Let’s start with a simple explainer of what it means to be delta-neutral. A delta-neutral strategy is one that attempts to construct a portfolio or group of positions that have no directional risk to the market. For example if I both open a long trade of 1 ETH and a short trade of 1 ETH at the exact same price, then regardless of the movement of the market, my total portfolio value will not change (ignoring fees).

Understanding the basics

A perpetual exchange such as Kwenta built on top of Synthetix has a funding rate (see image below). In simple terms a funding rate ensures that the perpetual price of an asset e.g. ETH remains in line with the spot value of ETH. If you are familiar with derivatives you likely have traded or heard of a ‘futures’ contract. Where a futures contract is an agreement between a buyer and a seller to transact an asset at an agreed date and price in the future, a perpetual has no expiration date. As a trader this gives you an opportunity to take advantage of this pricing mechanism to increase your potential risk adjusted returns.

Let’s decode the funding rate you see in the image. Different perpetual exchanges across different chains will use slightly contrasting mechanisms to calculate funding rates but as a trader you want to understand the time period in which funding is paid/received as well as how the funding rate fluctuates over time. To calculate the annual APR using the funding rate above the calculation is as follows:

0.007060% * 24 = 0.17% (1 day APR)

0.16944% * 365 = 61.8% (1 year APR)

When the funding rate is positive (as per our example) traders that are long pay the funding rate whereas traders who are short receive the funding rate. This is important as it sets the stage for understanding how we can build delta-neutral strategies to use the funding rate to our advantage.

Strategies

Armed with our new knowledge on funding rates, let’s explore some ways in which we can exploit them to our benefit to generate delta-neutral returns.

Cash and carry

The simplest strategy commonly known as the cash and carry trade is to buy the spot asset and sell the perpetual future in the same size. The funding rate presented above is for the crypto asset OP. The trade would look as follows:

Buy $10,000 OP spot.

Short $10,000 OP on a perpetual exchange.

OP is trading at approximately $2.50 at the time of writing this article and therefore to execute this strategy a trader needs to ensure that they are able to as effectively as possible both buy and short the asset in equal size and price as possible in order to eliminate what is known as leg risk. Leg risk is the risk that when putting on the two sides of the trade that the markets moves so that the two sides don’t end up balancing each other out i.e. they are not market neutral.

The goal of the above trade is to pick up the 62% in annualised funding i.e. $6,200 in annual returns regardless of if the market trends up or down. While this sounds too good to be true, a trader must understand how funding rates can vary across different exchanges but also different assets. There are various analytics sites available for tracking funding rates across exchanges such as coinglass and Laevitas that are essential for traders to understand how the funding rate deviates over time. The first image below shows how the funding rate changes for the asset $UMA with each red bar representing the funding rate for an 8 hour period. On the extremes, the $UMA funding rate was -0.75% meaning that extrapolated out on a daily basis you would pay/receive (depending if you were short or long) 2.25% in funding fees i.e. 821.25% annualised!

Even if we were to assume a -0.1% funding payment every 8 hours, this equates to >100% APR annually. Returning to our earlier cash and carry strategy, a trader would take advantage of this persistent negative funding rate to long $UMA and short the corresponding amount of $UMA spot elsewhere. To short spot $UMA a trader would need to borrow it from a defi money market protocol and therefore incur borrow costs which would reduce the returns. Maybe there is a more capital efficient strategy?

Funding rate arbitrage

While the combination of a spot position and a perpetual is attractive and often simpler to manage for a trader, there are other ways to position in a delta-neutral manner involving leverage enabling a more capital efficient and potentially higher return (also risk). A funding rate arbitrage strategy involves a long and a short perpetual position across different exchanges. The goal here is to find the largest discrepancy between two funding rates on the same asset. The below image is the funding rate for Sol on Kwenta. The funding rate is paid/received every 1 hour. A trader would want to take a long position in Sol on Kwenta given the funding rate is negative and take a short position for the same amount on dYdX (second image).

The benefit of using perpetuals is we can employ leverage on both the long and short leg of the trade. Let’s see what the returns might look like if we use leverage to maximise gains using the same $10,000 as per the cash and carry trade example from earlier. I’ll employ 5x leverage for this example.

$2,000 long Sol on Kwenta at 5x leverage = $10,000

$2,000 short sol on dydx at 5x leverage = $10,000

Daily funding received on Kwenta = 0.042235 * 24 = 1.01364% (370% annualised)

Daily funding received on dydx = 0.000138 *24 = 0.003312% (1.21% annualised)

For rounding and simplicity sake let’s say we are making $100 per day on $20,000 i.e. 0.5%. That’s actually 2.5% daily on $4,000 collateral!

This all sounds too easy right?

Important considerations

Funding rate fluctuations

Although examples presented previously have shown funding rates fluctuate, they have generally been consistent in their negativity/positivity (see UMA example). This has meant that a delta-neutral position in the asset has been easier to manage as both sides of the trade are able to be held for days, weeks or even months. See the image below for AAVE on dYdX on how the funding rate fluctuates between positive and negative. Asset selection and exchange selection are the key determinants in selecting a delta-neutral trade that has the highest probability of success.

Leg risks

I covered leg risk earlier in the article but it’s an important topic to reiterate. When choosing exchanges you must consider fees and spreads in order to execute the trade in a delta-neutral manner. Leg risk is the risk the market moves a significant direction after you place one side of the trade (one leg) and therefore you delta does not = 0 and you are exposed to market direction.

Liquidation

Leverage carries benefits in capital efficiency provided you are executing a profitable trade however it also presents liquidation risk that must be managed. If you are trading both sides of the position using perpetuals then it’s likely that one side will be liquidated (depending on how long you hold the position) and a trader will need to ensure that they manage the overall position in order to close it delta neutral.

General fees and associated trading costs

You need to consider the various associated costs that are incurred on both sides of the trade as well as the fee structure and the associated chain costs. Are you trading on one chain or across chains? are you trading on Ethereum layer 1 for one leg and optimism for the other leg etc…

Other delta-neutral strategies?

While I focused on a couple of simple strategies in this article focusing in on using perpetual exchanges, there are a number of other ways in which a trader can express a market neutral view in order to collect risk premia involving options, cex vs dex, futures vs spot etc….

Options utilise more greeks than just delta and therefore they have become natural instruments to express views on non-delta risk premia. This is an article for another time!

Concluding remarks

It might be sad for me to admit but I think I’ve tested nearly every perpetual exchange that exists in crypto — at least across the major chains and L2’s. That said, there’s a few features I’d like to see as common place or developed further:

1. Clear historical funding rate data

2. An interface that enables cross exchange atomic positioning

While historical funding is not necessarily an indicator of future funding rates, it is nonetheless helpful in helping the trader when considering their strategy when presented in a clean and simple UI.

Atomic positioning would likely need to be developed outside of a perpetual exchange as a layer on top enabling positioning across various perpetual exchanges to be executed in one transaction.

I didn’t even get a chance to mention automating all of this through bots or the opportunities across cex/dex for these strategies. Any quants/devs/HFTs want to collaborate on the next piece?

It’s an exciting time to be both building and trading in the space. As L2’s continue to proliferate the market, the quality of the exchanges and the opportunity for traders will only increase. In order to answer the question set in the title, there’s only one way to answer that. Go and test these protocols and try it yourself!

Good luck out there and reach out if you’re also an active user in the DeFi perpetuals space!

