Santiago Roel Santos: Blockchain Is the Next Internet-Scale Shift for Every Single Business
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Every business is going to use this technology over the next 25 years. Like full stop. Every business interacts with the financial services system. That is going to be a huge transformation. It's a secular trend. In the same way that you were sitting there in early 2000s coming out of a dotcom crash and every business was like, "Hey, what's this internet thing?" Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. >> Ladies and gentlemen, welcome back to Wealthy. I'm Chris Perkins, managing partner and president at Coinfund. And today I am with my friend Santiago Santos, the founder CEO of Inversion Capital. Welcome, sir. >> Chris, thanks for having me on. >> So, you've been around the crypto space for a very, very long time. Um, would love to get a little bit about your background for the listeners. Uh, and also what got you into crypto in the first place. >> Yeah. U as traditional background as it gets, I uh started my career at JP Morgan and their investment bank in New York. Um, and that's when I started investing in Bitcoin. I did not tell Jamie Diamond. Uh, but you know, I back then it was just Bitcoin. And growing up in Mexico, I I had this frustration. You know, as an investor, you always wonder in your day-to-day interactions like when there's friction, there's opportunity and certainly moving money cross border, you know, you'd be doing large M&A deals at JP Morgan and transaction might fall apart because the wire didn't get in time. >> Yeah. and then seeing it at the micro level of individuals sending money you know US Mexico and it you know Western Union and other remittance operators taking an 8% 9% take rate and you're like you're sitting there and like every part of your life is just simplifying with technology but not not finance and so that really for me was the first foray into crypto only Bitcoin [clears throat] and you know Bitcoin back then was $50 so it was 21 million Bitcoin $50 big Bitcoin's market cap was less than a billion dollars and Western Union at the time was god I think it was like eight or 10 billion market cap and so it's like okay well this could be a 10x it's venture scale I'm going to take a bet on it seems pretty interesting it works and over you know over the many years that I've invested in crypto um from there I went to a growth equity fund investing in enterprise software open source technology that's where Ethereum was coming to being and I I started discovering sort the aperture that crypto's had, which is it's not just Bitcoin. It's not just digital gold. You can really use smart contracts and blockchain to fix a lot of the friction that a lot of businesses face. And so, it's just been pretty remarkable the last, you know, 12 plus years of seeing the aperture of this technology, the applications of it. And it almost feels surreal now where you're seeing from Black Rockck to JP Morgan to Stripe really implement this technology. And it's not just a pilot. It it's real. uh for the same and for the simple reason that it's now regulated. So I'll I'll pause there but of course now I I'm really expressing that thesis which is uh starting a private equity fund to acquire traditional businesses and retrofit them with this technology. That's fascinating and and yeah, I want to get into inversion uh a little bit. And so it sounds like that the thesis is you got this amazing technology. It can make the world a much better place because the way things you know you are in traditional finance, I was in traditional finance. Like there's it's just so clunky. There's so much friction. There's so much cost. And it sounds like the thesis with inversion is that you're going to take this new technology, this blockchain technology, and you're going to use it to address all those across, you know, a multitude of of companies that that don't understand the efficiencies they can derive from blockchain technology, VV payments, collateral, etc. Is that the thesis? >> Yeah, I'll give you an example. So back a couple years ago when I was a pairy I was a partner there we were very heavily investing in decentralized finance stuff like stable coins um tokenization and I would call my friends at JP Morgan or at hedge funds and I said okay guys what if you had a system where you had transparent collateral that you can inspect 24/7 365 of your counterparty would that not be great and they're like that that would be amazing you know because right now you know we don't have visibility or you're at, you know, a credit fund extending credit to a company that is audited but is double pledging and there's not a lot of transparency. And so when you frame it like that, I think finance people get really excited about this technology. But the minute you drop the blockchain lingo, they're like, "No, no, no, no, no. That's that's just not real. Like, we're never going to implement it." So that that's sort of been the state where crypto's always been, which is people I've always found over the last better part of like four or five years since like 2020, I think a lot of enterprises started paying attention to this technology. They weren't maybe public about it, but they were certainly paying attention like, hey, the only departments that keep growing at the bank is back office and compliance. Might there be a way to streamline that with a smart contract? Most people are really surprised to know that JP Morgan's had a team, a pretty big one, exploring blockchain since I believe it was 2015 like and now they have Kexus and you know they're they're using uh you know they deploy their own token for clients to trade 24/7. It's like let's just peel it all back. The financial system predates the internet. It is clunky. It is antiquated. It's not very interoperable and it has a lot of freeze and friction. whether you see them or not, different story. But um you know, I I think that's where you're seeing a huge wave of companies really be public in this administration because yeah, you know, it was a 180 on the regulatory environment. >> Yeah, 100%. We can get into that, but let me tell you my thesis and let me know if I'm right. I think Coinbase did something incredible with Bass. And there's an opportunity now. And when I was in Tradfi, I would spend hundreds of million, like literally hundreds of millions of dollars on tech that was awful because remember that stuff's really expensive, too. It was a big loss center. >> Yeah. >> But I think there's an opportunity now with blockchains, sequencer fees, and appropriate treasury management to turn your tech stack, your settlement layer from a from an L to a P. You can actually make money, >> right? I I talk to institutions all the time. They don't get it. And I'm like, dude, I I can turn this L to a P. Like, and I look at like derivatives market, CME, they're they went very long into Google. They're paying them zillions of dollars, you know. Meanwhile, Coinbase is using B. They're making money on base. And it's not perfect apples to apples. But is that the big unlock here is that you're turning your tech stack into a P, not an L? Uh, very much so. And we are that's the way we're architecting inversion. So, we tell people we're a private equity fund. So we'll invest companies and we'll cut costs and improve unit economics with blockchain. A lot of it is tokenization and stable coins, but we also have our own chain and we're settling all of that flow of our portfolio companies in our own infrastructure. So to give you another example, you have uh historically portfolio support services at KKR uh call it capstone or Bane maybe has Bane consulting and they monetize a bit better but every major private equity fund has internal consulting and ops people that you're sort of at a cost center which you have to do to drive value and you're just monetizing that. But now we have own the analogy is we're buying cars. We're making those cars more efficient. We're swapping the engine. The chassis kind of stays the same because the infrastructure is invisible, but the inner workings of that car are made more efficient. So all of a sudden, the car you bought for pennies on the dollar runs better, has better fuel economy. And oh what, we also own the highway >> and the highway is much faster. And by the way, the more cars you put on that highway, we own the toll booth. And every time the more cars are on that highway, meaning the more portfolio companies that we have, the more transactions that we capture. Historically, private equity funds have only owned the cars and have had to sell the cars after 5 10 years. We never want to sell the cars because we own the highway. So, so Dante, you you famously chose Avalanche as your highway uh that you just described. Um can you walk I mean there's so many opportunities you know to to choose infrastructure but then also to invest in infrastructure you know why did you choose Avalanche u for the listeners it's as out of the box as it gets and I don't want to spend 10 years building a highway I want to deploy the highway in a reliable safe and as quickly as possible and Avalanche very much checks those three vectors the technology to build a highway has come a really long way. You know this better than anyone in your seat at coin fund. You know now we're at that point where infra there's been over a hundred billion invested in infrastructure the likes of Ethereum all the L2s Salana Monad Avalanche and so that's great for us to want to deploy the highway. I'm not looking to do anything other than have a very reliable highway for the type of cars that I'm buying. >> A lot of that is payments, right? And so >> I think that's something that a lot of people have not really updated their priors on because, you know, infrastructure historically, yeah, there's been a lot of developments over the last decade that I've been investing in crypto. I funded a lot of these highway builders, if you will. >> Yeah. >> That's increasingly commoditized. It takes five minutes to launch a chain. >> Yeah. >> During this rant of mine, I could have launched a chain. Now the question is we've solved the supply which is block space. >> Y >> is increasingly a commodity. What we haven't solved is the demand. Like okay, where are the cars? Because we have you've seen those pictures of North Korea where they have or China where they have massive highways built for military tanks. And then back in the 80s of Deng Xiaoing in China, you had bicycles there. So what are the highways going to be used for? Now, of course, China's developed so much that those highways are actually being used in production, but there has demand. There needed to be capitalism there. >> And I think that's sort of the state of