On today’s episode, NLW breaks down a slew of stories that reflect different aspects of the crypto industry:
- Billionaire John Paulson doesn’t like crypto
- FTX US acquires LedgerX
- Syndicate DAO raises $20 million
- Layer 1 battles with Ethereum and Solana
- Vintage Bitcoin-based “Rare Pepes” get repurposed and sold on OpenSea
- Treasury trying to add MORE rules for crypto reporting
“The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Malte Mueller/Getty Images, modified by CoinDesk.
What’s going on guys, it is Tuesday, August 31 and today’s news is wildly emblematic of the full breadth of the crypto industry today. So, I thought it’d be good to go through each of these stories and give them some context. And let’s start with one of the most classic tropes in this industry, an “old rich guy who doesn’t get it” story. One of the interesting things about hedge funds and venture investors is that oftentimes, one really big contrarian bet that pays off can solidify an investor’s reputation for a very, very long time. John Paulson had one of those bets: betting against the housing market in advance of the great financial crisis. That position ended up netting him in his investors something like $20 billion, which is very clearly a career-defining bet. However, it hasn’t been quite as good since then. At peak in 2011, Paulson managed $38 billion, that was down to $9 billion by 2019 when he shut down his hedge fund and started managing his own money, an estimated $3.5 billion instead. This is not to scoff at a $3.5 billion fortune, but simply to point out that Paulson has proven himself to be pretty firmly in the camp of one really good call, which perhaps takes the sting out of his recent comments on Bloomberg Wealth with David Rubenstein about crypto.
The setup to that combo is one many Bitcoiners in particular will resonate with. Basically, he says that an expanded money supply is going to drive inflation. His bet, however, big-time, is gold. He’s backed it for years and this apparently is finally its moment. Crypto, on the other hand, he says will “Eventually prove to be worthless. I wouldn’t recommend anyone invest in cryptocurrencies.” Santiago Santos said on Twitter: “It’s hard to know how much is luck versus skill in investing, unless you can win and lose on purpose. To this day, I doubt my ability. Here’s Paulson, who got a tip from a Deutsche Bank trader to short housing, poor track record since. Won’t be as lucky this time with crypto.” Messari’s Ryan Selkis was a bit snarky here: “John Paulson must be better than about 30 crypto investors and entrepreneurs have now leapfrogged him in net worth betting on gold versus digital gold. The financial internet and the user-owned economy at this point is record-shattering Boomer energy.” What a savage and true phrase: record-shattering Boomer energy.
Next in this cavalcade of industry reflective stories, an institutional story. As we well know by now, the initial catalyst for this bull market was the surge of institutional interest in bitcoin in the wake of last year’s COVID-19 crisis. This was, of course, embodied in Paul Tudor Jones’s “Great Monetary Inflation” thesis, which became a blueprint for so many hedge funds and institutional investors to get into bitcoin last year. We were initially buoyed and excited by the new institutional offerings and interactions that started sprouting up. MicroStrategy and Square and Tesla putting bitcoin on the balance sheet, all of these major banks and investment houses launching bitcoin products, NYDIG, this show’s sponsor working with smaller banks around the country to offer bitcoin directly in people’s checking accounts. Still, there are some who’ve been hoping for more new products. In particular, a Bitcoin ETF. The big question has been regulation and getting regulators comfortable with this emerging space on that front.
The interesting news today is that FTX U.S. has agreed to acquire LedgerX, one of the few exchanges with some key derivatives licenses for the United States. I won’t say much about this one because for disclosure, I work with FTX on marketing. Instead, I’ll simply point to CEO Sam Bankman-Fried’s tweets, which I think tell the story pretty clearly. He writes: “This is probably one of the most exciting announcements we’ve ever had. FTX U.S. plus LedgerX. It’s been incredibly exciting getting to know the whole LedgerX team and watching them and our team work together on a common goal, one of the most exciting goals in the crypto ecosystem. We’re excited to work with the CFTC on innovating in the U.S. crypto derivatives space in a regulated, understood manner. Common ground between regulators and industry is the foundation of safe, sustainable innovation.”
Back to our big list of stories, it’s not just institutionally recognized investment opportunities that are making news today. It’s also new crypto native forms, notably DAOs. Syndicate DAO announced that it has raised a $20 million series A backed by the likes of Andreessen Horowitz, Alexis Ohanian, Snoop Dogg and many others. Another disclosure for you, I was an investor in Syndicate DAO’s community round where they raised $800,000 from about 100 people a few months ago. For those who aren’t familiar with DAOs, I loved this description from Cheyenne Ligon at CoinDesk, who wrote: “DAOs are basically shared bank accounts on the blockchain with tools meant to facilitate group decision making.” That’s pretty much it. And I’m bullish, because it seems pretty obvious to me that in an internet native world, there’s going to be something between a Facebook group or a Discord server, and an LLC. Also, I think organizing around shared financial decisions is just super obvious, a key human social primitive.
Syndicate’s goal is to make the tools for building these sorts of resource coordination DAOs radically easier, and in doing so, opening them up to new communities. Their earliest DAO experiments have been focused on groups historically excluded from venture capital, including black and female founders. What’s more, the team’s vision is about more than just capital in the crypto space. One of their founders said: “So, not only a protocol for investing in venture capital or other forms of private equity, but to also serve as a general purpose protocol for things like grant making, nonprofits or donations.” Basically, as I said, it’s a bet that resource coordination and supporting others with money is a fundamental human social primitive that can use an update.