What is Bitcoin and why does it matter?

Bitcoin was born on October 31, 2008 posted on a cryptography mailing list by its pseudonymous founder(s) Satoshi Nakamoto with the comment:

“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.“

Now you’d be forgiven for thinking so what, we already have digital cash right? so let me lay out why this breakthrough is so important and its potential implications for how we store, record and transact value.

Anatomy of a payment

Before we move on to Bitcoin, let’s provide some context for how the current payment infrastructure works. While cash payments still happen, most of us use our debit and credit cards for every day use.

While using our cards to pay for a morning coffee may seem pretty seamless, behind the scenes there’s a number of intermediaries and steps that happen for that transaction to take place. **It’s the difference between what the daily user sees and what happens behind the scenes as to why I think many people fail to grasp the potential massive implications of blockchains. **In the transaction steps above between the person paying and the shop we have:

• Card provider company

• Visa

• Person’s bank

• Shop’s bank

• Bank of England

That’s a lot of middlemen to simply send money from one person to another isn’t it? There must be a better way to send money digitally don’t you think!

Enter the Bitcoin blockchain

“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.“

The Bitcoin blockchain was a solution to enabling two parties anywhere in the world to transact without the need to trust each other. The current system relies on central parties such as banks holding ledgers (record of transactions) to understand who owns what and who owes who. We trust banks (largely). But this system is cumbersome, slow and is prone to hacks and data leaks. So how would we remove banks and other middle men enabling two parties to transact with each other without the need to trust each other?

Enter the Bitcoin blockchain.

What people don’t often realise is that Bitcoin was not the first attempt at building a digital currency. In fact there has been multiple attempts with the first cryptocurrency created by David Chaum’s in 1980/90's called eCash. Other notable attempts that laid the groundwork for Bitcoin included B-money, Bit Gold, and Hashcash. While Satoshi might not have been the first to build a digital currency, he/she/they were the first to solve the major issue holding it back — the double spending problem.

Double spending refers to spending the same money twice. While this isn’t a problem with physical money, digital transactions are easier to replicate. As such our traditional financial system relies on the trusted third parties outlined above. The magic of Bitcoin is the blockchain that solves the need for central intermediaries. In my ‘What is crypto’ article I explain the blockchain in a little more detail. Think of the blockchain as a digital ledger which records transactions. Importantly, this ledger is transparent and distributed meaning thousands of nodes (computers) all have an exact copy of the same digital ledger. Every time a transaction takes place, it is bundled together with a number of other transactions in a block and added to the chain i.e. blockchain. The records are immutable meaning they cannot be altered in any way once they have been verified as valid and added to the blockchain. Because the record of transactions is distributed amongst thousands of computers around the world, if someone tried to alter or defraud the system in any way the transaction would not be declared valid.

Why does it matter?

The importance of this breakthrough is monumental. Marc Andreessen explains it well:

“The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”

It’s not a big stretch to imagine both digital and real world assets moving to using a blockchain ledger in the future given the benefits in speed, cost and security. The Bitcoin blockchain is very focused and specific in its goals to be a decentralised uncensorable money however its invention has given birth to a whole new industry worth over $1 trillion. A number of other blockchains have been born, each with their own goals and trade-offs such as Ethereum, the second largest blockchain by market capitalisation. Ethereum will be the focus of a separate article however it aims to add flexibility and programmability to the Bitcoin blockchain to expand the use cases beyond just money.

Whether Bitcoin succeeds in its original purpose as a new form of digital money is yet to be seen but its growth so far and the industry that has been built off of the back of it cannot be understated.

If you have any burning questions on the basics of crypto you want me to cover next, please reach out.

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What is an NFT and how could they impact the real world with examples.

An NFT (Non-Fungible Token) is a unique digital asset stored on the blockchain that represents ownership or proof of authenticity of a digital or physical item.

NFTs are different from crypto assets such as Bitcoin (BTC) and Ethereum (ETH) in that these assets are fungible i.e. swapping 1 ETH for another 1 ETH has no impact. To better explain this, let’s take an example from the real world. When paying for my morning coffee, I could hand over any £5 note to the barista. All £5 notes hold the same value and are interchangeable. Neither I nor the barista care which specific £5 note I am handing over so long as that £5 is legitimate. In this analog, BTC and ETH are the crypto versions of the £5 note. NFTs on the other hand are non-fungible i.e. each one is unique and CANNOT be interchanged for another identical version because there is no identical version.

You may have seen or heard about NFTs such as Bored Apes (pictured above). The gain in popularity and price in many of these NFTs has led to many critics to mislabel and misunderstand the wider technological innovation. The current floor price i.e. minimum price a Bored Ape can be purchased for currently stands at 71.95 ETH ($118, 280).

How can you pay $118,280 for a picture of a digital ape?

Why can’t I just copy paste the image and now I own it?

While the subjective value the market ascribes to art is beyond the scope of this article, an NFT cannot be owned just because I have copied and pasted the image. Much like I can buy an exact replica of the Mona Lisa and hang it on my wall, does this mean I own the original and it can be sold as such? absolutely not! As explained earlier, an NFT represents ownership or proof of authenticity and as such I would not be able to prove ownership or sell the NFT without owning it within my digital wallet.

How could this impact the real world?

While expensive pictures of digital apes might leave you scratching your head about NFTs, the potential applications across a variety of industries from music, gaming, real estate and more is extremely exciting.

Music

Those lucky enough to get a record deal often have up to 80% of royalties taken by their music label. Out of approximately 8 million artists on Spotify, only 42,100 artists (0.53%) made over $10k for the year; just 13,400 (0.17%) made over $50k.

The famous DJ Steve Aoki Says he’s made more money with NFTs than from 10 years of music advances. Unless you are playing live gigs or on tour, the music industry is an extremely tough business even for the most famous of artists. While NFTs are still very much in the experimental stage, they offer some exciting opportunities for artists to take back control over the content they create.

The famous DJ and music producer Diplo was one of the early artists to experiment with NFTs using the crypto music platform https://royal.io/ allowing fans to invest in his song ‘Don’t forget my love’.

Diplo sold 2000, 100 and 10 NFTs across three respective rarities with each one offering different benefits to its holder. The image below shows the platinum rarity NFT (10 total) priced at $9,999.

As well as benefits such as first access to tickets and discord access to chat personally with Diplo, the NFT afforded fans a 0.7% royalty payout for the song. As can be seen below, the song actually did 150m streams, significantly more than estimated amount paying out over $2k to fans. That’s a 20% return on your investment and that’s not to mention the other benefits available to NFT holders.

While music NFTs are still very much in their infancy and the benefits and business models are still being understood, it is clear they have the potential to improve the music experience for both artists and fans alike.

Real Estate

Returning to the definition of an NFT:

An NFT (Non-Fungible Token) is a unique digital asset stored on the blockchain that represents ownership or proof of authenticity of a digital or physical item.

While music is an example of a digital item, NFTs equally allow for the representation of physical items such as the ownership of a home.

As anyone who has bought/sold a home before can tell you, it’s an arduous process involving middle men from banks, lawyers and real estate professionals. With NFTs, it’s possible to tokenise real estate assets and represent ownership of a property on the blockchain. The benefits of this could include:

• Efficiency benefits and therefore reduced costs gained through disintermediating middle men meaning real estate transactions can take seconds instead of months.