crypto. I if I were to further analogize and push it further is we've built these cities with mega highways and there's no cars in them. >> There quite literally is no cars in these highways. >> Let's talk about your cars before we get into apps. Um, so as you look at various companies, you me mentioned payments. That's just an obvious vertical. >> Yeah. >> Walk me through the investment verticals that you're focusing on to bring them on chain to drive those efficiencies. >> Pretty much every company, especially if you're doing crossber trade or paying merchants or paying even salaried workers, can save 200 up to 600 basis points by switching over to this infrastructure. Now, that might not seem a lot if you're a software business with 70% operating margins, but that's a lot for a business that has six 7% operating margins. And that's really the business that we like. They're deeply unsexy. They're legacy businesses. And we go in there and we say, okay, we kind of do an X-ray of a business. So we've looked at now many many verticals but the ones that we like are for instance companies that have some sort of financial relationship with the end user and we're adding on other finance modules to that meaning blockchain technologies collapse the cost to serve financial products to your user. So what does that mean in practice? So we looked at a payroll alone company. They have access to 500,000 government workers. Those workers need factoring. they need, you know, 6 months to 18month loans. The APR on that 65%, the default rate's really low. That business um can we can lower their cost of capital by issuing debt on chain. So, internet capital markets like there's there's an interesting component. There's some companies that just don't have access to capital markets. You can issue them on chain. The other element is really doing what we like to call uh embedded finance and closing the loop, right? Because that company can do so much more for that end user. They're just extending loans. Well, what if you created a digital wallet for that user? What if you allowed them to pay in stable coins? What if, you know, and then you layer on some of these financial services? And so your LTV, the lifetime value of that customer really grows in a very meaningful way. Uh we've looked at remittance operators. Most people would say, "Wow, isn't that going to go away? Like stable coins seem like they're going to totally eat in that business. It's going to go away." And this is kind of a core thesis that we have at Inversion, which is there is a lot of value that you can capture by understanding the nuances of how the technology works. Because most of what you hear is people oversimplifying how this technology is going to solve everything. And that's not the case. >> You have to Eventually, the world of of bits need to interact with the world of atoms. And in that intersection, there's a lot of value to be had. So, we're a men's operator. If you go look at the transcript of Western Union or even PayPal, most analysts would would would argue, hey, look, there's this thing called stablecoin. Stripe is getting in the mix. Some companies are adopting it. People are going to send money cross border and it's going to cause zero with a stable coin. So, Western Union, the tur 9% is going to cease to exist. And we say, wait a minute, not so fast. Why not so fast? Because at the end of the day, consumer behavior never changes. People always pay for convenience. Point number one. Point number two, a business like Western Union can save a ton >> on the payment that they're issuing for last mile sourcing of liquidity. And by the way, they can hedge more. They don't have to hedge as much when that money is in transit. And so when we look at the cost structure of that business, you can radically compress that with a stable coin. And what's the difference? They already have distribution. They already have trust. You walk around the street, you ask people, "Hey, how are you thinking of sending money back home?" Guarantee you five, six, seven out of 10 people in my immigrant populations in town will say Western Union and Money Gram. And what's the best part of all this? What multiple do you think I can pay for Western Union today? >> I don't know. >> Four times P ratio. >> Okay. >> Four times. Now, >> price really dictates the return that you get. If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hardass Assets Alliance, at hardassetsalliance.com. That's hardassallalliance.com. >> I can think of few global citizens like yourself. And the thing about blockchain technology is that it's instantaneously global, right? Those highways you talk about, doesn't matter where you live, you can drive, right? >> Yeah. And like you know you you're you're Mexican, you live in Europe. I think you're educated in the US. So you have an incredible perspective. H how do you think about the opportunity set globally? Is this going to advantage? You're spending all your time looking for deals in Asia, Latam or is it, you know, is this going to be a US victory? You know, the president wants to make this the crypto capital of the world. C >> talk me through the global paradigm here. >> Every business is going to use this technology over the next 25 years. like full stop. Every business interacts with the financial services system. That is going to be a huge transformation. It's a secular trend. In the same way that you were sitting there in early 2000s coming off of the dotcom crash and every business was like, hey, what's this internet thing? We're not we don't really see it. And then you had software as a service. And then every business like was like, oh wow, we can we should be using a CRM. We should be using this software. And and I think this is one where pretty much every business that we inspect has these systemic friction payment processing chargebacks, cash conversion sucks. A lot of the fees there because because you know your question about the US is really interesting because if you ask consumers there, they'll tell you, hey, sounds interesting, but I don't relate to it. I have JP Morgan, I have zel, I have re I have Venmo, there's Revolute in Europe, fees are kind of zero. What What are you talking about, man? like I I really just don't relate to anything that you've said over the last 16 minutes that we've been talking. And I said, "Well, you may not see the friction. You may not be charged by it, but someone is paying for that. So, we want to go find the businesses that are paying for that and buy those because those are really the companies that exist everywhere. By the way, in the US, um in in Europe, we spend most of our time in the US. We actually most most of our fund is going to be deployed in US-based companies that are doing international trade um have some sort of you know uh payment flow that is crossber um and so that's really the opportunity that we see um for instance we've spent a lot of time looking at telco businesses based in the US but with a heavy concentration of migrant populations telco is great because you already have that user you understand their cash flow because they'll pay you and kind of you have a long history to extend credit >> and all of those are sending money back home. >> Yep. So, you've been talking you've been talking through the lens of private markets, right? You come from venture side. Um, now you're running a PE firm >> and for a lot of listeners, it's hard for them to access private markets. Yeah, they can sign up and be an LP in one of your funds for sure. Um, but you know, we also are looking at an issue. We have an SEC chair who's now saying, "Hey, I'm going to make public markets great again." And the fact of the matter is is that in the US public markets have been really struggling, right? I think 81% of companies in the US with $100 million in revenue, they're private, right? >> Crypto feels with the liquidity that you can achieve through through crypto day one, that's been an exception to this rule where retail can ape into crypto tokens. Sometimes they get burned, sometimes they do very well. Early Bitcoin adopters did very very well. >> But there seems to be this friction between public and private. And some people believe that you can take, you know, even some folks are even tokenizing like PE um interests to try to make them liquid and make them accessible to the public markets. >> And you know, obviously you're you're operating private markets. How do you think of that? Um >> I guess that interface like how is this balance is you know it feels like we're not in stasis right now. >> You know, tell me about how these markets are going to develop between private and public. And for people listening, it sounds like right now everything you've talked about, maybe they can go buy the stock of some of these companies, maybe they should buy Avalanche. How should they start thinking about getting access to this market? >> Uh, well, you're absolutely right. A lot of the wealth creation historically has happened on the private side. You have some of the fastest growing companies. Even a company like SpaceX is going to IPO at 1.5 trillion. I mean, gosh, you just did not have that in the 80s, 90s, early 2000s. Most companies would go private at a, you know, 1 2 3 4 5 billion valuation. I think Amazon IPOed at sub5 billion valuation. Now you have tokens that are out of the gate trading at that uh you know low float but nonetheless. >> Yeah. >> So the world wants access to high growth. It always is paying that. And so I think you're going to continue to see this blurred line of what is public and private. My distinction is just liquidity. >> Yeah. >> Like you can have a public company with a low liquidity. You can have a private company with a ton of liquidity like buying stripe equity or buying ramp equity or buying SpaceX equity. It's poly market equity. It's it's it's private but there's a lot of liquidity. There's a lot of demand behind it. So I think um the access point that you're talking about is probably the most important thing which is crypto as a whole over the last since 2014 that Ethereum came around and it created this capital formation vehicle where anyone in the world could buy ETH and then get access to this everexpanding ecosystem of projects. ETH was just sort of that substrate currency that was create detonated this capital markets formation and in a way that is explosive like mo you know the the reality is most people elsewhere ex US ex Europe don't have access to the US stock market don't have access to even basic financial products so crypto comes along and says hey you can buy these stable coins or uh whatever token of choice and that is going to give you access to something that probably feels better than the current limited set of investment products. I'll