempt to explore more ways at which lending can occur, which is like the Iron Bank as well as bridging the global liquidity that is sloshing around native DeFi Web3 today to the real world, which is what Compound and Aave are focusing on. I think they’re all going to have a very bright future, and I don’t view it in the case today yet they are at the stage where they should kill each other because look at all these things that they can do.
Maple Leaf Capital (00:50:37):
So, basically, I think if your question is, is Aave going to really take off and all the others won’t? I don’t think that’s the case. I think they’ll all work, right? Because the pie’s so large. But who’s going to outperform versus the other? I’d go back to my original point of well, actually, the ones that have the circulating market cap flows, which is really diluted market cap, and the ones that are more eager on value capturing… And by the way, value capturing is not just buybacks due to the token or issuing dividends, it’s actually rotating that cash flow generated towards more EV positive and high ROIC activities. Which coincidentally, is kind of what Compound and Aave’s doing, and so is Cream.
Maple Leaf Capital (00:51:27):
So, I think they’re all going to have a bright future. I’m slightly personally more leaning towards Aave and Cream. The Cream is a little weird. I think the corporate governance there is changing for the better, but I think they’re going to do very well if they just execute what they promised.
Yeah. No, and governance is a really interesting point you bring up there because that in our view is one of the really key things that will act as a leverage to everything else in this space because I don’t know if you followed the Wi-Fi mint discussions or any of the other big discussions that happened in the community. They’re kind of pretty chaotic, and it’s a pretty chaotic process. And I think this thing that every token holder has to ratify every single decision is a really difficult way to build early-stage tech.
You really need some kind of self-sufficient independent committees that can make decisions, and then have a negative process where token holders challenging it. But do you see that as a challenge? Is there anything you’re looking at in that space that you find interesting?
Maple Leaf Capital (00:52:32):
So, it’s two questions. Is anything in the governance side? And then two, what do you think of the sort of Athenian democratic process, right? Basically.
Maple Leaf Capital (00:52:40):
I have two controversial views, and people are probably going to hate me for this. I’m going to say two things. One is a lot of token holders don’t deserve anything. They don’t contribute enough value to be deserving of the token bestowed upon them. And number two I think democratizing votes on every single business decision onto the token holder is a dumb decision. It is actually a stupid decision, and it’s just because like you said, you need to iterate fast, and there’s never… You’re sort of in a war in a way. You can’t just defer decision of making… Striking decisions based on the wisdom of the crowd.
Maple Leaf Capital (00:53:22):
And by the way, the wisdom of the crowd is really good at deciding and reaching consensus on something that already happened, right? They’re but good at figuring out a future or past and arriving at the truth there. But I think it’s the future is not written by consensus. The future is written by a selected few that have a sense of the future and work through blood, sweat, and tears to get there.
Maple Leaf Capital (00:53:48):
So, most of the crowd is average and mediocre and they are to be led in a sense. But they can greatly empower the leader to get there with their wits, with their capital. In terms of future, I actually fully believe in a consensus by what’s that word called? What did basically, which is… Here’s a good way, which is..
Maple Leaf Capital (00:54:13):
Committee? Like the Spartan Council? The Spartan Council?
Maple Leaf Capital (00:54:19):
Like rough consensus. And the proposal I would have is three things. For something that is of history or of something that is very community… The community needs to be a part of, you defer that voting decision to the community. But for something that is protocol moving and future determinant like deciding the direction of the company or the protocol, you do two things. One is the token holders delegate to trusted actors within the space on a rolling basis, right? For them to make decisions on behalf of token holders, A. And B, the founding team or the leading team propose alternatives to what they want to do, and with a very short time window, allow the broader community to decide on that direction.
Maple Leaf Capital (00:55:10):
And by the way, that’s not binding. It’s kind of like, “Here’s what we want to do. What do you think is best? And give us some advice and you have 24 hours to do it because we need to do this and that.” I think it’s almost a better way to win for a protocol. And by the way, decentralization for the protocol level or application level is not necessary. I don’t think it’s necessary because layer ones? Yeah, because decentralization as a means of safety is super important. It’s a defining characteristic, but then like protocol level and the application level, you’re just an application. Take the token holders you need to get you to the place you want. You don’t have to be fully decentralized.