• Increased liquidity gained through improved simplicity to buy and sell NFTs.

• Composability with DeFi protocols enabling NFT owners to use their real estate as collateral to borrow against all on-chain.

• Transparency allowing ownership history and other relevant data all recorded on-chain.

• Fractionalisation opportunities enabling investors to own and claim rental income on part of an asset.

• Elimination of fraud given a clear ownership record of data.

While NFTs representing physical real estate have lots of potential, many of the benefits above involve a number of different market participants (many of whom will not benefit from the evolution of the industry). NFTs are early in their journey but hopefully using the examples above it is clear that they have the possibility to disrupt and improve a number of industries.

If you have any burning questions on the basics of crypto you want me to cover next, please reach out.

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What is crypto?

You might have heard it referred to as cryptocurrency, blockchain, web 3 or something else. These terms are confusing in their own right but ultimately, these words are all generally used to describe the same thing — the future of the internet.

I don’t like the term cryptocurrency, It leads readers down a linear path of thinking such as:

“We have the £, $ etc… why do we need another currency?”

I prefer to use the terms crypto or Web 3. Therefore to understand the future of the internet, we must understand the internet in its current design for its evolution to make sense.

Web 1

Early 1990’s and 2000’s internet where early users could do little more than read simple static web pages and exchange e-mails. Interaction was a one-way street.

Web 2

The internet as we know and interact with in our daily lives today. Where users of Web 1 could do little more than read simple content, Web 2 has seen the internet boom in popularity as user generated content has become king. Often called the ‘social web’, Web 2 is exemplified by social media giants such as FaceBook, YouTube and Tiktok. Users own data is the driving force of Web 2. Although this enables wonderful new user experiences, users don’t fully grasp the fact that they are signing over ownership of all their information to a few large dominant technology companies. This meant that the data has become centralised amongst a few big players in the industry. Google keeps the most, collecting over 39 different individual data points on you. This can include anything from basic information such as your name and e-mail address through to the websites you’ve visited, videos you’ve watched and messages on your phone.

Web 3

When Tim Berners-Lee invented the internet in 1989, he did so based on the key founding principle of Decentralisation.

“No permission is needed from a central authority to post anything on the web, there is no central controlling node, and so no single point of failure…and no ‘kill switch’! This also implies freedom from indiscriminate censorship and surveillance.”

While Web 1 was built with these principles in mind, Web 2 shifted the Web away from its intended design into a few monopolistic companies monetising its own users.

Web 3 is an attempt to fundamentally re-architect how the web works using blockchain technology as the underlying infrastructure to alter how information and value is stored, shared and owned.

The blockchain is the magical infrastructure that allows for this shift away from centralisation. Whether you know it or not, databases power nearly every service you consume on a day to day basis from access to your banking to the movies you watch on Netflix. While the details of blockchains and how they compare to traditional databases is the topic for another post, what is important to highlight is that a blockchain is simply a new type of database structure. While your bank or streaming service operate their own database (centralised), blockchains offer a new way to store and secure data in a way that is distributed and secured by cryptography and consensus mechanisms.

Think of a blockchain as a large excel document which records transaction data. Where you can change and edit a normal excel document, with a blockchain, data can only be added or read, never edited. Let’s say for example that If I sold my house to you. Because the blockchain is distributed, 1000’s of copies of the chain exist across a network of computers where the records all need to match. If you are the rightful owner of your home and that information is recorded on-chain then you will be able to sell me your home and that new information will be added to the excel document for all to see. The magic happens if you try and alter or cheat the system. The information stored across all the computers would not match and therefore the transaction will not be viable. The value therefore is in facilitating transactions across groups of non-trusted parties. While middle-men exist today operating as these ‘trusted’ parties, the promise of blockchains is to potentially eliminate and streamline how value is stored, shared and owned.

Web 3 aims to give the power back to the every day user and democratise the internet back to its Web 1 principles replacing rent-seeking middlemen with blockchains. A vision of new applications, use cases and online economies from cryptocurrencies to NFTs. Users are no longer the product and instead can create a world in which they are rewarded for their contribution rather than exploited. “Web 3 is the internet owned by the builders and users, orchestrated with tokens,” says Chris Dixon of a16z. The Ethereum foundation defines the core principles of Web 3 below:

• Decentralised

• Permissionless

• Native payments

• Trustless

While the vision is ambitious, re-architecting the internet as we know it today is no small task. As per all new innovation attempts, there will be failure upon failure as builders tinker with new economic incentive design mechanisms as they endeavour to build out a better, more transparent and fair internet.

If you have any burning questions on the basics of crypto you want me to cover next, please reach out.

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I read this great thread from Cory during the holidays on living like a monk for 6 months. Some truly fascinating insights for us all to live by.

https://twitter.com/corymuscara/status/1594717233334427656?s=20&t=EHr19pnf4KW0D79zeZcvyA

What are your goals for 2023, I’d love to hear them. Shoot me a DM or reply to my post.

I’ve seen a lot of predictions come across my timeline over the last week. As news flow is thin and people speculate for the year ahead I thought it would be fun to throw my hat into the ring as I did in 2022.

2023 Predictions

#1- Fed continues hawkish stance but pivots eventually

J Powell has been consistently hawkish throughout the year much to the continued frustration of the market. My belief is that his view is very much shaped by the Volcker years of the 70’s and the double pump inflation drama. I think the Fed maintains a firm stance until they are comfortable inflation is under control, something breaks or deflation becomes the more likely scenario. I believe the ‘pivot’ in whatever form comes sometime in the summer. Much to the disappointment of the fractal lovers, I think once inflation is under control it stays as such and we move to a ‘normal’ interest rate environment.

#2- Macro leads, crypto follows

Quite simply I believe we are tied to our older siblings in TradFi for some time. As a higher beta risk asset, crypto is simply not attractive enough on a risk adjusted basis to warrant enough fresh capital to see it dislocate to the upside. If we see the Fed funds rate shift into the 2 or 3% range in H2 2023 we likely see crypto outperform to the upside on higher beta but I think it will take some time for risk sentiment to repair the carnage of 2022 and overall value will outperform growth.

#3- Institutions continue to ‘arrive’

While 2022 saw Fidelity grant access to their clients to buy/sell crypto, Blackrock partnered with Coinbase and Goldman and JP Morgan increasingly experimenting with DeFi and crypto company acquisitions, I see 2023 continuing this trend.

#4- Regulation is bullish

My belief (hope) is that FTX speeds up regulation for the sector which ultimately is bullish if done correctly. I don’t know if this happens in 2023 in the US given the stage and state of the US political cycle but we’ve had positive developments come out of the UK recently. In December, Jeremy Hunt released the “Edinburgh Reforms” of UK financial services — over 30 regulatory reforms to unlock investment and turbocharge growth in towns and cities across the UK.

“The reforms build on the UK’s desire to harness the benefits of emerging technologies, including committing to shortly publish a consultation on proposals to establish a UK Central Bank Digital Currency– which could one day see Brits using a digital pound. Other measures will see the Investment Management Exemption extended to cryptoassets, ensuring more overseas investment can flow into the sector — and the government has recommitted to establishing the Financial Markets Infrastructure Sandbox in 2023, allowing firms and regulators to safely test, adopt and scale new technologies that could transform financial markets.”