give you an example. People in China, I believe, have very limited access to what they can invest in. That's a feature, not a bug. Why? Because even in Mexico, most pension funds can only access kind of local markets. Why? Because they the government wants to make sure that they have a constant buyer for their paper. And so you see kind of these weird phenomenon where real estate in China is really propped up. You have massive construction and that you know eventually kind of corrects. But that's also that that's sort of a reminder like money wants to be open. Money wants to move freely and finally you have a technology that allows you to do that through natively the internet. And that's sort of always been the mega bull case for blockchain which is it is the settlement layer of the internet. You probably talked about it at length here. I would say earlier this year, you saw companies primarily like Robin Hood say, "Hey, we're going to tokenize private company." >> Yeah. >> Shares. I think it's a bit of a misrepresentation. You're not d having direct access to the cap table. It's kind of like a derivative. And anytime you're not anytime you're interacting with derivative, there's a lot of counterparty risk. there's just a lot of fine print that your average consumer is not going to read. So I think we we the potential is certainly there. Um there have been now companies like Superstate which is like Robert Lesnar's you know he wants to >> you know the the other mega trend that you probably will see is depending on the regulatory environment but it sort of makes sense for if you're a company like Uber probably makes sense to give shares of Uber stock to your most active passengers and drivers because it's a marketplace and a marketplace is you know you know incentive ive design is super powerful and so I think we've been constrained by these archaic rules and regulations that have prevented companies from you know in a perfect world you'd have a a better mechanism to reward your most loyal customers in the way of a stock but you know there's limitations to that but I think that's changing I think now how quickly that would change unclear but um but even private companies could issue you know slices of their equity to customers and improve their business model and you know scale faster. >> Yeah, 100%. I think these accredited investor rules are going away. I agree with your point on Robin Hood where yeah, they took a bunch of secondaries, they put it in an SPV and then issued tokens on that SPV. It's not really clean. >> It's a receipt. >> Yeah. And I think in time you're going to see this line between private markets and public markets blur even more. You talked about a couple of regions and like the one thing we've seen to date that highway is only being run by dollars, right? It's US dollars. is US dollar stable coins. You know, FX is a $7 half trillion dollar a day market. Is the endgame here going to be that the internet's run by dollars and like, you know, the circles of the world, the tethers of the world, you know, are are the play? Uh, how do you think about that? >> You're right on on all of that. I think a lot of the world would rather have a dollar than the local currency. But um I don't think that I I don't you might have more deposits be sitting in stable dollar denominated stable coins, but but a but perhaps even more conversion into local currency in the last mile, right? If you Chris are traveling to Europe, you have your credit card and that credit card represents, you know, some sort of you have dollars in your bank account and then when you swipe your card, you know, you either can elect how to do that you you know and and most of the time you should be selecting that you're going to pay in euros and your bank gives you a better conversion rate. Um, so I think the same will be true. You're probably going to see way more volume as the you know, mind you, a lot of the world is sitting in an informal economy that is cashbased. So yeah, the more you digitize that, you just have way more flow. And you know also will depend on local rules and regulations like most countries like we've looked at places in Latin America where they recognize dollar denominated stable coins. >> Yeah. >> Um but there's also local stable coins. So at that point I think governments might just impose some sort of threshold where hey look if you're a citizen you might you can't have more than 10,000 or 100,000 in dollar denominated stable coins. you have to have the rest in in local currency, peso, real, euro. Um, and and that's okay, too, right? You know, that you're just going to have way more FX flow. >> Yeah. So, you know, right now you're focused on the PE side of of the business. You're looking at acquiring companies. You're fitting them out, but prior to that, you were a crypto investor and you still are a very prolific crypto investor. You've also recently been very critical about some of the valuations um that we're seeing in the space. I would love to understand as you underwrite crypto investments that you know even ones that are public, right? Like tokens that people can acquire. >> How do you think about underwriting them? What goes into your mind? What are you looking for? Uh what are some of the red flags that you see? And I agree with you. There's plenty of fluff in various projects. We see it over and over again in crypto. But walk us through how you underwrite crypto projects. >> Um as a public investor or as an early stage investor. >> Start whichever you prefer. Like I probably easier for public actually like and I know you're not a liquid you're not a liquid guy but you have been talking a lot about liquid liquid valuations. >> A large part of my family office is liquid right you know investing in early stage eventually have a token. >> Yeah. um look early stage because a lot of people said why why all of a sudden are you being critical evaluations like I said well you know every day that you're holding a position is a day you're buying it so you constantly have to reandwrite your thesis now I guess part of my this all started by me saying okay you have a very friendly regulatory environment where's the demand again where are all the cars in the highway we built >> and that's something that we punted for so long because we could have pointed to the lack of regulatory clarity and a bunch of roadblocks. But as soon as that gets removed, it's like okay, you open the the floodgates crickets >> and everything most of the transactions in these chains are speculation based. So, so again just how do I evaluate any business and this goes back to my days at Sage View which was investing in enterprise software. I look at the world through unit economics like what is the customer acquisition cost? What is the nature of that revenue? Is it recurring? Is it reoccurring? and what's the margin on that? And so the argument that you that you hear is Ethereum is going to capture a lot of this flow. Okay, you say, okay, well, what what is Ethereum ETH that I'm owning? What does that represent? And there all of these systems produce a bunch of fees. And so I ultimately look at the world of like how predictable is that revenue stream? Um is it durable? Is it going to how does it behave through cycles? And you know, you basically do a discounted cash flow analysis. you say okay what what's the value of this and then you compare it to what else you can be holding in your portfolio right >> right >> because you know a lot of times we just don't have to buy these things you could buy public stock you can buy Nvidia you can buy S&P lowcost index right and so I think that that's concretely Ethereum is a $380 billion asset um yeah anyone can buy it you know there has some sort of mimemetic component and some defensibility some modes but it only re re generates one at most two billion of revenue and that's sort of been the cap for that system. And so you're sitting there and saying gosh should I be paying 380 times price to like revenue and the answer to that is most definitely not >> and especially when you overlay some of the dynamics in crypto which is infrastructure is increasingly commoditized. It's a very competitive space and it's only tied to speculative activity. So, you know, I am definitely looking at I'm not a macro guy, but I do relative to a recurring like an enterprise software contract is multi-year contract. Companies are paying for that no matter what and there's very little churn. The problem with crypto is we built these highways but it's only one type of activity which is drunk drivers that are willing to punt on tokens and they don't show up. you know, the longer and that's fundamentally the problem that I think most people in this industry don't appreciate that sense of urgency. >> Yeah. I think some of the challenge is that the the foundation, the regulatory foundation, the the concrete's still hardening and and institutions just don't show up overnight. In fact, I know guys who was like, "Hey, you know, regulators used to walk in my office and they say, "What are you doing in crypto?" And I'd say, "I did nothing." And they would be they would smile and they'd walk out. He's like, "Now they're walking in, they're saying, "What are you doing in crypto?" And he's like, "Uh oh." like because he just didn't build the muscle memory. He doesn't have the technologist. They would like to use it, they couldn't. So, I think there's piece of timing um to that. People don't move overnight. >> And so, it's like it's interesting because you're looking at it through an infrastructure play. How am I going to use this technology to optimize companies? >> Um where my next question is like obviously you chose Avalanche. Have you looked at that through an underwriting lens through a liquid investment as well? Are you eating your cooking through that or does it not matter? That's just a pure tech play. >> It's a tech play. >> Chris, when you select um >> when you select u AWS or Asia, >> do you care about the stock price of Microsoft or Amazon? >> Nope. >> Exactly. We will know that we've sufficiently matured and the concrete is hardened when we start making decisions for infrastructure without looking at the price. Of course, you look at the counterparty risk. Hey, is Google going to be around? Is Amazon going to survive? Is Avalanche going to survive? But the survivability of this technology transcends I think the stock price or the token price. I think as long as this I mean this is open infrastructure like no one really looks and says hey how is Linux survive like is it of course you have to care about is it being maintained as a repo is the technology good enough but the other element here is the technology is increasing like let's not forget this is open source technology and the world