Yeah, there’s a lot to unpack there. I agree with the majority of what you said. All I would say is I definitely agree that with the leading thing you do need strong visionaries, highly incentivized, working together in a centralized way to make things happen. What I would say is crypto does enable a different kind of company building or project building and we have seen the benefits of that in terms of their community members in all these communities.
Synthetix specifically has a few all-stars that added more value than team members, I’m convinced, and that are sort of like 10x community members. At the same time, when we write up our proposals for Aave, there are community members that no one’s heard about that come back to us with the best feedback. Better than the big fund managers that we send it to, better than anyone. And I think right now because this tech is young, we haven’t arrived at the right incentive model, the right governance framework to really maximize those contributions, because I totally agree with you, most token owners don’t add enough value, and really what projects need to do is find ways to dilute passive token holders in favor of active contributors.
I would say centralization is important to drive a vision forward, but there’s also a way that you can find better structures to encourage different teams to be building on the same thing and adding value. That’s what I’m pretty excited about someone figuring out.
Maple Leaf Capital (00:57:21):
And by the way, that sounds like a product already. And by the way, you asked me what I’m very excited about, I’m actually really excited about someone building a tool that does that, which is a coordination or… I forgot the name of that… You can vote with your MetaMask wallet, but it costs no guest fee, you were signing. I forgot what the app is called.
Maple Leaf Capital (00:57:43):
Yes, I think that’s also… And by the way, they can blow this out into a coordination type product, right? You can do a lot more things than just voting. You should be able to coordinate press releases or investor relation stuff or for projects to… I don’t want to open four, five screens just to track Medium, get on Discord, do Telegram, get on Twitter. Wouldn’t it be great if there’s one place where you can also do governance stuff as a B2B type tool? I think that’s something I would be very interested in, for example.
Yeah, I mean, that’s what got us so excited about Aragon Agreements back in the day. The idea of being able to encode these subjective characteristics, and then have them be ruled on by a court. I just think initially, it needs to be like a multisig, and then you can take it to a broader court, but it’s really expensive kind of thing.
I think that’s the product that I’d love to see built, and some way to give out grants or to put bounties on features because you have all these… Whether it’s ESD, or Yearn, all these problems that need to be fixed, and it’s just about creating incentives for the brightest minds that want to fix them, I think.
Maple Leaf Capital (00:58:56):
Just touching on insurance because it’s one you’ve been really vocal about and an area we like as well. What are your thoughts on insurance right now in crypto, and the most important characteristics here, and projects that you’re watching?
Maple Leaf Capital (00:59:11):
Yes, I think right now the space is still duking it out. There are some unsolved problems, and I think the most important unsolved problem today is the battling of… Two things is, A, who owns the cap pool, and what’s that denominated in. And then B is how do we decide the risk-sharing and pricing mechanism works. And you see various models. You see various spectrum of how liberal that capital pool and how levered it is. And then you have on the other hand how the pricing of insurance premium works today.
Maple Leaf Capital (00:59:45):
One good development I see is more non-smart contract type products. I think at CVS default type products being worked on, for example, for the loans or for deploying B2C miner type contracts. I think that’s very interesting, and the custodial type of default insurance on Gemini or BlockFi. I think that’s very interesting because it certainly hedges the pool.
Maple Leaf Capital (01:00:12):
I don’t have a good answer yet, but I think the leading protocols, especially Nexus Mutual and Cover are iterating closer and closer to a good balance on how capital pool is funded, and how the risk could be more accurately priced. And that’s a tough question because I’m of the view that you need to live in two sides of the world. You either have a proprietary price pool or a pool of capital that just trusts you, and you have very proprietary pricing.