#5- Solana survives

While I’m less optimistic about Aptos, Sui and many competing L1’s, I believe Solana ultimately weathers the SBF association and ends up building a credible blockchain niche. I’m excited about Solana mobile.

#6- Ethereum continues dominance and L2’s flourish

Despite there being room for more than one layer 1 blockchain, I can’t look past Ethereum as the ‘winning’ base layer. As L2’s such as starkware, arbitrum etc continue to gain users, the argument for faster L1’s becomes redundant in a world re-focused on decentralisation.

#7- Airdrops evolve

The days of 5 and 6 figure airdrops may be a thing of the past as protocols continue to experiment with new models rewarding actual users (sorry sybil attackers). Regulatory uncertainty also plays a large role in this prediction.

#8- Web3 social begins to evolve past web2 copy paste and establishes unique use cases

While the early days of the internet saw newspapers put online in digital format, much of the early web3 applications in the social space has been in a similar vein i.e. take what works in web2 and make a decentralised version of it web3 style. While there is nothing wrong with this, it’s not exciting or game changing and I think much like Facebook, WhatsApp, Uber etc were made possible by web2 architectures, web3 will see unique applications only possible leveraging a immutable blockchain stack.

#9- NFT’s continue to evolve

2022 saw notable developments in NFTs crossing the chasm to mainstream adoption with projects like Reddit and Starbucks. I believe brands across various industries will continue to experiment with NFTs in an effort to understand how they can better collaborate with fans/customers and monetise their products/services.

As well as corporates experimenting, I think we will see how projects like pudgy penguins begin to tie crypto native projects with real world IP in 2023.

#10 Commodities + ‘boring’ businesses become sexy again. Benjamin Graham simps reunite.

Even if interest rates do come down slightly in H2 2023, I think the focus on free cash flow generative businesses with strong moats and stable demand (think Coca Cola) will come back into the limelight and tech and growth may lag for much of 2023. Gold and Silver supercycle 2.0?

https://twitter.com/allstarcharts/status/1606694404067971072?s=20&t=hEqeLE1sBBdqdOh-FAdx5g

What’s your predictions for 2023?

Peace out and have an amazing 2023 all!

Disclaimer

The Content in this and all Monday musing posts is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. I may hold positions in assets mentioned. Nothing contained in these posts constitutes a solicitation, recommendation, endorsement, or offer by the author or any third party service provider to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing in the Site constitutes professional and/or financial advice, nor does any information on the Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. The author is not a fiduciary by virtue of any person’s use of or access to the Site or Content. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other Content on the Site before making any decisions based on such information or other Content. In exchange for using the Site, you agree not to hold the author, its affiliates or any third party service provider liable for any possible claim for damages arising from any decision you make based on information or other Content made available to you through the Site.

One of my goals for this coming year is to continue to post Monday musings every Monday of the year regardless of where I am in the world or what I’m doing.

Let’s be honest no one is going to be reading this edition so it’s more to hold myself accountable and the interesting news flow is thin at this time of year.

I’ve been trying to be less glued to my phone over this festive period and spend time outside with family and friends. As a family we played this board game yesterday called The Chameleon. I’d highly recommend buying it and playing it!

I’m heading to Barbados in early January so I’m looking for book recommendations so please reach out if you have any. All genres appreciated.

In crypto related matters I’m looking forward to continuing working with smart and ambitious founders across the space. Reach out if you want to jam on anything from growth to product market fit and idea generation.

Peace out and Merry Christmas again!

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Disclaimer

The Content in this and all Monday musing posts is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. I may hold positions in assets mentioned. Nothing contained in these posts constitutes a solicitation, recommendation, endorsement, or offer by the author or any third party service provider to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing in the Site constitutes professional and/or financial advice, nor does any information on the Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. The author is not a fiduciary by virtue of any person’s use of or access to the Site or Content. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other Content on the Site before making any decisions based on such information or other Content. In exchange for using the Site, you agree not to hold the author, its affiliates or any third party service provider liable for any possible claim for damages arising from any decision you make based on information or other Content made available to you through the Site.

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We flew from Heathrow to Newquay to celebrate my mum’s birthday over the weekend. If you choose to drive it’s about 5 hours from London depending on where in Cornwall you visit but the flight only took us 45 minutes with some wind at our tail. I feel the British countryside has been left in a slight time warp with the ease and availability of flights to warmer climates these days. Nonetheless, some of the coastlines are up there with anything you will find globally. See below a picture I took from my hotel room. We decided to revisit a favourite restaurant we had previously eaten at for my birthday by Nathan Outlaw called New Road. The restaurant had previously had 2 Michelin stars before closing down over covid to experiment with a new more informal menu before reverting to their tried and testing tasting menu format again. It champions the local seafood produce through an 11 course tasting menu. A few instagram friendly pictures below. All in all I was underwhelmed to be honest. Don’t get me wrong, it was lovely but my first experience was so magical that maybe sometimes it’s best to leave certain experiences as nostalgic memories? All in all, time spent with family should be cherished.

Macro

For those of you not interested in my quasi food blog, let’s move on to markets.

CPI data came in soft across the board last week leading markets to fake out of the famous trend line in place on the $SPY from Dec 2021 before reversing. J Powell remained firm in his hawkish tone in his customary press conference the following day with the market taking him at his word and trading lower. The Fed continues to be stuck between a rock and a hard place as they try to steer the US economy to a soft landing. Their view continues to be that inflation is the worse of the two evils and if that means driving the economy into a recession to cure the ails of inflation then so be it.

Markets have previously rallied on the ‘Fed pivot’ narrative where bad data was good news. It seems the market is finally taking J Powell at his word.

Deflation more likely than persistent inflation

The tweet thread here from Andreas highlights how many leading indicators already point to the very real threat of deflation rather than sticky inflation. He has always been in the double pump inflation camp of the 1970’s. I think J Powell is very much also in this camp given his remarks and admiration of Paul Volker. The market dynmaics are very different to the 1970’s in my view and this inflation surge was driven by exogenous covid related factors + supply chain constraints which are reversing as quickly as they accelerated. My view is inflation comes crashing down almost as quickly as it escalated. Only time will tell.

https://twitter.com/AndreasSteno/status/1603029551449260033?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1603029551449260033%7Ctwgr%5E45c7ab4f8e1579975e993eecdb35b56730a134ef%7Ctwcon%5Es1_c10&ref_url=https%3A%2F%2Fcdn.embedly.com%2Fwidgets%2Fmedia.html%3Ftype%3Dtext2Fhtmlkey%3Da19fcc184b9711e1b4764040d3dc5c07schema%3Dtwitterurl%3Dhttps3A%2F%2Ftwitter.com%2Fandreassteno%2Fstatus%2F1603029551449260033image%3Dhttps3A%2F%2Fi.embed.ly%2F1%2Fimage3Furl3Dhttps253A252F252Fabs.twimg.com252Ferrors252Flogo46x38.png26key3Da19fcc184b9711e1b4764040d3dc5c07

Equities bull or bear?

