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JOHN QUINN: Hey, I'm John Quinn.
I'm the Chief Investment Officer and general partner of Decentral Park Capital.
I've been in the crypto space since 2015, when I co-founded Storj Labs, which is a decentralized
cloud storage provider.
Prior to that, I was doing traditional finance.
I was an investment banker at Credit Suisse and Fleming's and I also did global markets
at Deutsche Bank, and also ran a $200 million private equity fund.
What is defi?
Defi is short for decentralized finance.
If you can imagine a financial primitive like lending, or trading, or insurance, that financial
primitive is being boiled down into a protocol, much the way that TCP/IP is a protocol for
the web.
Within these protocols, they do one specific thing, but it really brings supply and demand
together to interact with the protocol directly without any middlemen.
We like to say that the middleman has been replaced with middleware.
What makes it so interesting as well is it's open source and it's transparent, and its
highly inclusive, such that anyone with a mobile phone and an internet connection can
participate in this.
Especially important when you think about it, there's 1.7 billion people globally that
are unbanked.
Now, there's 3.5 billion people that have smartphones, which has doubled in the last
eight years.
With the advent of SkyLink, you can see a future where everyone's going to have a smartphone,
everyone's going to have internet, and they're going to be able to have banking services
through decentralized finance.
What we believe and part of our investment thesis is what we're seeing now is basically
the building of the backbone of the global financial network that's going to touch every
human on the planet.
How do you value defi projects?
We're seeing a Cambrian explosion of projects in this space.
And this is being buoyed by a large amount of capital flowing into the space.
Total value locked is a metric widely used to measure how much collateral is in the ecosystem,
went from 1 billion in January of last year to about 15 billion by the end of the year.
Now, over 40 billion, we believe to over 200 billion by the end of this year.
Basically, each protocol has a different value capture mechanism.
Some of these assets are more-- or some of these protocols are more asset driven, and
some of them more cash flow revenue driven.
And so, it really depends on the type of business it is to basically understand the value capture
mechanism within the protocol.
What we do is basically, we look at the on-chain data to be able to measure what the acid flows
are and the cash flows.
We ingest all that on-chain data, and then do financial models on top of that, that basically
mimic what you'd use in traditional finance, whether that be an asset-based methodology
or a cash flow-based methodology.
So, it depends based on the protocol.
Do we see product market fit for defi?
I think that when you start to see tens of billions of dollars flow through an ecosystem,
and each one of these has code that ostensibly is hackable and they haven't been hacked,
then I think you are really starting to see product market fit.
Once we get to 100 billion, I believe in the second part of this year, it'll be even
April 22 nd
, 2021 - www.realvision.com 2 The Expert View - Crypto: Decentralized Finance
(DeFi): The Future of Finance more clear, but don't kid yourself.
This is very early days.
This is perhaps 1992-1993 internet days.
We're in the very early stages.
Only 1.5 people globally have interacted with smart contracts using defi.
If you're looking at this video, you're one of the very first people to know about this.
One of the great things about defi is all of the on-chain data ----
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JOHN QUINN: have interacted with smart contracts using defi.
If you're looking at this video, you're one of the very first people to know about this.
One of the great things about defi is all of the on-chain data is transparent and visible
to anyone.
We basically ingest all of that on-chain data into our business analytics software infrastructure
that we've built over the last two years, and basically do overlays of that on-chain
data, whether that be an asset based valuation methodology or a cash flow based methodology,
in order to basically use what are real cash flows and real assets flowing through them
to establish what is fair market value in our view, for what that token should be worth
based on the value capture, based on the growth and the like.
Then we see where the price is trading, because all the assets that we're targeting are traded
assets.
They may be illiquid, but they are traded.
And so, there's a price.
Then we're looking at basically the fair market value versus the price, whether there's a
compelling opportunity for us to get involved or perhaps to exit a position.
What are some financial primitives being carried over into defi?
Well, last year, we had some screaming winners in the lending space.
We were early investors in Ave and earned about 36 times our investment on that.
We were also early investors in Nexus Mutual, which is an insurance primitive that also
returned over 15x.
Within the broader finance ecosystem, you can think of that being composed of hundreds,
if not thousands of financial primitives.
What we're seeing is the replication of the traditional finance ecosystem, now in de-finance.