Maple Leaf Capital (01:00:46):
You have your own underwriters, and they just go underwrite risk their own way, and that way I think you can iterate pretty fast. Basically, it’s like an insurance company that takes some DeFi capital and start underwriting risk. And you can iterate fast and what’s the issue there is that you have to trust the underwriter so that your capital pool is like… It’s almost like a credit hedge fund in a way.
Maple Leaf Capital (01:01:07):
Or you operate in another way, which is you have a very liberal open pool of capital and you have complete open and transparent market pricing. And the question there becomes how much leverage can you put on a system?
Yeah, exactly. That was what I was about to ask.
Maple Leaf Capital (01:01:24):
Which I think you can do it with some very clever bundling of risk, right? You can say, “Okay. Well, actually the community-led projects, you can have a first-to-default basket of four to 10 protocols and whoever defaults first, that’s what you’re covering for.” But you’re protected for 10 of them. And maybe at any given time only one of them will default, and you’re already well protected because you’re pulling from all the other pools at that time. And that bundling of risk for first-to-default could lower the risk meaningfully, for example.
Maple Leaf Capital (01:01:57):
But that’s one way. I don’t know, I think people are exploring how you can add leverage. I don’t have a good answer yet. I’m talking to teams to figure that out myself, unfortunately.
No. Yeah, that’s cool. It’s a tough question I guess with the supply and demand-driven models, but I like that framing of proprietary pool of capital, and you have your own proprietary pricing or more supply and demand-driven.
Maple Leaf Capital (01:02:22):
I’d say that’s the design space. I think Nexus is a nice mix, right? They have a proprietary capital pool, and then they have their own pricing, which right now I think is fluid. It’s definitely going to improve. But they do have supply and demand incentives within Nexus, right? With the staking to specific contract.
Maple Leaf Capital (01:02:39):
Interesting. And what about the… Just because it’s on everyone’s mind, the algo-stables. What are your thoughts there? Ponzi or potentially huge market or somewhere in the middle or both?
Maple Leaf Capital (01:02:53):
I think I’m keeping my mind open. I could make arguments for each side. My sort of view is that this is a search engine type play. You need 20 to fail for one to succeed, and the one that succeeds, succeed in a way that it’s a little odd that you can’t imagine why it succeeded, but it did. And I think the preconditions for it is, one, is there enough business activity on-chain for that to be the case? And how strong is the development capability of the team? And then number two, how do you harness degen capital in a good way?
Maple Leaf Capital (01:03:35):
I’m still very skeptical that this kind of stablecoin could remain pegged even through a bear market because ultimately, you need a degenerate crypto-native central bank to be backing the peg when times get tough. I’m still a little skeptical. I think they are really fun on the way up because they are Ponzi in a way just like many fiat systems. But when you play Ponzi stabilizing it could be a very hard thing to do.
Absolutely, and I think Ben Simon from Mechanism said it best when he said, “It was interesting to observe these algo-stables go through their own bailout central bank moments, right? These coupons.” Most of them have arrived at these changes where you no longer lose your coupon, and so, supply doesn’t actually contract, which seems to make incentives better to get back to a dollar, but doesn’t seem to help it go back into expansion, right? It’s interesting to see crypto communities go through what we criticize in central banks.
Maple Leaf Capital (01:04:34):
Yeah, very funny.
Just to finish up because I know you have to go. What are some… Two parts of the question. We’ll start with what are some sectors or projects that you’re really bullish about that you think other people are overlooking? Or that you think are more interesting than the market’s giving credit for right now.
Maple Leaf Capital (01:04:54):
So, I’ll give you two. I think one is actually, I think Web2 social network type applications are not very well-loved because the traditional VC would think it lacks imagination, and then the space would think that they don’t quite make enough money yet. And it’s not degen. But I actually feel like they would be the real businesses, B2C businesses that actually will be using DeFi and Web3 in a very tremendous way that we can’t imagine yet. And because they already have the users so they have the network effect. This could be a tremendous flywheel.
Maple Leaf Capital (01:05:33):
Two good examples I think Gitcoin is a very good example of that, and the other one I would say it’s like a Medium plus Twitter hybrid in China called MYKEY. They have the largest crypto degen community that are on there posting articles every other day with 50,000 plus active users.
