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I really like Bloomberg’s “Odd Lots” podcast. The hosts are pretty good (Tracy and Yes), and they consistently bring in amazing guests (readers may remember the Zoltan Pozsar-inspired Reserve Asset 3.0 article on an “Odd Lots” podcast).
Well, in this Monday’s episode, “Odd Lots” had Sam Bankman-Fried (SBF). He is probably best known for his excellent hair, but he also founded the crypto exchange FTX. He ranks among the richest in crypto, and given that he studied physics at MIT, probably one of its most talented (whatever that means). On the podcast, he compared crypto- “yield farming” to a “box” that allows you to withdraw more money than you put into it.
This quote hit me like a ton of bricks, but then it added a blow to the venture capital investment approach that annoyed me. His view of venture capital is shared by many, but that view has been clouded by the introduction of crypto. I am not saying that the SBF is necessarily wrong. What I suggest is that crypto venture capital … it’s … just … not really … venture capital.
That (and maybe more …) below.
– Georges Kaloudis
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I’m a bitcoin. According to the internet purist’s set of rules, that means I have to completely avoid altcoins and “crypto”. But honestly, it’s boring.
I’m not boring, so I’m mind the hell of a landscape with “crypto this, NFT that and all blockchain” inspired by Bitcoin. Part of it means I listen when SBF speaks. I want to zoom in on two specific things he talked about in the podcast mentioned in the intro: 1) The Box and 2) venture capital.
On the podcast, Matt Levin (any newsletter writer’s hero) asked the SBF to provide “an intuitive understanding of yield cultivation”.
Sam replied with:
You start with a company that builds a box … they probably dress it up to look like a life-changing, you know, world-changing protocol that’s going to replace all the big banks in 38 days. Maybe for now, ignore what he’s doing and pretend he’s literally not doing anything. It’s just a box. You can then put a token in the box and you take it out of the box. Okay, you put it in The Box and you get an IOU token to put it in The Box, then you can swap that IOU with the token.
Sam Bankman Fried
Ok … a strangely simple example with a slightly cynical tone: The box seems a bit pointless, a tech-enabled piggy bank.
In about five minutes with an internet connection you could create such a box and such a token, and [decide] that it should be worth $ 180 depending on how much you put into it. In the world we are in, if you do, everyone will be like, ‘Oh, box-token. Maybe it’s fat. Then it appears on Twitter and it will have a market value of $ 20 million …
Sam Bankman Fried
Then dividend farming starts and The Box starts distributing tokens as interest payments to people who put tokens in The Box.
Let’s say the total amount in The Box is $ 100 million and it pays out $ 16 million a year in X tokens, a return of 16%. That’s pretty good. So people add a little more. And maybe it’s going to happen until there’s $ 200 million in The Box … And now all of a sudden everyone’s like, wow, people put $ 200 million in The Box Box! It’s a pretty cool box, right? For example, this is a valuable box, as evidenced by all the money people have apparently decided to put in The Box. And who are we to say they are wrong?
Sam Bankman Fried
Uh … who turned up the heat here? This is a devastating bid for dividend farming that you would only expect from its harshest critics. That it came from the mouth of one of the richest in the field of crypto was surprising. SBF stated in essence that dividend management consists of:
Step 1: Put some money in the coffers.
Step 2: Wait.
Step 3: ???
Step 4: Profit.
I have nothing more to add as I think these quotes are pretty much sufficient on their own. I wanted to write about these quotes to emphasize that individuals need to exercise caution when deciding whether or not to participate in yield breeding. Your performance could simply be based on nothing but The Box. Which may be fine as long as you understand it and are okay with it.
Read more: What is yield breeding? DeFi’s Rocket Fuel, explained
Crypto Venture Capital vs Venture Capital
After talking about dividend farming in the episode, the SBF answered a question about how he thinks “institutional money or a quasi-type venture capital” found the next big thing in crypto. . The SBF offered to take it further and respond to how he believes venture capitalists have found the next “everything they intend to invest in.”
You get a strange process. Venture capitalists see what all their friends are talking about. And their friends keep talking about this company or this token and they start FOMO [fear of missing out-ing] saw their LP [investors in the venture capital fund] is like, yo, have you ever earned us a lot of money from this company or this token? And the answer is no, we have not invested in it. But that’s not a good answer considering the question your LPs have just asked. So instead you’re like, oh boy, you want to be excited about what we’ve done and / or want to do. And then you will find a way to get into that token and / or business.
These are bizarre processes like the one that ultimately are like shaping venture capitalists’ investments in traditional stocks and in cryptocurrencies.
Sam Bankman Fried
Again. Cynical. But despite all my personal cynicism, I do not completely agree with SBF here. I think even though he tried to take a stand on venture capital in general, he still offered his crypto-venture capital thank you. Because crypto-venture capital and traditional venture capital are different.
Venture capital is a form of equity investment that targets startups and start-ups in new industries. Once a venture capital investment has been made, the five- to 10-year process of growing, developing and operating the business begins. Only then will venture capitalists and their LPs make a comeback. Rinse and repeat. Venture capital funds have a long-term time horizon just like private equity and private credit funds.
Crypto-venture capitalists invest in tokens when they are not investing in stocks of companies operating in space (companies like Coinbase). And when they do not step in early in presales, they step in later when their LPs ask if they have invested in certain projects (as suggested by the SBF).
This model is not really venture capital. If a token that a VC investor buys after an LP has requested it increases the price, the VC investor can reap profits by selling on the open market, perhaps after years, but sometimes after months.
This is one of the places where crypto-token venture capital differs from traditional venture capital. The illiquidity of traditional venture capital investment liabilities is part of the reason why investors expect “good” returns; they take a risk by locking their money inside for at least five years, and investors feel they have to be paid for that risk.
With token investments, crypto-venture capitalists can go in and out of trades just as easily as hedge funds. That was what I think SBF described, but it is not venture capital.
And that’s just one of the differences. There is much more that can be written that deserves attention. For example, there is likely to be a level of FOMO ‘in traditional venture capital driven by the huge amount of capital that has been raised in recent years in the pursuit of investment. There is also something to be said about the fundraising numbers announced by token venture capitalists, but that’s for another time (and maybe another author).