of open source is is is very much like a bizarre you can pick and choose whatever it is that you want interoperability is very strong and so all I care about when I'm using this technology is do I have enough guarantees that it is secure. >> Yeah. >> That you have a strong Lindy like has this system survived? Can this system credibly absorb? If I go and deploy a million cars on this highway, how many lanes is the the toll booth kind of uh system efficient? Is there going to be bottlenecks? Are there traffic lights? Is the concrete good? That's sort of the things to to overanalogize. But I would say where most people in crypto have probably overintellectualized is value capture of these systems. The highway is very much a volume play. If you are a total booth operator, you just want to make sure that there are tons of cars going in and out. Uh and you have to, you know, maintain the road and whatnot. But the problem is that in crypto you have lanes everywhere. >> Everywhere. And it's super easy to deploy the highway. >> That's right. All the time. >> Now, the only reason why I'm able to monetize the highway more is because I control I own the cars. >> I can tell the cars, hey, you need to go through this highway. You don't have any choice. And that sort of in the internet, most of the value got captured by people that own the cars. User aggregators. If you control a user, you just monetize a user in different ways. >> And and that's where I think like you can think of inversion as a pure the purest vertically integrated infrastructure play in crypto, which is we own the highway, we own the car. No one else kind of has that. And if for whatever reason the concrete, the asphalt, the any technology provider that we're using to make sure that the highway is sound and reliable and can support more cars, there's a ever expanding universe of service providers that we can go to. So as much as we we really like Avalanche, I think it's reliable, you know, it's we we did an RFP, we you know, we think that it provides, you know, very convenient out of the box. we don't have to think about, you know, overengineering that, but there's plenty of other solutions that we can employ and utilize and maybe strengthen that offering. And so, you know, our core business is finding the best businesses that we can go and acquire and make more efficient with this technology. We're going to work with and route all of those cars to the best technology providers out there as it relates to stablecoin issuers, deepend projects, um, tokenization platforms, credit platforms, money markets, AMMs, gaming companies, pretty much everything that's being built in real time we love because we're going to just curate the best experience and the best technology solutions for that specific company. How do you think about decentralization? Like I'm hearing a lot of centralization the thesis coming through. Um >> does that highway need to be decentralized? Do you care about that or do you just care about efficiency? And oftentimes decentral means less efficiency I would argue. >> Um it's a great question because for instance you have tempo which is stripes project along with paradigm. Um I think it will start off fairly centralized. you have an initial set of partners that very impressive similar to how Libra and Facebook kind of orchestrated that consortium right that would say hey we're going to develop this highway and there's going to be a bunch of players around it um I think I think decentralization is definitely important especially because you're moving money so you want to have sufficient guarantees that that techn that that people are not going to move the road from underneath you they're not going to all of a sudden block the road for no good reason. Um, but again, you have to comply to local speeding limits, KYCL, OFAC, you have to work with existing regulations. You can't just buy really fast or buy a car, make it super efficient and deploy it and then that car go at, you know, 300 miles an hour. Well, it's going to cause harm and risk. And so I think um I like to think of this decentralization as a spectrum. It's not sort of a binary state. It's not that you're decentralized and then you're centralized. It is are you providing sufficient guarantees that it makes the highway safer. And how you define safe I take a very pragmatic approach to that. I think is the end you like like Amazon did. Is the end user faster, better, cheaper? not super fast that it breaks, but making sure that whatever service you're providing, it shows up with incremental utility and you have to comply. You have to comply with speeding limits. You have to comply with sometimes you got to close a road and and and that's, you know, you have to have I I think like u Facebook kind of learn and YouTube kind of learned this the hard way, right? which is technology is like neutral, but it sometimes it can be used for nefarious, you know, child pornography and you people are uploading stuff on the internet that hey look like you're going to have to censor that and you have to kind of have to take an opinion on how this technology gets used and so that's where I draw the line like it needs to be safe it needs to be uh reliable and yeah it needs to provide sufficient guarantees so that if someone want comes to join your highway you're not going to maximally extract, right? But I will say I think it's self-correcting because if you become overly centralized, let's talk about an L2. You talk about sequencer feeds. Yeah. >> Pace, they're capturing all the sequencer revenue. >> That's a choice that they've made. Might there be a time where users at some point say, "Hey, listen. We're going to go and pack up our stuff and go elsewhere. We're going to go to Arbitum now or we're going to go to Salana." They can do that any day. And that's on Coinbase to kind of adjust in real time because it's going to be fiercely competitive. So I think more compet the the the silver like the what I'm trying to impress on you is I think this industry is becoming increasingly commoditized in the base layer. >> Yeah. >> If you are going to want to be very centralized and maximally extract, I think this goes back to the Jeff Bezos kind of which I've learned so much from which is your margin is my opportunity. >> That's right. So, fat thesis, uh, fat protocol thesis is dead. Time to focus on some apps and that's exactly what you're doing, man. Um, anything I should have asked you today? I mean, you got so much going on. Um, love listening to you. I encourage, you know, you host the Empire podcast, which is awesome. I listen to it every week. Um, anything else on your mind? >> Well, I I going back to your question of how I evaluate valuations. There there's a very interesting dynamic 1KX report. I think they did a fantastic job and they there's a very powerful statistic that reveals kind of what's happening in real time which is from a market stamp market share standpoint layer 1's account for 90% of the valuations in crypto. >> Yeah. >> So excluding Bitcoin it's like $ 1.5 trillion industry. L1's represent 90% of that >> but they only capture 16% of the revenue. Deep in applications capture the vast the rest of the revenue 82%. And they account for 10 less than 10% of the market cap. >> Yeah. And this is decentralized physical infrastructure. Um there's some amazing >> DeFi. I mean we share investments in companies like Geonet. >> Yeah. >> Uh there's a number of others. I mean look that I think is re very revealing the market. I think you could say maybe the market is efficient. Maybe we are missing a core component that from a valuation standpoint a lot of these networks have mimemetic staying power and social currency like Cardano, Ripple, Ethereum, Salana. There's an element of definitely social currency and brand in the same way that a company might have goodwill on their balance sheet. But as an investor, I just am not willing to pay too much for that goodwill. Certainly not 380 times price revenue. And so I do think that at some point that selforrects like at some point the market starts valuing and paying for cash flow and I think the you know the proof is on the chain right you're just seeing most of these protocols uh most of these apps capture DeFi and deepen projects capture most of the revenue and and I think the market eventually wakes up to that and especially as you have a more institutionalized flows coming into the space >> I think that's going to be the case um but you know I' I've been wrong since my days of Pari we're investing in DeFi which I could have told you that the top 10 composition of the top 10 projects by market cap would radically change and you still have Cardano there. You still have a lot of projects that just don't produce revenue. It's not a it's not a dig at them. It's actually quite impressive that they've been able to capture >> attention and maybe that's sort of the >> that should be the ultimate way to look at kind of how to underwrite these things. Just if you're able to capture attention, then that's really all that matters. and attention is really hard to capture especially in this ever kind of uh you know short attention span world. So I think it's going to be a very interesting thing. I I think the next 12 years as I said that the biggest takeaway probably from this conversation that I'm so excited now is I think the industry is finally at a really powerful inflection point. >> Yeah, >> it's like 2001. Every company's going to use this technology. You're seeing it every week and it's real. Like Clara just launched a stable coin. O just >> stripe is onboarding many many companies and the beauty of all this is most of the highways have been built. a lot of the technology to deploy the highway is being built and and really large companies are appreciating that and saying, "Huh, I can upgrade our car and deploy into this new highway and we're going to save all this money because we already have all these cars." And I was going to kind of let go of these cars, but now you're telling me that we can give them a new more juice and we can squeeze more out of this. And I mean, that's just that's explosive. you've seen nothing when it comes to adoption of crypto. >> I totally agree. Well, awesome, man. Really, really appreciate your time today. Love your insights. I learned a ton. And how can people reach you? >> Yeah, I'm on Twitter, Santiago Roel. And then if they want to learn about inversion, it's inversion_cap or inversionap.com. >> Thank you, Santi. Really appreciate it, man. >> Thanks, Chris. Appreciate it. Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.com/free. With markets hitting all-time highs, now is a great time to stress test your strategy and be prepared for what comes next. Thank you all for watching. We'll see you again next time.