Maple Leaf Capital (01:05:53):
The token is in the gutter, but I feel like once these kind of platforms figure out the token model if they have a token, for example. Or if they sort of figure out how best to create value and monetize their users, it could be a really tremendous business protocol to be had. I don’t think people give them due attention.
Maple Leaf Capital (01:06:12):
The second thing I think is more lending primitives. And especially non-recourse or lending for something that does not have a continuous price is oracle-less or is very OTC or long tail. Ruler is actually exploring it. Ruler protocol started by the Cover team. It’s like one of the first attempts I’ve seen doing something like this.
Maple Leaf Capital (01:06:37):
I think the common criticism and issue they’ll run into would be it’s almost going to look more like a peer-to-peer type market, and how can you scale this model well? That’s a fair criticism, but I actually feel like there’s tremendous value to be had because it really goes back to my original point of the long tail of assets. I think you need a non-recourse oracle-less type of protocol to explore that kind of thing. So, I actually would love to see this space get funded.
What do you mean by non-recourse oracle-less?
Maple Leaf Capital (01:07:10):
So, imagine if you have an asset that does not have a continuous price based on the link oracle. It is one of a kind, it trades by appointment. Picasso painting or the NFTs are a good example. You only have in history in discrete increments. It was bit here or it was bit there. You can’t have length or oracle for that, there’s no oracle basically. It’s just a point in history.
Maple Leaf Capital (01:07:35):
And then non-recourse basically means when the price goes down 50% and I’m under collateralized I don’t get called. It’s like a US mortgage basically. If you buy a house in California, you take out a mortgage, and then the housing price by common measures drop 50% and you’re underwater on your mortgage, the bank can’t call your mortgage as long as you keep paying your mortgage, for example. I think the two go hand-in-hand actually, and whoever crafts that, I think it’ll be a pretty big market, I think, in some shape or form.
Yeah, that’s pretty interesting. That’s a very cool one. I think the Web2 social is one that we’re super interested in as well. Ian Lee from IDEO has a really good thesis on this, and I think he’s influenced our thinking on it a lot. There’s some super interesting stuff happening. I think one of the interesting things is we’re starting to see these breadcrumbs of identity, of unchained identity. Whether it’s your credit history, and we’re working on some wallet credit history for Aave or your interactions with various protocols.
There’s a bunch of these data points that you can put together, and I think that increasingly platforms will start issuing or acting as issuers like Gitcoin or these NFTs that prove some aspect about you. That eventually, you’ll have a pretty interesting social graph. And for me, it’s like what will the social network converge around? Because it always needs some kind of status. Like that article Status as a Service by Eugene Wei. Always needs some kind of status, and I kind of think that one of the most interesting ones would be an investment one.
Something like Melon built on top of something like that where… Because like crypto Twitter, people are already making investment decisions off tweets, right? And following people for their insights on stuff. So, I think that could be an interesting way to build the first social network around.
Maple Leaf Capital (01:09:22):
Yes. It’s possible. Look, I think Melon, and DeHedge, and then Set Protocol index are all very interesting. I do think they’re under… I think the confine to them today is I view DeFi as like a permit, right? There is the foundational protocols, and then there are primitives in finance that can only be built as secondary or tertiary primitives.
Maple Leaf Capital (01:09:46):
And asset management is upper in the stack in terms of the finance primitives. And if the bottom foundational lending and borrowing is two billion maybe asset management as a service is orders of magnitude smaller than that at the moment. But it seems like a fun place to allocate for sure.
Absolutely. So, you mentioned some of the ones you’re bullish about that other people aren’t. What are some things that you see others be super bullish about right now that you’re less so?
Maple Leaf Capital (01:10:18):
Yeah, I think… And these two could be controversial. I personally don’t get NFTs and let me explain that a little bit more. I think NFT is… It is a fragment of the concept it stands for. I think NFT is part… It’s a subset to the superset of non-standard assets. A non-standard asset being higher dimension in maturity and various features and tradeable art pieces, tradeable game pieces. It’s just one part of it. You can think of insurance as part of non-standard assets.