Still not close to done though, are we? Nope, nope, nope, nope. Let’s talk Layer 1 battles. First of all, in the Ethereum camp, Arbitrum from The Scaling Solution announced a $120 million raise and also launched its main net. For the “explain it like I’m five,” here’s how The Block describes them: “Arbitrum is a Layer 2 scaling solution that promises to handle many more transactions than Ethereum at lower costs, it processes transactions on a side chain that uses optimistic roll-ups technology and then regularly settles them in batches to the main Ethereum blockchain.” Arbitrum is one of two big Eth scaling projects, with Optimism being the other one, and the need for that is clearly on display right now.
NFT mania has caused ETH gas prices to absolutely skyrocket, and frankly, getting resources into scaling solutions isn’t the only impact. For weeks, ETH competitor Solana has been the talk of the crypto Twitter town, especially when it comes to that all important crypto technology, NGU, or “number go up” technology. On that front, there was no one coming close to SOL right now. Solana is up 70% this week, 250% this month, and it’s getting in big on the NFT game and seems likely to attract even more attention in the weeks ahead. Now, as for this show, if you’d like me to dig in a little bit more on these Layer 1 battles, let me know. One of the things that I think is most interesting is that one of Ethereum’s main critiques of Solana is that it isn’t decentralized enough. That’s the same critique that Bitcoin levies against Ethereum. The question is of trade offs and what sufficient decentralization really is. Bitcoin has made a clear choice in weighing decentralization and the properties that it brings, including censorship resistance, higher than just about anything else. What are the differences and approaches of these other Layer 1s? If that is something that’s interesting to explore, let me know.
Next, though, what about an NFT story and this one tickles my history fancy just right. In the mid 2010s, a bunch of digital collectible cards called Rare Pepes, based around the Pepe the Frog meme, were minted. They were built on blockchain and traded on this tiny little platform, Counterparty. In May of 2017, four years ago, investor Fred Wilson wrote about getting into Rare Pepes on his ABC blog. He tweeted: “About the coolest thing ever. What happens when you combine a crypto asset with a meme and a trading card?” and then wrote, “So why do I think this is interesting? Well, for one, it shows the utility of a blockchain in action. You can buy, sell, hold and transfer digital assets, and they have value and are traded for other digital assets like BTC in an online global marketplace. Anyone can make one of these cards and if they are determined to be rare, they become digital assets with value attached to them. It also shows how a game can be built on a blockchain with virtual goods and characters and more.” Not bad for a guy writing more than four years ago.
Anyway, back to today. Apparently, a bunch of the owners of these things are using an old software protocol called Emblem Vault to reconfigure them for Ethereum, and then listing these wrapped Rare Pepes on OpenSea and they are making bank. One that has a Pepe version of Dorian Nakamoto, who Newsweek called the inventor of Bitcoin back in 2016, sold for 111 ETH or around $352,000, another sold for 149.99 ETH, around $500,000. So clearly, there’s some value to both history and memes. But with all of this happening, someone has to rain on the parade, right? It can’t just all be wild “number go up, things happen,” can it? Don’t worry, we still have our lovely Treasury Department.
And honestly, I swear at this point I get hives anytime I see Jerry Brito from Coin Center tweet. Last night, he wrote: “Treasury wants to add more crypto reporting requirements in the reconciliation bill,” with the hand covering face emoji. Here’s the section he excerpts: “The Biden administration is urging Democrats to include more rules for tax compliance on cryptocurrency transactions in the upcoming $3.5 trillion budget reconciliation package after a provision in the Senate passed infrastructure bill spurred a major industry lobbying offensive to limit the reach of new mandates. The administration is hoping to add to the filibuster-proof package requirements that cryptocurrency businesses report information on foreign account holders, so that the U.S. can share information with global trading partners, according to an administration official who wasn’t authorized to speak for the record.”
The thing that I want to point out and conclude with, in addition to just the insanity of this being the way that rulemaking happens, which I’ve covered so much, I barely need to reiterate here, but just for the record, it’s f**king insane. Anyway, I want to point out what seems to keep coming up over and over and over again about where some of the real fear is, from the end of the article on rollcall.com that Britto cites, here the last two paragraphs: “Treasury is preparing guidance aimed at quelling some industry and lawmakers’ concerns about the reach of the bipartisan infrastructure bill’s cryptocurrency rules. The department plans to reiterate the rules won’t apply to certain parties that industry has warned don’t have the information on coin traders that the IRS would seek, such as minors. Treasury has pushed against limiting rules from applying to decentralized and person-to-person exchanges, a matter the department believes should be left to the regulatory process to avoid court challenges and to give flexibility for crafting rules that aim to avoid business shifting to exchanges that lack reporting obligations, according to the administration official.”
The fascinating thing to me is that it’s just so clear where this battleground is going to be. And it’s going to be DEXs. It’s going to be peer-to-peer trading. These battles are going to be big, and if you think it’s quiet now, that’s just because these teams are absolutely gearing up for an insane fall. So strap in, get ready. Enjoy your last beautiful gasp of summer. And we’ll be here to keep track of everything that’s coming down the pipe as it happens. For now though, like I said, such a reflective day of what’s going on in this industry and I appreciate you hanging out as always. Until tomorrow guys, be safe and take care of each other. Peace!