Julien Bittel who is now Head of Macro Research at Raoul Pal’s GMI had a promising chart for the bulls below highlighting the following trajectory of the $SPY following major peaks in CPI across 12 historical episodes from 1950 to 2018.

https://twitter.com/BittelJulien/status/1604046906920943617?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1604046906920943617%7Ctwgr%5Ecf4e7a35b26bad23ca1135339e4c48bb92196857%7Ctwcon%5Es1_c10&ref_url=https%3A%2F%2Fcdn.embedly.com%2Fwidgets%2Fmedia.html%3Ftype%3Dtext2Fhtmlkey%3Da19fcc184b9711e1b4764040d3dc5c07schema%3Dtwitterurl%3Dhttps3A%2F%2Ftwitter.com%2Fbitteljulien%2Fstatus%2F1604046906920943617image%3Dhttps3A%2F%2Fi.embed.ly%2F1%2Fimage3Furl3Dhttps253A252F252Fabs.twimg.com252Ferrors252Flogo46x38.png26key3Da19fcc184b9711e1b4764040d3dc5c07

I often see people tweet out that 2023 is going to be even worse than 2022 as if we get a recession we are going to see new lows. While we cannot predict the future, it is important to understand that the markets are not the economy and this is what most people seem to miss. If the US does enter recession, what does that mean for equity performance?

Data above from Darrow Wealth Management highlights how on average, equities performed worst 1 year prior to recession than during a recession. In fact average return during a recession was -1% (skewed to the downside by -37% in 2007) with an average return of 16% in the 1 year post a recession.

Limitless clean energy?

In non market, non family holiday related news, scientists in the US have made a breakthrough in nuclear fusion that could lead to limitless clean energy. See a short clip here that succinctly describes the breakthrough and a funny clip here from nuclear scientist Marv Adams.

No pressing crypto news this week to highlight so instead I’ll wish you a Merry Christmas and hope you all enjoy some time off with loved ones.

Disclaimer

The Content in this and all Monday musing posts is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. I may hold positions in assets mentioned. Nothing contained in these posts constitutes a solicitation, recommendation, endorsement, or offer by the author or any third party service provider to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing in the Site constitutes professional and/or financial advice, nor does any information on the Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. The author is not a fiduciary by virtue of any person’s use of or access to the Site or Content. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other Content on the Site before making any decisions based on such information or other Content. In exchange for using the Site, you agree not to hold the author, its affiliates or any third party service provider liable for any possible claim for damages arising from any decision you make based on information or other Content made available to you through the Site.

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GM from snowy London. We don’t get it often here so it’s pretty exciting to me and makes me want to go skiing/snowboarding. Not sure London has the best slopes though…

It’s not hard to find the content for these posts, there’s always so much happening in every corner of the crypto markets. I was around during the 2018/19 bear market and this is very different!

Macro / non crypto

This week all eyes are on Tuesday’s CPI’s data. Are J Powell and friends rate rises killing inflation? tune in tomorrow at 8:30 Eastern to find out….

Did Elon solve Twitter’s bot problem?

https://twitter.com/elonmusk/status/1602027334751571968?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1602027334751571968%7Ctwgr%5E242be5d2fa76375e474cad129f8af4fb3cbc4386%7Ctwcon%5Es1_c10&ref_url=https%3A%2F%2Fcdn.embedly.com%2Fwidgets%2Fmedia.html%3Ftype%3Dtext2Fhtmlkey%3Da19fcc184b9711e1b4764040d3dc5c07schema%3Dtwitterurl%3Dhttps3A%2F%2Ftwitter.com%2Felonmusk%2Fstatus%2F1602027334751571968image%3Dhttps3A%2F%2Fi.embed.ly%2F1%2Fimage3Furl3Dhttps253A252F252Fabs.twimg.com252Ferrors252Flogo46x38.png26key3Da19fcc184b9711e1b4764040d3dc5c07

Maybe his focus on elite level engineering talent isn’t looking so stupid now?

Oaktree share their year-end reading recommendations. Whether you’re taking some time off in your respective homeland or you’re away on holidays and have some down time this is an excellent list covering a plethora of genres and disciplines.

https://www.oaktreecapital.com/insights/insight-commentary/market-commentary/2022-year-end-book-recommendations

Crypto

The StarkNet ecosystem is coming to life. Starknet id went live on 7th Dec on Mainnet. I got a bit trigger happy and minted a few domains but my main one is native0x.stark!

Certain NFT’s are weathering the current crypto climate better than some of their fungible brethren. Who would have known that Pudgy Penguins were the ultimate hedge in this brutal bear market? The floor price of these cute little penguins touched 5 ETH last week before retracing slightly. I’m biased given I own a few but the community Luca Netz and team have built is a great blueprint for others to follow!

In other NFT related news we had the Blur airdrop 2 release as well as the announcement of a 3rd and final airdrop in January 2023 and the launch of the $BLUR governance token. NFT volumes continue to tick along in this market and BLUR (orange line below) has taken significant volume from the market since early November. How much of this is mercenary token farming vs organic demand? we will find out in the new year I guess. Token incentives and user behaviour will be the topic of a longer form post as that’s a story for another day. For now, Blur seems to have brought much needed liquidity to the NFT market (see tweet below). Maybe this killer feature is enough to cement itself as a future NFT infrastructure leader?

https://twitter.com/blur_io/status/1601305190468308992?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1601305190468308992%7Ctwgr%5E1659d4b4a905740caea71aa136ddb3ce801b8874%7Ctwcon%5Es1_c10&ref_url=https%3A%2F%2Fcdn.embedly.com%2Fwidgets%2Fmedia.html%3Ftype%3Dtext2Fhtmlkey%3Da19fcc184b9711e1b4764040d3dc5c07schema%3Dtwitterurl%3Dhttps3A%2F%2Ftwitter.com%2Fblur_io%2Fstatus%2F1601305190468308992image%3Dhttps3A%2F%2Fi.embed.ly%2F1%2Fimage3Furl3Dhttps253A252F252Fabs.twimg.com252Ferrors252Flogo46x38.png26key3Da19fcc184b9711e1b4764040d3dc5c07

12.12.2022 — Neon EVM goes live bring the first EVM to Solana. Ethereum-based applications will now have access to Solana’s scalability and liquidity without any changes to their codebase. Notable Ethereum-based projects starting to build on Neon include Aave and Curve Finance. A much welcome bullish development for Solana fans!

https://twitter.com/neonlabsorg/status/1589596997883146241?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1589596997883146241%7Ctwgr%5E97e14234d65a7ce6d52e148ba17294a590c6639c%7Ctwcon%5Es1_c10&ref_url=https%3A%2F%2Fcdn.embedly.com%2Fwidgets%2Fmedia.html%3Ftype%3Dtext2Fhtmlkey%3Da19fcc184b9711e1b4764040d3dc5c07schema%3Dtwitterurl%3Dhttps3A%2F%2Ftwitter.com%2Fneonlabsorg%2Fstatus%2F1589596997883146241image%3Dhttps3A%2F%2Fi.embed.ly%2F1%2Fimage3Furl3Dhttps253A252F252Fabs.twimg.com252Ferrors252Flogo46x38.png26key3Da19fcc184b9711e1b4764040d3dc5c07

Protocols I’m using this week

Voltz is a crypto native interest rate protocol that seeks to bring this quadrillion (yes that’s $1,000 trillion) market to DeFi. These financial derivatives exist in TradFi to enable corporates, banks, sovereigns etc manage their debt servicing costs and obligations. Simply put, interest rate swaps allow two entities the ability to ‘swap’ one interest rate payment for another (usually a fixed interest rate for a variable or vice versa). There’s a few notable interest rate protocols building to bring this essential financial pillar on to crypto native rails and much of the exciting work has gone under the radar. My view is that there is mix of reasons for this, from complexity and understanding of interest rate swaps through to a very young debt finance ecosystem in crypto i.e. DAO’s primarily fund growth through token incentives vs debt finance. As the crypto ecosystem matures however I believe interest rate swap protocols will play as pivotal role in crypto as they do in TradFi. I’ve been an earlier supporter, contributor and tester of the Voltz protocol and one thing they have done which sets them above the competition in my opinion is they seek to remove much of the complexity away for the user. As a crypto native, there’s a few core use cases that projects like this can solve for me, namely elevated potential APY returns in a bear market.