Defi represents hundreds of financial primitives that will be built over the next year, two,
three years, and they're composable.
And so, part of the network effect between these protocols is that you can plug one into
another, Lincoln Logs and build other things.
Once these protocols have billions of dollars running through them and have not been hacked,
then you can have some certainty that they can't be hacked.
Then you can basically build financial products that compose multiple of these primitives.
Ethereum basically was the first layer-one chain that offered smart contracts, which
basically enabled people to build applications on top of that, and unfortunately, is a victim
of its own success.
We've seen the theoretical limits be reached in terms of throughput.
Now, you're seeing massive gas costs and congestion in that network.
Other protocols, chain of chains have stepped into the fray.
And they're basically helping do computations off-chain, or through other chains, and then
connect back into the Ethereum network.
You're seeing chains like Binance, which are centralized their chain.
Then you're seeing things like Polkadot, which enable people to basically utilize the Ethereum
network but without the congestion, without the high gas fees.
Decentral Park Capital is a digital asset manager.
We're basically wrapping up our first one and launching our second fund.
It was born from friends of mine and business associates that were seeking to get exposure
to digital assets, folks that I've made money for in the past, and has grown to a team of
six people, and probably 10 by the end of this quarter.
It's been rapid growth in terms of our performance and assets under management.
We currently manage about $60 million, and we're targeting $75 million in this upcoming
close.
This fund is a 24-month fund for decentralized finance.
We're going to be investing in assets, we're targeting assets that have market caps under
200 million.
These are assets that we believe that have 10x potential within the defi space.
There are assets that are multibillion-dollar assets within defi.
We were investing in those last year before they were multi-billion dollars.
What we're trying to do is identify the new tokens, the new financial primitives that
have the potential to reach multibillion-dollar capitalizations, but to get into them, sub-200
million How does Decentral Park Capital monitor and
analyze developments in the ecosystem?
It's drinking out of a firehose.
It's really difficult.
There's now over 8000 tokens.
And so, it's challenging.
We've built a proprietary technology that basically helps us to ingest on-chain data,
and basically track that data and basically build our models for fair market value relative
to the current price based on on- chain data.
That's been really helpful because for any given financial primitive, there might be
5 or 10 names that are competing in that space.
Then we can basically plug all of them into our business intelligence platform, and basically
measure one against the other and see who's winning and start to make bets within that
peer group.
We're investing solely in liquid tokens.
Generally, these tokens have not been listed on Coinbase's or Binance's, but we were trying
to basically identify them, and they're currently traded on decentralized exchange, DEXes like
Uniswap and SushiSwap.
We're basically buying them.
We've developed proprietary technology to buy them using traditional finance tools like
TWAP and VWAP to get into relatively illiquid names.
We're targeting very early stage, but liquid tokens.
So, it's a contrast to venture capital, we might have a seven-year hold period before
you have liquidity.
Here, you have liquidity on day one, but the liquidity might not be able to get in in large
numbers.
In what ways has the market changed compared to 2020?
2020 was really where defi started to get product market fit, went from 1 billion to
15 billion in total value locked, how much collateral was flowing through the ecosystem.
Now, we're seeing it going from 15 billion, are already over 40 billion here this spring,
and it looks like it's going to go well over 100 billion to 200 billion by the end of this
year.
Because there's been so much capital flowing through it, there's more and more teams, there's
more and more opportunities, people trying to fill in all the financial primitives that
haven't already been spoken for.
Then there's people that are building applications using these protocols that are almost like
Lincoln Logs, you're adding lending, plus insurance, and then creating a new financial
product.
It's quite interesting to see how the Lincoln Logs are coming together and building financial
products that have more application to a wider audience.
What valuation methods do you use?
We've built a business intelligence platform that we affectionately call The Whopper.
There was a computer in a movie called Wargames with Matthew Broderick.
That was a riff on that.
But The Whopper basically allows us to ingest on-chain data and be able to then do an overlay
of financial valuation methodologies on top of that on-chain data.
We spent a lot of time and we've been developing this over the last two years, and we're constantly
refining it.
What it really does is helps us surface opportunities, and things that we should be paying attention
to.
When something's growing 20%, 30% week-over-week, then it's going to pop up on The Whopper.