Santiago Roel Santos: Blockchain Is the Next Internet-Scale Shift for Every Single Business
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Wondering how long-term tech shifts like blockchain fit into your portfolio? Get a free portfolio review with Wealthion’s endorsed …Transcript
Every business is going to use this technology over the next 25 years. Like full stop. Every business interacts with the financial services system. That is going to be a huge transformation. It's a secular trend. In the same way that you were sitting there in early 2000s coming out of a dotcom crash and every business was like, "Hey, what's this internet thing?" Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. >> Ladies and gentlemen, welcome back to Wealthy. I'm Chris Perkins, managing partner and president at Coinfund. And today I am with my friend Santiago Santos, the founder CEO of Inversion Capital. Welcome, sir. >> Chris, thanks for having me on. >> So, you've been around the crypto space for a very, very long time. Um, would love to get a little bit about your background for the listeners. Uh, and also what got you into crypto in the first place. >> Yeah. U as traditional background as it gets, I uh started my career at JP Morgan and their investment bank in New York. Um, and that's when I started investing in Bitcoin. I did not tell Jamie Diamond. Uh, but you know, I back then it was just Bitcoin. And growing up in Mexico, I I had this frustration. You know, as an investor, you always wonder in your day-to-day interactions like when there's friction, there's opportunity and certainly moving money cross border, you know, you'd be doing large M&A deals at JP Morgan and transaction might fall apart because the wire didn't get in time. >> Yeah. and then seeing it at the micro level of individuals sending money you know US Mexico and it you know Western Union and other remittance operators taking an 8% 9% take rate and you're like you're sitting there and like every part of your life is just simplifying with technology but not not finance and so that really for me was the first foray into crypto only Bitcoin [clears throat] and you know Bitcoin back then was $50 so it was 21 million Bitcoin $50 big Bitcoin's market cap was less than a billion dollars and Western Union at the time was god I think it was like eight or 10 billion market cap and so it's like okay well this could be a 10x it's venture scale I'm going to take a bet on it seems pretty interesting it works and over you know over the many years that I've invested in crypto um from there I went to a growth equity fund investing in enterprise software open source technology that's where Ethereum was coming to being and I I started discovering sort the aperture that crypto's had, which is it's not just Bitcoin. It's not just digital gold. You can really use smart contracts and blockchain to fix a lot of the friction that a lot of businesses face. And so, it's just been pretty remarkable the last, you know, 12 plus years of seeing the aperture of this technology, the applications of it. And it almost feels surreal now where you're seeing from Black Rockck to JP Morgan to Stripe really implement this technology. And it's not just a pilot. It it's real. uh for the same and for the simple reason that it's now regulated. So I'll I'll pause there but of course now I I'm really expressing that thesis which is uh starting a private equity fund to acquire traditional businesses and retrofit them with this technology. That's fascinating and and yeah, I want to get into inversion uh a little bit. And so it sounds like that the thesis is you got this amazing technology. It can make the world a much better place because the way things you know you are in traditional finance, I was in traditional finance. Like there's it's just so clunky. There's so much friction. There's so much cost. And it sounds like the thesis with inversion is that you're going to take this new technology, this blockchain technology, and you're going to use it to address all those across, you know, a multitude of of companies that that don't understand the efficiencies they can derive from blockchain technology, VV payments, collateral, etc. Is that the thesis? >> Yeah, I'll give you an example. So back a couple years ago when I was a pairy I was a partner there we were very heavily investing in decentralized finance stuff like stable coins um tokenization and I would call my friends at JP Morgan or at hedge funds and I said okay guys what if you had a system where you had transparent collateral that you can inspect 24/7 365 of your counterparty would that not be great and they're like that that would be amazing you know because right now you know we don't have visibility or you're at, you know, a credit fund extending credit to a company that is audited but is double pledging and there's not a lot of transparency. And so when you frame it like that, I think finance people get really excited about this technology. But the minute you drop the blockchain lingo, they're like, "No, no, no, no, no. That's that's just not real. Like, we're never going to implement it." So that that's sort of been the state where crypto's always been, which is people I've always found over the last better part of like four or five years since like 2020, I think a lot of enterprises started paying attention to this technology. They weren't maybe public about it, but they were certainly paying attention like, hey, the only departments that keep growing at the bank is back office and compliance. Might there be a way to streamline that with a smart contract? Most people are really surprised to know that JP Morgan's had a team, a pretty big one, exploring blockchain since I believe it was 2015 like and now they have Kexus and you know they're they're using uh you know they deploy their own token for clients to trade 24/7. It's like let's just peel it all back. The financial system predates the internet. It is clunky. It is antiquated. It's not very interoperable and it has a lot of freeze and friction. whether you see them or not, different story. But um you know, I I think that's where you're seeing a huge wave of companies really be public in this administration because yeah, you know, it was a 180 on the regulatory environment. >> Yeah, 100%. We can get into that, but let me tell you my thesis and let me know if I'm right. I think Coinbase did something incredible with Bass. And there's an opportunity now. And when I was in Tradfi, I would spend hundreds of million, like literally hundreds of millions of dollars on tech that was awful because remember that stuff's really expensive, too. It was a big loss center. >> Yeah. >> But I think there's an opportunity now with blockchains, sequencer fees, and appropriate treasury management to turn your tech stack, your settlement layer from a from an L to a P. You can actually make money, >> right? I I talk to institutions all the time. They don't get it. And I'm like, dude, I I can turn this L to a P. Like, and I look at like derivatives market, CME, they're they went very long into Google. They're paying them zillions of dollars, you know. Meanwhile, Coinbase is using B. They're making money on base. And it's not perfect apples to apples. But is that the big unlock here is that you're turning your tech stack into a P, not an L? Uh, very much so. And we are that's the way we're architecting inversion. So, we tell people we're a private equity fund. So we'll invest companies and we'll cut costs and improve unit economics with blockchain. A lot of it is tokenization and stable coins, but we also have our own chain and we're settling all of that flow of our portfolio companies in our own infrastructure. So to give you another example, you have uh historically portfolio support services at KKR uh call it capstone or Bane maybe has Bane consulting and they monetize a bit better but every major private equity fund has internal consulting and ops people that you're sort of at a cost center which you have to do to drive value and you're just monetizing that. But now we have own the analogy is we're buying cars. We're making those cars more efficient. We're swapping the engine. The chassis kind of stays the same because the infrastructure is invisible, but the inner workings of that car are made more efficient. So all of a sudden, the car you bought for pennies on the dollar runs better, has better fuel economy. And oh what, we also own the highway >> and the highway is much faster. And by the way, the more cars you put on that highway, we own the toll booth. And every time the more cars are on that highway, meaning the more portfolio companies that we have, the more transactions that we capture. Historically, private equity funds have only owned the cars and have had to sell the cars after 5 10 years. We never want to sell the cars because we own the highway. So, so Dante, you you famously chose Avalanche as your highway uh that you just described. Um can you walk I mean there's so many opportunities you know to to choose infrastructure but then also to invest in infrastructure you know why did you choose Avalanche u for the listeners it's as out of the box as it gets and I don't want to spend 10 years building a highway I want to deploy the highway in a reliable safe and as quickly as possible and Avalanche very much checks those three vectors the technology to build a highway has come a really long way. You know this better than anyone in your seat at coin fund. You know now we're at that point where infra there's been over a hundred billion invested in infrastructure the likes of Ethereum all the L2s Salana Monad Avalanche and so that's great for us to want to deploy the highway. I'm not looking to do anything other than have a very reliable highway for the type of cars that I'm buying. >> A lot of that is payments, right? And so >> I think that's something that a lot of people have not really updated their priors on because, you know, infrastructure historically, yeah, there's been a lot of developments over the last decade that I've been investing in crypto. I funded a lot of these highway builders, if you will. >> Yeah. >> That's increasingly commoditized. It takes five minutes to launch a chain. >> Yeah. >> During this rant of mine, I could have launched a chain. Now the question is we've solved the supply which is block space. >> Y >> is increasingly a commodity. What we haven't solved is the demand. Like okay, where are the cars? Because we have you've seen those pictures of North Korea where they have or China where they have massive highways built for military tanks. And then back in the 80s of Deng Xiaoing in China, you had bicycles there. So what are the highways going to be used for? Now, of course, China's developed so