Non sponsored content, just a good product. Find the below and similar vaults under their ‘LP Optimiser’ here.

Continuing our debt market focus, I want to highlight a project I was sad to see shut down and now am excited to see has been reborn. Arbor finance (previously Porter Finance) **has been resurrected by three of the core team members to bring on-chain debt to DAOs. In an extension of the importance highlighted above about interest rate swaps, 2021 and the years prior saw increasingly dilutive token issuance to bootstrap growth and drive adoption. While the merits of this are debated, a mature and growing crypto ecosystem needs other methods to finance growth. See the tweet thread here for a good overview from the team. Their recent bond auction with ShapeShift has gone live today and is live until 21 December.

Terms:

✅ 20% Max APY

✅ 1-year duration

✅ 250% Collateral in $FOX

✅ Min. Deposit is $500.

Pretty cool if you ask me…..

That’s it for another Monday musings. Peace out and have a good week fam.

Disclaimer

The Content in this and all Monday musing posts is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. I may hold positions in assets mentioned. Nothing contained in these posts constitutes a solicitation, recommendation, endorsement, or offer by the author or any third party service provider to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing in the Site constitutes professional and/or financial advice, nor does any information on the Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. The author is not a fiduciary by virtue of any person’s use of or access to the Site or Content. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other Content on the Site before making any decisions based on such information or other Content. In exchange for using the Site, you agree not to hold the author, its affiliates or any third party service provider liable for any possible claim for damages arising from any decision you make based on information or other Content made available to you through the Site.

Each Monday of the week I highlight interesting projects, news and data that has caught my attention. Not another newsletter I hear you cry…. but I promise to try and focus on lesser well known projects, founders or the like. The dominant narrative will be crypto with a wider macro lens but I’m not immune to spotlighting other notable technology developments within the last week. I promise no GPT-3 mentions this week.

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I woke up this morning and saw this image on my timeline from Shaun Heng. An important reminder to start the week off don’t you think?

Macro

Moving on to the hot topic of the year — inflation. The popular discourse is that inflation will remain elevated in the 3–4% range in a post covid, nationalist world where supply chains and energy production will on-shore. Bear markets bring out the doom and gloom in most market participants but I’m personally in the unpopular camp that the recent ascent in inflation will be followed by a somewhat similar descent back to pre-covid levels. To be fair I was in the ‘inflation is transitory’ camp so take that with a pinch of salt. That said, data on Personal Consumption Expenditure Prices (PCE) inflation last week came out much lower than expected at 2.6% at an annualized rate in October, far below its peak of 7.5% in June. Claudia Sahm wrote the best piece on the inflation picture last week which I’d recommend reading here s/o to Hal Press for sharing on Twitter. The European picture doesn’t look much better…..

https://twitter.com/Native_0x/status/1597523698768310273?s=20&t=V7fqg40yEj5OXlIUlEl-IQ

If you’re interested in macro chart porn, I’d recommend following Charlie Bilello.

Crypto

I’ve been spending the last week reviewing 10+ startups that applied to Alliance DAO next cohort — All10. I have been part of the Alliance DAO community since the early days as a community member and mentor and I’m looking to step up my involvement in supporting projects. If you are thinking of applying or have already applied please reach out and I’ll do my best to give you honest feedback. I used to build and run incubators across tech and finance so I might have got the inflation forecast wrong but I tend to know what to look for in early stage crypto projects!

https://twitter.com/alliancedao/status/1587474546268971009?s=20&t=V7fqg40yEj5OXlIUlEl-IQ

The early application deadline is over but you can still apply as the ultimate deadline is not for another two months. Apply here: https://alliance.xyz/apply

https://twitter.com/argentHQ/status/1599772818522005504?s=20&t=V7fqg40yEj5OXlIUlEl-IQ

The Devs, they keep on building! ETHIndia and StarkNet CC just wrapped up their multi day events and you’d be forgiven for thinking crypto was in a bear market. As Richa from push protocol notes in her thread here we had 2000+ devs from 321 cities who built 450+ Web3 projects!

The love for the StarkNet ecosystem was also very promising in India. Argent provide a nice tweet summary of the event here. Congrats to the three winners of the hackathon:

NFT Craft: https://devfolio.co/projects/nft-craft-1196

Stark Wallet: https://devfolio.co/projects/stark-wallet-4605

NFTY Gateway: https://devfolio.co/projects/nfty-gateway-22d5

Ribbon Finance are rolling out the red carpet for VIPs. You’ll need $250,000 USDC deposited in their ETH put selling vault or the equivalent in their other vaults to qualify as a VIP whale. Do you make the cut anon?

https://twitter.com/ribbonfinance/status/1597512995550089216?s=20&t=V7fqg40yEj5OXlIUlEl-IQ

I’ve been working with a couple great founders Pol and Noe recently on a number of web3 experiments. One of their most recent and novel experiments is called WalletRoulette:

https://walletroulette.xyz/

The keen eyed among you may notice the similarities to the famous application we all know and (love) Chatroulette!

Unlike Chatroulette which is largely filled with grotesque male body parts on camera, WalletRoulette leverages XMTP — The open protocol for secure web3 messaging to enable users to login with their crypto wallets and chat with other crypto users 30 minutes per day at random times. Think BeReal mixed with Chatroulette. I think it’s pretty fun and unique but I’m biased! reach out to Pol or Noe if you’d like to learn more.

That’s it from me this Monday. I promise to try to keep each newsletter short and sweet with a highlight on areas of the market that may get overlooked.

Disclaimer

The Content in this and all Monday musing posts is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. I may hold positions in assets mentioned. Nothing contained in these posts constitutes a solicitation, recommendation, endorsement, or offer by the author or any third party service provider to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing in the Site constitutes professional and/or financial advice, nor does any information on the Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. The author is not a fiduciary by virtue of any person’s use of or access to the Site or Content. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other Content on the Site before making any decisions based on such information or other Content. In exchange for using the Site, you agree not to hold the author, its affiliates or any third party service provider liable for any possible claim for damages arising from any decision you make based on information or other Content made available to you through the Site.

Pokémon gotta catch em all

Did you know that after Mario, Pokémon is the best ever selling game in the world and that as recently as in 2017, the Pokémon Trading Card Game had an 82% share of Europe’s strategic card game market. Why is this game still so popular 30 + years since its original release? Does it have something to do with humans innate propensity to collect things?

Humans have collected things since the dawn of time. Carl Jung argued our desire to collect is a genetic predisposition which has its roots from our hunter gatherer ancestors. Our most capable forefathers who were best able to hunt and survive would live on and pass these traits through generations. Evolutionary theorists suggest that mans ability to collect things was a signalling mechanism to attract future mates.

So why am talking about Pokémon and divulging the psychological theories for why humans innately collect things?