Maple Leaf Capital (01:10:55):
I think it’s a catch-all phrase, but right now it’s being viewed as an art piece or a game, and I think that space is… I have a little bit of trouble seeing until a really good game or a really good product come to market, I think it’s too early to be placing huge bets there. That’s one. And two, I think it’s really hard… Well, it’s extremely valiant attempts for what the Fold of the world are doing, but I think it’s a really hard game to play to be in B2C-type APP apps that are going to market with a iPhone or an Android-type feature.
Maple Leaf Capital (01:11:36):
They may succeed, but at the same time, I think the cost of customer acquisition and what kind of customers could go into this space through you versus somebody like a Stash or a Mint, for example. I think that’s a really big uphill battle. You need a big war chest to compete and hordes of engineers. I personally think that’s going to be really, really challenging for something to stand out.
Maple Leaf Capital (01:11:58):
And even Fold, I mean, that’s a great product, but I think Gemini is doing something similar, BlockFi doing something similar. If it really works you could see J.P Morgan and Bank of America doing something similar. So, it’s a tough 2C to a broader audience. It’s a valiant attempt, and some will probably succeed, but it’s a really tough bet to make, I think at the moment.
Yeah. No, it’s really interesting. I kind of agree with you about the NFTs, although we’re pretty long Axies. The ones we find most interesting are the ones that do have specific characteristics and almost cash flow characteristics, right? I think Axie is a good example because you can battle them, you can breed them, and obviously, whether you want to breed them or not especially if they’re very rare is a game theory consideration.
But they have some form of intrinsic value that’s connected to the game that’s being built. And I do think it’s very early, but yeah, it’s a super interesting one.
Maple Leaf Capital (01:12:56):
Yeah, I would much rather back games and the NFT from those games than a… And I don’t know, I think art pieces, for example, are just overflowing wealth effect from the broader sub-community that exist. But the games, I actually feel much more comfortable. If you ask me to bid on an artifact from Dark Force, I would probably be much happier doing so because I can use that in the game, for example. I don’t know, it’s just my personal advice.
100%. I think art is that plus a lot of watch trading, right? It’s very beneficial for everyone that the prices are quite high, and it’s quite hard to stop as well. Although I definitely think there’s a lot of legitimate volume. I think there’s undoubtedly quite a bit of watch trading as well. But I really appreciate your time, really enjoyed the conversation, and is there anything you want to touch on that we haven’t, or any notes you want to leave before we end?
Maple Leaf Capital (01:13:54):
No, I would say, guys, subscribe to Delphi’s Podcast and their research. I didn’t get paid to plug this, but I think you guys do fantastic work, and I’m really glad that we get to connect today.
Thanks very much. Really appreciate it, and yeah, we’ll keep following you. And thanks very much for all the work you do as well. That report was great. We really enjoyed it.
Maple Leaf Capital (01:14:15):
Thank you so much.
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(2:10) – Maple Leaf’s background and what brought him to crypto.
(4:20) – Maple Leaf’s crypto thesis.
(10:13) – The multi-dimensional costs of value transfer.
(14:02) – Democratizing high-end financial services.
(18:41) – Examples.
(21:26) – Is DeFi simply a form of regulatory arbitrage?
(22:51) – Three types of value nets and their interaction in the long/medium long term.
(29:22) – 3 potential reasons why crypto could fail.
(34:36) – Maple Leaf’s Investment Thesis.
(40:30) – Competitive Advantages and Moats in Crypto.
(46:40) – Valuing protocols.
(48:35) – Views on Credit: Aave, COMP, Cream.
(51:43) – Thoughts on decentralised governance.
(58:59) – Thoughts on decentralised insurance.
(01:02:41) – Views on Algorithmic Stablecoins.
(01:04:36) – Contrarian bullish takes.
(01:10:08) – Contrarian bearish takes.