much that those highways are actually being used in production, but there has demand. There needed to be capitalism there. >> And I think that's sort of the state of crypto. I if I were to further analogize and push it further is we've built these cities with mega highways and there's no cars in them. >> There quite literally is no cars in these highways. >> Let's talk about your cars before we get into apps. Um, so as you look at various companies, you me mentioned payments. That's just an obvious vertical. >> Yeah. >> Walk me through the investment verticals that you're focusing on to bring them on chain to drive those efficiencies. >> Pretty much every company, especially if you're doing crossber trade or paying merchants or paying even salaried workers, can save 200 up to 600 basis points by switching over to this infrastructure. Now, that might not seem a lot if you're a software business with 70% operating margins, but that's a lot for a business that has six 7% operating margins. And that's really the business that we like. They're deeply unsexy. They're legacy businesses. And we go in there and we say, okay, we kind of do an X-ray of a business. So we've looked at now many many verticals but the ones that we like are for instance companies that have some sort of financial relationship with the end user and we're adding on other finance modules to that meaning blockchain technologies collapse the cost to serve financial products to your user. So what does that mean in practice? So we looked at a payroll alone company. They have access to 500,000 government workers. Those workers need factoring. they need, you know, 6 months to 18month loans. The APR on that 65%, the default rate's really low. That business um can we can lower their cost of capital by issuing debt on chain. So, internet capital markets like there's there's an interesting component. There's some companies that just don't have access to capital markets. You can issue them on chain. The other element is really doing what we like to call uh embedded finance and closing the loop, right? Because that company can do so much more for that end user. They're just extending loans. Well, what if you created a digital wallet for that user? What if you allowed them to pay in stable coins? What if, you know, and then you layer on some of these financial services? And so your LTV, the lifetime value of that customer really grows in a very meaningful way. Uh we've looked at remittance operators. Most people would say, "Wow, isn't that going to go away? Like stable coins seem like they're going to totally eat in that business. It's going to go away." And this is kind of a core thesis that we have at Inversion, which is there is a lot of value that you can capture by understanding the nuances of how the technology works. Because most of what you hear is people oversimplifying how this technology is going to solve everything. And that's not the case. >> You have to Eventually, the world of of bits need to interact with the world of atoms. And in that intersection, there's a lot of value to be had. So, we're a men's operator. If you go look at the transcript of Western Union or even PayPal, most analysts would would would argue, hey, look, there's this thing called stablecoin. Stripe is getting in the mix. Some companies are adopting it. People are going to send money cross border and it's going to cause zero with a stable coin. So, Western Union, the tur 9% is going to cease to exist. And we say, wait a minute, not so fast. Why not so fast? Because at the end of the day, consumer behavior never changes. People always pay for convenience. Point number one. Point number two, a business like Western Union can save a ton >> on the payment that they're issuing for last mile sourcing of liquidity. And by the way, they can hedge more. They don't have to hedge as much when that money is in transit. And so when we look at the cost structure of that business, you can radically compress that with a stable coin. And what's the difference? They already have distribution. They already have trust. You walk around the street, you ask people, "Hey, how are you thinking of sending money back home?" Guarantee you five, six, seven out of 10 people in my immigrant populations in town will say Western Union and Money Gram. And what's the best part of all this? What multiple do you think I can pay for Western Union today? >> I don't know. >> Four times P ratio. >> Okay. >> Four times. Now, >> price really dictates the return that you get. If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hardass Assets Alliance, at hardassetsalliance.com. That's hardassallalliance.com. >> I can think of few global citizens like yourself. And the thing about blockchain technology is that it's instantaneously global, right? Those highways you talk about, doesn't matter where you live, you can drive, right? >> Yeah. And like you know you you're you're Mexican, you live in Europe. I think you're educated in the US. So you have an incredible perspective. H how do you think about the opportunity set globally? Is this going to advantage? You're spending all your time looking for deals in Asia, Latam or is it, you know, is this going to be a US victory? You know, the president wants to make this the crypto capital of the world. C >> talk me through the global paradigm here. >> Every business is going to use this technology over the next 25 years. like full stop. Every business interacts with the financial services system. That is going to be a huge transformation. It's a secular trend. In the same way that you were sitting there in early 2000s coming off of the dotcom crash and every business was like, hey, what's this internet thing? We're not we don't really see it. And then you had software as a service. And then every business like was like, oh wow, we can we should be using a CRM. We should be using this software. And and I think this is one where pretty much every business that we inspect has these systemic friction payment processing chargebacks, cash conversion sucks. A lot of the fees there because because you know your question about the US is really interesting because if you ask consumers there, they'll tell you, hey, sounds interesting, but I don't relate to it. I have JP Morgan, I have zel, I have re I have Venmo, there's Revolute in Europe, fees are kind of zero. What What are you talking about, man? like I I really just don't relate to anything that you've said over the last 16 minutes that we've been talking. And I said, "Well, you may not see the friction. You may not be charged by it, but someone is paying for that. So, we want to go find the businesses that are paying for that and buy those because those are really the companies that exist everywhere. By the way, in the US, um in in Europe, we spend most of our time in the US. We actually most most of our fund is going to be deployed in US-based companies that are doing international trade um have some sort of you know uh payment flow that is crossber um and so that's really the opportunity that we see um for instance we've spent a lot of time looking at telco businesses based in the US but with a heavy concentration of migrant populations telco is great because you already have that user you understand their cash flow because they'll pay you and kind of you have a long history to extend credit >> and all of those are sending money back home. >> Yep. So, you've been talking you've been talking through the lens of private markets, right? You come from venture side. Um, now you're running a PE firm >> and for a lot of listeners, it's hard for them to access private markets. Yeah, they can sign up and be an LP in one of your funds for sure. Um, but you know, we also are looking at an issue. We have an SEC chair who's now saying, "Hey, I'm going to make public markets great again." And the fact of the matter is is that in the US public markets have been really struggling, right? I think 81% of companies in the US with $100 million in revenue, they're private, right? >> Crypto feels with the liquidity that you can achieve through through crypto day one, that's been an exception to this rule where retail can ape into crypto tokens. Sometimes they get burned, sometimes they do very well. Early Bitcoin adopters did very very well. >> But there seems to be this friction between public and private. And some people believe that you can take, you know, even some folks are even tokenizing like PE um interests to try to make them liquid and make them accessible to the public markets. >> And you know, obviously you're you're operating private markets. How do you think of that? Um >> I guess that interface like how is this balance is you know it feels like we're not in stasis right now. >> You know, tell me about how these markets are going to develop between private and public. And for people listening, it sounds like right now everything you've talked about, maybe they can go buy the stock of some of these companies, maybe they should buy Avalanche. How should they start thinking about getting access to this market? >> Uh, well, you're absolutely right. A lot of the wealth creation historically has happened on the private side. You have some of the fastest growing companies. Even a company like SpaceX is going to IPO at 1.5 trillion. I mean, gosh, you just did not have that in the 80s, 90s, early 2000s. Most companies would go private at a, you know, 1 2 3 4 5 billion valuation. I think Amazon IPOed at sub5 billion valuation. Now you have tokens that are out of the gate trading at that uh you know low float but nonetheless. >> Yeah. >> So the world wants access to high growth. It always is paying that. And so I think you're going to continue to see this blurred line of what is public and private. My distinction is just liquidity. >> Yeah. >> Like you can have a public company with a low liquidity. You can have a private company with a ton of liquidity like buying stripe equity or buying ramp equity or buying SpaceX equity. It's poly market equity. It's it's it's private but there's a lot of liquidity. There's a lot of demand behind it. So I think um the access point that you're talking about is probably the most important thing which is crypto as a whole over the last since 2014 that Ethereum came around and it created this capital formation vehicle where anyone in the world could buy ETH and then get access to this everexpanding ecosystem of projects. ETH was just sort of that substrate currency that was create detonated this capital markets formation and in a way that is explosive like mo you know the the reality is most people elsewhere ex US ex Europe don't have access to the US stock market don't have access to even basic financial products so crypto comes along and says hey you can buy these stable