Well, something happened in 2021 in crypto that those of us deep in the space the last few years were probably quite surprised about. It wasn’t a better, more inclusive financial system that put crypto on the radar but instead digital JPEGs. Right click copy pasters in max pain as 2D pixels on the blockchain exchanged hands for millions of dollars. But why did pictures of Apes and Punks resonate with normies more than any other use case?

Digital status = IRL status?

Is the desire for status a fundamental human motive?

The sociologist Thorstein Veblen coined the term conspicuous consumption to explain the human desire to acquire goods and services as public displays of power and status.

The extent to which you care about your standing in society varies person to person. The most confident among you will likely postulate you care not what others think of you or whether you have a fancy job or a nice car but I’m afraid to tell you that you do care. How do I know this about you? well, more specifically, Professor Cameron Anderson says you care based on a 2015 paper of hundreds of studies based on the topic over 70 years. Anderson defined status as comprising three components:

1. Respect or admiration

2. Voluntary deference by others

3. Social value

His findings showed that people with low status in society, their peer group etc… are at higher risk of depression, anxiety and even cardiovascular disease. Even if you don’t realise it, our aversion to low status drives us towards higher status.

Look across crypto Twitter and you’re unlikely to see 10% or more of human profile pictures. Instead you will see people flaunting their crypto status through their use of a CryptoPunk or a Bored Ape. Many crypto folk haven’t set their profile pictures to several hundred thousand dollar NFTs as ostentatious displays of wealth but instead as a symbol of their crypto nativeness. Whether knowingly or not, others will look up to these people as high status individuals with the logic that this person is a crypto OG and therefore what they say and do has high standing within the community.

As our digital identities become ever more intertwined with our physical ones, it stands to reason that our status within the digital world becomes ever more important — maybe more so than our physical ones.

The need for social belonging

Boomers won’t believe it but what it means to be social is no longer confined to face to face interactions within the meatspace. Even now, people of all ages spend a majority of time on their phones, laptops etc… engaging with others in a digital format. I would argue this is already the early signs of the Metaverse. As our identities, work and social lives continue to blur between the physical and digital boundaries, what it means to develop human connection is also shifting. As we saw with covid lockdowns and mental health, pure digital interaction likely isn’t the solution but that’s a topic for another conversation. However, what we must appreciate is that many digital anons whose name, gender, sex, race etc… we do not know yet many of us call friends. Boomers in disbelief.

However, despite an ever changing world, what makes us humans hasn’t changed for many years and our yearning for social acceptance and belonging is as strong as ever. In fact if you read the book ‘Social’ by Social Psychologist Mathew Lieberman, our need to connect is as fundamental as our need for food and water. He goes as far to say that when we experience social pain — a snub, a cruel word — the feeling is as real as physical pain.

By thinking of the above in context, it makes sense that we see such strength in crypto native communities that blend together this new digital and physical world with communities such as Friends With Benefits (FWB) and the Bored Ape Yacht Club (BAYC). Through owning their native token or NFT, users can gain entry into exclusive online conversations through discord and in real life parties and events globally. Again if we use Twitter as an example, BAYC profile pictures are common place and you will often see people follow other BAYC twitter users simply because they are part of the same community. Social belonging and community transported online in evidence.

Reflection of self

How I dress, my hairstyle, my instagram profile all tell a story of who I am or more likely, how I want others to see me. I recently changed my LinkedIn profile picture to a Pudgy Penguin (see image at the beginning) in some form of protest against the cringeworthy cesspit that is LinkedIn. Why did I do that? well on a subconscious level its a form of protest against the old system but more specifically it’s my allegiance to crypto and web 3.0. Our possessions, traditionally physically but more increasingly digitally (those who have spent thousands on in game items in fortnite etc… will understand) reflect how we want people to see us. A paper titled ‘Possessions and the extended self’ by Russell Belk explains how Ruthie Segev at Jerusalem College of Technology found evidence that selecting and buying gifts for friends helps adolescents achieve a sense of identity independent from their parents. Further, research conducted in the 1980s made the finding that the more young men saw their cars as extensions of themselves, the more trouble they took to wash, wax and care for them.

It makes sense then that as we spend more time online, what it means to express ourselves, becomes ever more important in a digital context as it previously has been in a physical context. With NFTs, we have the ability to own our digital items for the first time ever. Will the digital flex become more important to zoomers than the physical one? among a sub crowd of early enthusiasts, it already has.

The above paragraphs are just some holiday season musings about why NFTs might have resonated with normies backed up by some much smarter academics than myself. Let me know your thoughts and remember — WAGMI.

Dear family, I hope this finds you well. First of all, I am safe. A little battered and bruised but we fight on. I am one of the lucky ones for I largely managed to avoid (at least directly) the fall-out from FTX. Others were not so lucky so we must do our best to support all of those in our industry at this time.

I know your friends have been asking for a simple explanation of what happened. Many have written about the situation and rather than be the 500th person to explain it, I thought I’d point you to this excellent thread here from Jason Choi about this week’s events. Instead, I thought I would spend my time sharing a simple note of why FTX is not crypto and how this and other high profile events in 2022 are not possible in the fully public on-chain world we are trying to champion.

I promised not to explain the FTX situation but we need to set some definitions and context. FTX was a centralised exchange (CEX). Binance, Coinbase and other well known exchanges also fit into this category. They are simply a marketplace that allow you to buy/sell assets. In this case crypto assets, however the asset is not important and FTX could have allowed you to buy and sell bananas for all intents and purposes. The world I champion and bore you about every time we speak is the decentralised world. This is TRUE crypto. Applications built on public blockchains such as Ethereum that are open source and where every transaction is verifiable on-chain and can be seen and validated by anyone through a block explorer such as Etherscan. We use the term ‘DeFi’ to describe financial applications built on top of public blockchains. The DeFi equivalents of centralised exchanges are called decentralised exchanges (DEXs). Examples include Uniswap, SushiSwap, CoW Swap and others. We seem to like food and animals in crypto but that’s a story for another time.

CEX: FTX, Binance, Coinbase (built on traditional financial rails)

DEX: Uniswap, SushiSwap, CoW Swap (built on top of public blockchains such as Ethereum)

At its core, DeFi is building a parallel and improved financial system on top of public blockchains. This Messari article explains it succinctly:

Today, the financial system (composed of banks, financial institutions, etc) mostly consists of centralized database systems littered with rent-seeking middlemen, high fees, and hold-ups. With DeFi, closed financial systems can be transformed into an open financial economy based on open-source protocols that are more accessible, with fewer intermediaries, and more transparent. Since these new financial protocols utilize smart contracts, they are both programmable and interoperable (are built with similar technical standards that enable them to easily communicate with each other).

FTX vs DeFi

Three huge differences can be cited here to help explain how this saga could NOT have happened in DeFi.

#1 — Customer deposits

While many of the facts are still surfacing in the FTX drama, it is widely understood they were using $10bn of customer funds to allow their sister hedge fund Alameda Research (also started by SBF the founder of FTX) to undertake risky trading strategies. This is outright fraud. This simply would not have been possible in DeFi. For one, DeFi applications do not hold customer deposits full stop. DeFi and crypto is fully non-custodial. This means that you and only you have access to your funds as you control the private key to your account. Dex’s such as Uniswap CANNOT do anything with your funds. It is written in the smart contract code. This code is open source meaning anyone in the world can see it and scrutinise it. This is not the case for centralised businesses and exchanges such as FTX.