Then we're going to say, okay, what's going on here?
How does it look relative to its peer group?
Why is this happening, and then perhaps we will allocate more capital towards those opportunities.
A lot of this is predicated on product market fit and growth.
This is really just a tool for us to be able to do the quantitative, okay, how are things
moving?
Then on top of that have a qualitative overlay, okay, who's the team?
What's the tech stack?
How are they addressing this market opportunity and the like?
Basically, The Whopper is a very important tool, a proprietary tool for our investment
process.
What is your investment thesis?
Our thesis is that what we're seeing now is the underpinnings of a new global financial
network.
The connotation of that is quite massive.
If you think about it in terms of the worldwide web and the implications that had on multiple
industries, the music industry, being one of the most poignant and how that disintermediated
labels.
If this does play out, and we're starting to see early signals of traditional finance
companies going in and seeking yield within the defi ecosystem, we think that we're just
really in the beginning or maybe in the fourth or fifth pitch or the first inning, to put
it in baseball terms.
We think it's very, very early days and this could be a multi trillion-dollar industry
within 5 to 10 years.
Are you investing in defi outside of the Ethereum blockchain?
We're definitely making investments outside the Ethereum ecosystem.
We're targeting other layer-one opportunities, where they basically they have financial primitives
similar to those on the Ethereum network.
We're really just looking for things that basically create value to their users, and
that are showing strong signs of product market fit but we're blockchain agnostic, we're trying
to figure out what is actually a value, and what is showing demonstrable traction.
Do fiat currencies ever go away?
I don't think that they fully go away, but I do think they're being disintermediated
by this technology.
Look at the US dollar, with 85% of global trade being done in dollars and the US economy
representing 20-ish percent, and China taking over the first spot in global GDP, is that
sustainable long term?
I don't think so.
China has been very, very successful building out their technology, their tech stack for
blockchains, called BSN, the Blockchain Services Network.
And they're going to use that for their trade finance with all their trade finance partners.
Fiat is being digitized and so there's central bank digital currencies like the digital Yuan,
that are going to compete with non-sovereign digital currencies, like blockchain and Ethereum.
I think they're going to co- exist.
But I do think that having a currency that's not beholden to sovereign government on code
and math does offer a lot of benefits as we've seen now with Bitcoin having over a trillion-dollar
market cap, and basically representing digital scarcity.
Yeah, I think that fiat currencies as long as there's aircraft carriers enforcing shipping
lanes, there's going to be a fiat currency.
But I do think that digital currencies are going to start to edge away on some of their
turf.
Will traditional finance be disintermediated?
I've spent a lot of time in investment banks.
I spent close to a decade in companies like Deutsche Bank, Credit Suisse, Fleming's.
I've seen how the sausage is made, and it's not that pretty and there is a ton of waste
within those organizations.
What is happening with defi, it's basically metal on metal, where supply meets demand,
and all of that waste is compressed into the protocol and there's a value capture within
the protocol that basically the token holders of that protocol participate in.
I do think that traditional finance will be disintermediated partially from this, and
they will co-op the technology over time.
What we're starting to see is that Fortune 500 companies are giving agents the ability
to put their money, their Treasury money into defi to generate yield, to basically pull
out crypto, convert back to dollars and give back to their balance sheet.
That's just the first stages of that happening, really in a world devoid of yield, you can
see that happening, basically because somebody has to-- there has to be a supply, liquidity
pools and the like in order to facilitate trading.
People have a lot of liquidity, but they don't have any way to generate yield.
This is an opportunity for people to generate yield on that liquidity.
And I think that will be increasingly attractive for traditional finance companies.
Defi and basically decentralized finance has the potential to be as disruptive as the internet
was to retail and the music industry to finance, as these intermediaries are disintermediated.
How much do you expect the space to grow over the next few years?
If you have a macro view that we're in a risk-on right now, then you want to basically be invested
in-- because we're investing in the riskiest part of defi, the early stage of defi.
Our view is then it's risk-on until the Fed starts jacking rates and the Fed has indicated
that they're going to jack rates in 2023.
We're really
trying to fit in to that timeframe and basically have a vehicle for people to express that
view, to basically capture outsized returns in that window of opportunity before the Fed
jacks rates and it becomes risk-off.
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