coins or uh whatever token of choice and that is going to give you access to something that probably feels better than the current limited set of investment products. I'll give you an example. People in China, I believe, have very limited access to what they can invest in. That's a feature, not a bug. Why? Because even in Mexico, most pension funds can only access kind of local markets. Why? Because they the government wants to make sure that they have a constant buyer for their paper. And so you see kind of these weird phenomenon where real estate in China is really propped up. You have massive construction and that you know eventually kind of corrects. But that's also that that's sort of a reminder like money wants to be open. Money wants to move freely and finally you have a technology that allows you to do that through natively the internet. And that's sort of always been the mega bull case for blockchain which is it is the settlement layer of the internet. You probably talked about it at length here. I would say earlier this year, you saw companies primarily like Robin Hood say, "Hey, we're going to tokenize private company." >> Yeah. >> Shares. I think it's a bit of a misrepresentation. You're not d having direct access to the cap table. It's kind of like a derivative. And anytime you're not anytime you're interacting with derivative, there's a lot of counterparty risk. there's just a lot of fine print that your average consumer is not going to read. So I think we we the potential is certainly there. Um there have been now companies like Superstate which is like Robert Lesnar's you know he wants to >> you know the the other mega trend that you probably will see is depending on the regulatory environment but it sort of makes sense for if you're a company like Uber probably makes sense to give shares of Uber stock to your most active passengers and drivers because it's a marketplace and a marketplace is you know you know incentive ive design is super powerful and so I think we've been constrained by these archaic rules and regulations that have prevented companies from you know in a perfect world you'd have a a better mechanism to reward your most loyal customers in the way of a stock but you know there's limitations to that but I think that's changing I think now how quickly that would change unclear but um but even private companies could issue you know slices of their equity to customers and improve their business model and you know scale faster. >> Yeah, 100%. I think these accredited investor rules are going away. I agree with your point on Robin Hood where yeah, they took a bunch of secondaries, they put it in an SPV and then issued tokens on that SPV. It's not really clean. >> It's a receipt. >> Yeah. And I think in time you're going to see this line between private markets and public markets blur even more. You talked about a couple of regions and like the one thing we've seen to date that highway is only being run by dollars, right? It's US dollars. is US dollar stable coins. You know, FX is a $7 half trillion dollar a day market. Is the endgame here going to be that the internet's run by dollars and like, you know, the circles of the world, the tethers of the world, you know, are are the play? Uh, how do you think about that? >> You're right on on all of that. I think a lot of the world would rather have a dollar than the local currency. But um I don't think that I I don't you might have more deposits be sitting in stable dollar denominated stable coins, but but a but perhaps even more conversion into local currency in the last mile, right? If you Chris are traveling to Europe, you have your credit card and that credit card represents, you know, some sort of you have dollars in your bank account and then when you swipe your card, you know, you either can elect how to do that you you know and and most of the time you should be selecting that you're going to pay in euros and your bank gives you a better conversion rate. Um, so I think the same will be true. You're probably going to see way more volume as the you know, mind you, a lot of the world is sitting in an informal economy that is cashbased. So yeah, the more you digitize that, you just have way more flow. And you know also will depend on local rules and regulations like most countries like we've looked at places in Latin America where they recognize dollar denominated stable coins. >> Yeah. >> Um but there's also local stable coins. So at that point I think governments might just impose some sort of threshold where hey look if you're a citizen you might you can't have more than 10,000 or 100,000 in dollar denominated stable coins. you have to have the rest in in local currency, peso, real, euro. Um, and and that's okay, too, right? You know, that you're just going to have way more FX flow. >> Yeah. So, you know, right now you're focused on the PE side of of the business. You're looking at acquiring companies. You're fitting them out, but prior to that, you were a crypto investor and you still are a very prolific crypto investor. You've also recently been very critical about some of the valuations um that we're seeing in the space. I would love to understand as you underwrite crypto investments that you know even ones that are public, right? Like tokens that people can acquire. >> How do you think about underwriting them? What goes into your mind? What are you looking for? Uh what are some of the red flags that you see? And I agree with you. There's plenty of fluff in various projects. We see it over and over again in crypto. But walk us through how you underwrite crypto projects. >> Um as a public investor or as an early stage investor. >> Start whichever you prefer. Like I probably easier for public actually like and I know you're not a liquid you're not a liquid guy but you have been talking a lot about liquid liquid valuations. >> A large part of my family office is liquid right you know investing in early stage eventually have a token. >> Yeah. um look early stage because a lot of people said why why all of a sudden are you being critical evaluations like I said well you know every day that you're holding a position is a day you're buying it so you constantly have to reandwrite your thesis now I guess part of my this all started by me saying okay you have a very friendly regulatory environment where's the demand again where are all the cars in the highway we built >> and that's something that we punted for so long because we could have pointed to the lack of regulatory clarity and a bunch of roadblocks. But as soon as that gets removed, it's like okay, you open the the floodgates crickets >> and everything most of the transactions in these chains are speculation based. So, so again just how do I evaluate any business and this goes back to my days at Sage View which was investing in enterprise software. I look at the world through unit economics like what is the customer acquisition cost? What is the nature of that revenue? Is it recurring? Is it reoccurring? and what's the margin on that? And so the argument that you that you hear is Ethereum is going to capture a lot of this flow. Okay, you say, okay, well, what what is Ethereum ETH that I'm owning? What does that represent? And there all of these systems produce a bunch of fees. And so I ultimately look at the world of like how predictable is that revenue stream? Um is it durable? Is it going to how does it behave through cycles? And you know, you basically do a discounted cash flow analysis. you say okay what what's the value of this and then you compare it to what else you can be holding in your portfolio right >> right >> because you know a lot of times we just don't have to buy these things you could buy public stock you can buy Nvidia you can buy S&P lowcost index right and so I think that that's concretely Ethereum is a $380 billion asset um yeah anyone can buy it you know there has some sort of mimemetic component and some defensibility some modes but it only re re generates one at most two billion of revenue and that's sort of been the cap for that system. And so you're sitting there and saying gosh should I be paying 380 times price to like revenue and the answer to that is most definitely not >> and especially when you overlay some of the dynamics in crypto which is infrastructure is increasingly commoditized. It's a very competitive space and it's only tied to speculative activity. So, you know, I am definitely looking at I'm not a macro guy, but I do relative to a recurring like an enterprise software contract is multi-year contract. Companies are paying for that no matter what and there's very little churn. The problem with crypto is we built these highways but it's only one type of activity which is drunk drivers that are willing to punt on tokens and they don't show up. you know, the longer and that's fundamentally the problem that I think most people in this industry don't appreciate that sense of urgency. >> Yeah. I think some of the challenge is that the the foundation, the regulatory foundation, the the concrete's still hardening and and institutions just don't show up overnight. In fact, I know guys who was like, "Hey, you know, regulators used to walk in my office and they say, "What are you doing in crypto?" And I'd say, "I did nothing." And they would be they would smile and they'd walk out. He's like, "Now they're walking in, they're saying, "What are you doing in crypto?" And he's like, "Uh oh." like because he just didn't build the muscle memory. He doesn't have the technologist. They would like to use it, they couldn't. So, I think there's piece of timing um to that. People don't move overnight. >> And so, it's like it's interesting because you're looking at it through an infrastructure play. How am I going to use this technology to optimize companies? >> Um where my next question is like obviously you chose Avalanche. Have you looked at that through an underwriting lens through a liquid investment as well? Are you eating your cooking through that or does it not matter? That's just a pure tech play. >> It's a tech play. >> Chris, when you select um >> when you select u AWS or Asia, >> do you care about the stock price of Microsoft or Amazon? >> Nope. >> Exactly. We will know that we've sufficiently matured and the concrete is hardened when we start making decisions for infrastructure without looking at the price. Of course, you look at the counterparty risk. Hey, is Google going to be around? Is Amazon going to survive? Is Avalanche going to survive? But the survivability of this technology transcends I think the stock price or the token price. I think as long as this I mean this is open infrastructure like no one really looks and says hey how is Linux survive like is it of course you have to care about is it being maintained