#2 — Asset transparency

It is estimated that Alameda has 56 wallet addresses with which they use to trade and store their tokens. The beauty of the blockchain is we can quickly search these wallet addresses to understand the exact amount of tokens that Alameda owns and therefore the subsequent impact if they were to sell them into the market. See the below from Lookonchain.

#3 — On-chain vs off-chain borrowing

While it is unclear exactly the amount of bad debts FTX and/or Alameda has in the ‘real’ world (estimated to be over 1 million creditors) we can quickly identify their exact payment obligations on-chain. Here is good summary of their on-chain liabilities. In an extension of the transparency benefits of #2, a search of all their addresses through a wallet aggregation platform such as Zapper would uncover all this information. The current off-chain situation is a black box.

During the FTX saga and the subsequent market movements, DeFi worked exactly as designed. Below you can see that Alameda had staked $49.6m of the FTX token ‘FTT’ as collateral in the DeFi lending platform abracadabra.money. When the value of the FTT fell below the required collateral requirements, the loan was liquidated and paid off.

The important part is highlighted in this excellent thread from Re7 Capital that demonstrates how despite the chaos, DeFi platforms continued to process transactions and liquidations. No down time.

Robert Leshner is the founder of Compound protocol, a money market DeFi protocol built on top of Ethereum where users can lend and borrow assets. His Tweet highlights how the the open transparent DeFi protocols governed by code are far superior to the black box approaches inherent in current financial infrastructure.

Buying a house

Bear with me as I try to explain this using the real estate market. Imagine you are in the market for a new home and you have two viewings lined up. One house you are able to go inside, you can touch and feel everything and importantly you are able to have experts come in and also confirm this fact. Let’s say even you have thousands of professionals looking at this house everyday and verfying the gas does indeed work and there’s no mould etc.. I mean you would feel pretty confident that the house is pretty much a secure buy right? What about the second house, let’s say you can only look at the house from the outside and gain a small peak through some of the windows but apart from that you have to trust the agent and home seller that everything is as advertised. And we all know better than to trust a real estate agent (sorry to you folk reading this). Which house would you feel more comfortable buying and living in? Number one all day of course! that’s the difference between DeFi and open source blockchain applications vs centralised applications. Did that make sense?

Where does this all leave us?

Exhausted for one. Angry as well. But more importantly, despite it being hard to be positive right now it only further reaffirms what we have been fighting for and advocating this whole time. While the media paints crypto as a shadow economy used to finance crime and the like, true crypto i.e. the open protocols described above are the polar opposite. They are open books, readable and accessible to all in which examples such as FTX simply are not possible. So we must dust ourselves off, purge bad actors from the space and importantly work with and educate the right people to continue to build a better, fairer financial ecosystem for all.

While the above tweet is peak engagement farming, it fails to grasp the fact that the price of Bitcoin has had many seeming bubbles and bursts yet each year gains more adoption and more antifragility. Bitcoin and crypto more generally now is Lindy. The Lindy Effect is the phenomenon that the older something is, the longer it’s likely to be around in the future. Why does Nouriel and his other boomer economist friends fail to grasp crypto and more widely the power of technology?

It’s because as humans we are conditioned to think linearly and not exponentially.

Linear chart = bubble?

Log chart = mass adoption?

Deriving from mathematics, the term ‘exponential’ or ‘exponential growth’ explains the rate in which as something grows, its rate of growth becomes faster over time. The most simple and well known example often touted in self help finance books and YouTube channels is compounding. Play around with this compounding calculator and you’ll get the picture: https://www.nerdwallet.com/banking/calculator/compound-interest-calculator

You know who else loves compounding, our crypto enemy Warren Buffet:

My favourite illustrative example of the power of exponential returns can be traced back to a fable about the origins of the game of chess. Legend has it that Paal Payasam invented the game of chess and presented it as a gift to the emperor of India. The emperor was so impressed that he insisted he reward the man for his gift. Paal requested to be paid one grain of rice for the first square on the board doubling for each square i.e. two for the second, four for the third and so on. Without hesitation the emperor agreed and it wasn’t until later that the emperor’s treasurer pointed out that to supply all the rice requested would be such an astronomical amount that it would end up covering the whole of India to a depth of over 50 feet.

I believe this chess example is most poignant as it points to our human nature blindspot to the power of exponentials. We have evolved to think linearly and incrementally.

“Technology is exponential, but humans are not” (Gerd Leonhard)

Another helpful example was shared with me by my good friend Rory:

A lily pond, so goes the French riddle, starts with a single lily leaf. Each day the number of leaves will double: 2 leaves on the second day; 4 leaves on the third day; 8 leaves on the fourth day; etc. If the pond is full on the 30th day, on which day is the pond half full?

Answer: Day 29

As humans we are accustomed to linear series of events. We are born, we grow, we die. The sun rises, it sets. I could go on. Technology has changed all of that and as such we must learn to think exponentially or risk getting left behind (sorry Nouriel). The most well known theory of exponential growth is Moore’s Law, named after Gordon E. Moore who published his ideas in 1965 when he was Co-founder and Chairman of Intel. His theory was that computers become smaller, faster, and cheaper with time, as transistors on integrated circuits become more efficient. More specifically that the number of transistors on a microchip doubles about every two years, though the cost of computers is halved. Moore’s Law has been a driving force of technological change up until this modern day.

We can’t discuss exponential growth and technological change without also mentioning Metcalfe’s law. Ever wonder why network businesses such as Apple, Amazon and Facebook (Meta) command such astronomical market caps? or wonder why Warren Buffet didn’t buy these stocks until very recently?

From a value investor lens these network effect businesses don’t make sense. Many of them have astronomical P/E ratios and other relative valuation metrics. Benjamin Graham proponents in disbelief.

The answer is humans are extremely bad at extrapolating exponential growth functions and as such see these technological marvels as ‘bubbles’ or fads.

Metcalfe’s Law states that a network’s impact is the square of the number of nodes in the network.

Image I had a phone and no-one else. Well, that would be pretty useless right? Now imagine my friend got a phone, that would be better but there’s still only one connection being made. However, as we scale the number of phones linearly, the number of connections scale exponentially where with only 12 phones we have 66 connections.

Consider the example of Uber. The value of Uber is proportional to the strength of its network i.e. that is to say the number of drivers and users in the network. This is known as the bootstrapping problem. With web 3.0 and token incentives, we might have the best shot yet at cracking this problem but the details of that argument are for another post.

What is important to take away here is the fact that network businesses have fundamental value that are are difficult to apply to a traditional linear framework or valuation techniques. If web 3.0 protocols are inherently network businesses, they will make tech stocks look like a drop in the ocean!

If we look at Web 2.0 businesses as largely enclosed garden networks i.e. Meta vs Amazon then Web 3.0 is one open network. We have Interest Rate Swap protocols like Voltz built on top of Aave and in the future will likely see new protocols built on top of Voltz and so on. The open source, composable nature of web 3.0 protocols and the interplay and cross pollination of users and use cases will lead to both valuations as well as dynamic new use cases which will blow web 2.0 out of the water. But sure, NFTs are a scam and crypto will be dead soon right?

Zoom out, focus on user metrics and adoption KPI’s and question the so called ‘experts’. Use these new protocols and make your own mind up. Adopt an exponential mindset to life.