as a repo is the technology good enough but the other element here is the technology is increasing like let's not forget this is open source technology and the world of open source is is is very much like a bizarre you can pick and choose whatever it is that you want interoperability is very strong and so all I care about when I'm using this technology is do I have enough guarantees that it is secure. >> Yeah. >> That you have a strong Lindy like has this system survived? Can this system credibly absorb? If I go and deploy a million cars on this highway, how many lanes is the the toll booth kind of uh system efficient? Is there going to be bottlenecks? Are there traffic lights? Is the concrete good? That's sort of the things to to overanalogize. But I would say where most people in crypto have probably overintellectualized is value capture of these systems. The highway is very much a volume play. If you are a total booth operator, you just want to make sure that there are tons of cars going in and out. Uh and you have to, you know, maintain the road and whatnot. But the problem is that in crypto you have lanes everywhere. >> Everywhere. And it's super easy to deploy the highway. >> That's right. All the time. >> Now, the only reason why I'm able to monetize the highway more is because I control I own the cars. >> I can tell the cars, hey, you need to go through this highway. You don't have any choice. And that sort of in the internet, most of the value got captured by people that own the cars. User aggregators. If you control a user, you just monetize a user in different ways. >> And and that's where I think like you can think of inversion as a pure the purest vertically integrated infrastructure play in crypto, which is we own the highway, we own the car. No one else kind of has that. And if for whatever reason the concrete, the asphalt, the any technology provider that we're using to make sure that the highway is sound and reliable and can support more cars, there's a ever expanding universe of service providers that we can go to. So as much as we we really like Avalanche, I think it's reliable, you know, it's we we did an RFP, we you know, we think that it provides, you know, very convenient out of the box. we don't have to think about, you know, overengineering that, but there's plenty of other solutions that we can employ and utilize and maybe strengthen that offering. And so, you know, our core business is finding the best businesses that we can go and acquire and make more efficient with this technology. We're going to work with and route all of those cars to the best technology providers out there as it relates to stablecoin issuers, deepend projects, um, tokenization platforms, credit platforms, money markets, AMMs, gaming companies, pretty much everything that's being built in real time we love because we're going to just curate the best experience and the best technology solutions for that specific company. How do you think about decentralization? Like I'm hearing a lot of centralization the thesis coming through. Um >> does that highway need to be decentralized? Do you care about that or do you just care about efficiency? And oftentimes decentral means less efficiency I would argue. >> Um it's a great question because for instance you have tempo which is stripes project along with paradigm. Um I think it will start off fairly centralized. you have an initial set of partners that very impressive similar to how Libra and Facebook kind of orchestrated that consortium right that would say hey we're going to develop this highway and there's going to be a bunch of players around it um I think I think decentralization is definitely important especially because you're moving money so you want to have sufficient guarantees that that techn that that people are not going to move the road from underneath you they're not going to all of a sudden block the road for no good reason. Um, but again, you have to comply to local speeding limits, KYCL, OFAC, you have to work with existing regulations. You can't just buy really fast or buy a car, make it super efficient and deploy it and then that car go at, you know, 300 miles an hour. Well, it's going to cause harm and risk. And so I think um I like to think of this decentralization as a spectrum. It's not sort of a binary state. It's not that you're decentralized and then you're centralized. It is are you providing sufficient guarantees that it makes the highway safer. And how you define safe I take a very pragmatic approach to that. I think is the end you like like Amazon did. Is the end user faster, better, cheaper? not super fast that it breaks, but making sure that whatever service you're providing, it shows up with incremental utility and you have to comply. You have to comply with speeding limits. You have to comply with sometimes you got to close a road and and and that's, you know, you have to have I I think like u Facebook kind of learn and YouTube kind of learned this the hard way, right? which is technology is like neutral, but it sometimes it can be used for nefarious, you know, child pornography and you people are uploading stuff on the internet that hey look like you're going to have to censor that and you have to kind of have to take an opinion on how this technology gets used and so that's where I draw the line like it needs to be safe it needs to be uh reliable and yeah it needs to provide sufficient guarantees so that if someone want comes to join your highway you're not going to maximally extract, right? But I will say I think it's self-correcting because if you become overly centralized, let's talk about an L2. You talk about sequencer feeds. Yeah. >> Pace, they're capturing all the sequencer revenue. >> That's a choice that they've made. Might there be a time where users at some point say, "Hey, listen. We're going to go and pack up our stuff and go elsewhere. We're going to go to Arbitum now or we're going to go to Salana." They can do that any day. And that's on Coinbase to kind of adjust in real time because it's going to be fiercely competitive. So I think more compet the the the silver like the what I'm trying to impress on you is I think this industry is becoming increasingly commoditized in the base layer. >> Yeah. >> If you are going to want to be very centralized and maximally extract, I think this goes back to the Jeff Bezos kind of which I've learned so much from which is your margin is my opportunity. >> That's right. So, fat thesis, uh, fat protocol thesis is dead. Time to focus on some apps and that's exactly what you're doing, man. Um, anything I should have asked you today? I mean, you got so much going on. Um, love listening to you. I encourage, you know, you host the Empire podcast, which is awesome. I listen to it every week. Um, anything else on your mind? >> Well, I I going back to your question of how I evaluate valuations. There there's a very interesting dynamic 1KX report. I think they did a fantastic job and they there's a very powerful statistic that reveals kind of what's happening in real time which is from a market stamp market share standpoint layer 1's account for 90% of the valuations in crypto. >> Yeah. >> So excluding Bitcoin it's like $ 1.5 trillion industry. L1's represent 90% of that >> but they only capture 16% of the revenue. Deep in applications capture the vast the rest of the revenue 82%. And they account for 10 less than 10% of the market cap. >> Yeah. And this is decentralized physical infrastructure. Um there's some amazing >> DeFi. I mean we share investments in companies like Geonet. >> Yeah. >> Uh there's a number of others. I mean look that I think is re very revealing the market. I think you could say maybe the market is efficient. Maybe we are missing a core component that from a valuation standpoint a lot of these networks have mimemetic staying power and social currency like Cardano, Ripple, Ethereum, Salana. There's an element of definitely social currency and brand in the same way that a company might have goodwill on their balance sheet. But as an investor, I just am not willing to pay too much for that goodwill. Certainly not 380 times price revenue. And so I do think that at some point that selforrects like at some point the market starts valuing and paying for cash flow and I think the you know the proof is on the chain right you're just seeing most of these protocols uh most of these apps capture DeFi and deepen projects capture most of the revenue and and I think the market eventually wakes up to that and especially as you have a more institutionalized flows coming into the space >> I think that's going to be the case um but you know I' I've been wrong since my days of Pari we're investing in DeFi which I could have told you that the top 10 composition of the top 10 projects by market cap would radically change and you still have Cardano there. You still have a lot of projects that just don't produce revenue. It's not a it's not a dig at them. It's actually quite impressive that they've been able to capture >> attention and maybe that's sort of the >> that should be the ultimate way to look at kind of how to underwrite these things. Just if you're able to capture attention, then that's really all that matters. and attention is really hard to capture especially in this ever kind of uh you know short attention span world. So I think it's going to be a very interesting thing. I I think the next 12 years as I said that the biggest takeaway probably from this conversation that I'm so excited now is I think the industry is finally at a really powerful inflection point. >> Yeah, >> it's like 2001. Every company's going to use this technology. You're seeing it every week and it's real. Like Clara just launched a stable coin. O just >> stripe is onboarding many many companies and the beauty of all this is most of the highways have been built. a lot of the technology to deploy the highway is being built and and really large companies are appreciating that and saying, "Huh, I can upgrade our car and deploy into this new highway and we're going to save all this money because we already have all these cars." And I was going to kind of let go of these cars, but now you're telling me that we can give them a new more juice and we can squeeze more out of this. And I mean, that's just that's explosive. you've seen nothing when it comes to adoption of crypto. >> I totally agree. Well, awesome, man. Really, really appreciate your time today. Love your insights. I learned a ton. And how can people reach you? >> Yeah, I'm on Twitter, Santiago Roel. And then if they want to learn about inversion, it's inversion_cap or inversionap.com. >> Thank you, Santi. Really appreciate it, man. >> Thanks, Chris. Appreciate it. 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