A highlight from The Chopping Block: Which DeFi Metrics Are Still Useful in a Bear Market? - Ep. 550



Token economics can do way less than the industry on the whole has claimed that it's able to do and so for the most part I Sort of consider token economics to be a little bit of a dirty word today compared to how I saw it two years ago It's a tale of two fun. Now. Your losses are on someone else's balance generally speaking aircrafts are kind of pointless Anyways, I'm into trading firms who are very involved DeFi protocols are the antidote to this problem Hello everybody Welcome to the chopping block every couple weeks the four of us get together and give the industry insiders perspective on the crypto topics of the day So quick intros first we got Tom the DeFi Maven and master of beams Next we got Robert the crypto connoisseur and czar of superstate then we've got to ruin the giga brain and grand poobah at gauntlet And finally, I'm a seed that had high mana dragonfly So we're early stage investors in crypto But I want to caveat that nothing we say here is investment advice legal advice or even life advice Please see chopping blocks at XYZ for more disclosures Alright, so it's been a crazy couple weeks. There's been a lot of conferencing going on I think most of us minus Robert were at token 2049 in Asia I guess Tom and to ruin you guys are back in the States. There was also main net in New York What's been the vibe? Give me give me the brain dump of what conferencing has felt like in the last few weeks The u .s. Is dead as a doorknob for crypto It seemed like the u .s. Conferences had less attendance than they normally do amongst other things Whereas the Asia conferences were crazy like I just didn't think there were 12 ,000 people who wanted to go to a crypto conference in 2023 and clearly there was much more in Singapore Singapore was insane Yeah, I think token 2049 had more people than East Denver. Like it was it was pretty wild I mean it is like the premier event in Asia and it's sold out. Yeah It was gigantic venue, right? One of the I mean obviously if Denver was a very large venue as well, but it was it was it was absolutely massive Robert you were at permissionless. How did permissionless feel? I mean compared to prior years permissionless Felt, you know pretty quiet really high quality group of people, you know The conference goers that were showing up to a conference in Austin, Texas during a relatively hot week in September We're not totally like broad retail audiences. Most of people that were closer to industry closer to Happening in this space and a little bit more informed than you know, I've seen elsewhere so Small like token 2049 pulled a lot of people last -minute from permissionless I think a lot of people were planning to go and then decided like oh shit This seems like there's so much happening in Asia. I gotta I gotta go out there So I think the timing was a little unfortunate for permissionless, but there was a clip of Eric Voorhees Giving I guess what was like the keynote. It was pretty amazing. If you haven't seen it, I would strongly recommend watching it It's got like a couple million views or something and it's essentially just like a rallying cry Just sort of a credo of hey, you know screw the government Like we're trying to build a decentralized alternative financial system and it really kind of plucked to the heartstrings I don't know. Do you see that live? I did not see that live I actually had to take off right before that speech, but I was able to watch it online afterwards It reminded me a little bit of a his debate with SPF. I think like a year ago It was almost like it was like a month right before FTX collapsed and it was similarly kind of getting back to kind of the core Religion ethos of crypto is very we gotta get him on the show at some point He's definitely he's a very good bear market in a bull market I always feel like Eric is a little too centered and like too grounded bull markets They kind of demand a bit more craziness and levity but in a bear market I feel like he's got this gravity that is very clarifying You know, I really I really appreciate the role that he's come to play as like the elder statesman of the industry Any other takeaways from token 2049? I mean we were out in Asia for a couple weeks the videos have just started going up for token 2049 and I did one panel that I moderated with a bunch of l1s and It was actually probably the most entertaining panel I did I did I did several panels while I was out there But most of them were you know, they were great but this one we had it was Aptos we Avalanche and near all of whom were on stage and Goon who's been on the show a couple times Goon was just like he just basically was ready to pick a fight and so they just got on say they were scrapping they were like interrupting each other and getting super aggressive and It was honestly the most entertaining panel. I think I've ever moderated just from how angry everyone was on stage So any other any other highlights or anything that stood out to you guys while you were giving talks or or moderating? How about being on stage but I'll say there was a bit of a bizarro world moment with them token for 2049 too Where obviously a lot of high quality projects a lot of good representation throughout the industry and then there were a lot of random products I'd never heard of that had these like massive, you know Sort of neon lit up boots that they clearly spent a bunch of money on I believe Islamic coin was one of the large sponsors I am a not an Islamic coin expert, but there was another sort of meme floating around They're doing a public crowd sale for Islamic coin at reportedly a 30 billion dollar f .d .v I think it's like 60 million dollars raise a million dollars wait, so it's Yes, but they went on on Twitter to explain that this is a 100 year f .d .v And so in reality the the near -term f .d .v. They're nothing into is not near -term f .d .v So, um, you're the more than the near -term market cap I think we need we add we need to add some extra f .d .v Numbers in into coin gecko just so we can start the near -term f .d .v long -term f .d .v You know, I think an interesting thing related to this That's a tiny deviation but important to note is the history of finance Actually has had a lot of things where the introduction of a new met financial metric as a form of reporting Completely changes company structure like EBITDA, right? like why does EBITDA exists like earnings before income tax depreciation depreciation amortization and it's like Because it was this some company that was losing money and they started reporting EBITDA instead of like true profits But that kept them afloat for long enough to raise financing and then EBITDA now became like the accounting standard over time Right, so I kind of think that these f .d .v games We're gonna just see this like war of all these metrics and whichever metric is like the market wants will eventually be the standard and everyone Will just try to optimize that. Yeah, this is 100 % what happened to TVL Yeah TVL in principle makes sense as a number right, but how do you count TVL? Do you count your own token? Do you count wrap versions of your token if somebody wraps your token and puts it back in your protocol? Is that double the TVL like, you know? DeFi llama just decided how TVL gets counted and then the rest of the world just warped around the way that you know These metrics decided to get reported and you of course you saw that on Solana where like all these people were recursively Kind of putting TVL from one protocol back in another one back in another one Now I think we've gotten better at not double counting triple counting But you know back in in 2021 when DeFi was in full thrust It was just whatever goes like that's TVL the other chart crime that exists is that I really irks me is when people show cumulative charts instead of like instantaneous charts it I just like kills me I Will say as a VC let this be like a little one -on -one lesson as a VC. We absolutely hate cumulative charts We understand that cumulative charts look good So for those who don't understand a cumulative chart normally when you have a chart you look at look Here are the number of transactions every day, right? cumulative chart is here is the total number of Transaction volume ever if you add it all together and the nice thing about cumulative charts is that they look like they're going up Into the right always no matter what because they're adding, you know It's like the number of how many trades have been acting positive number. Yeah, exactly The problem is that it is useless to look at as a VC We as a VC and you look at a cumulative chart What I assume is that your actual chart looks like dogshit and that's why you're showing the accumulative chart So in general don't show cumulative chart. However, if it's a chart with multiple dimensions shown if it's a cumulative chart and a daily or time period flow Together then it's cool. Is it? You know, I'm already doing the first derivative Okay, let's say let's say you have a daily chart and it's like net inflows We're like some days are positive. Some days are negative. Some days are positive. Some days are negative You don't know the total you find that that's a net chart not a cumulative chart So if you're netting, you know gains and losses and you're getting like P &L or something like that We're net inflows and flows that's not a cumulative chart. That's very different because that does not go up into the right I agree. No, no, I think Then it's well Complimented with a cumulative on the other access behind it. I Net and cumulative are two different things. I did see it. I agree. That's just a U .M. We should have a chart crime episode The truest of VC true crime it was inflows prefer for friend tech, but they didn't take out the outflows So it was literally just any deposits in a friend tech added to the chart And so of course you assume you're gonna be looking at a net chart And in fact, it's any sort of deposit, you know adds to the overall chart, which is kind of a useless metric chart crime chart crime Any other any other chart crimes that come to my lungs are on the topic? I think these like feed accumulated ones where they're like people who are like trying to annualize I think people annualizing certain types of fee accrual and crypto sometimes makes no fucking sense because it's very event driven like oh Like there's a ton of fees from one event and then like zero forever But they always like choose the right time scale so that they can say like we have at least X of fees Like I understand how integrals and derivatives work and you're just trying to play with the boundary conditions Yeah, I mean I saw a lot of this in 2021 when a bunch of people like a bunch of businesses that had a bunch of random core businesses but almost all of them had tokens on the balance sheet and those tokens went up and they counted that as revenue and So they're just like, oh, you know, I had 50 million of revenue this year And if you charge that forward, you know another 50 next year and it's gonna ramp this much I'm like dude your core business made like 3 million and 50 million just came from tokens going up on your balance sheet. Like that's not your business, you know, so that I mean It's kind of charty. I don't know if it's a sharp crime per se but it's like EBITDA, right? Like I think crypto still is so nascent and the idea of like what should count and what shouldn't and what flows are it's still Kind of an open thing of like what the accounting should be, right? So I kind of think I'm kind of curious what EBITDA like the thing that becomes a like meme that sticks That's not TVL and that that's not just like fees What do you think you guys think it is because I do feel like this bear market My prediction is this bear market will end when we have invented what that is like the last bear market ended when TVL started becoming a metric and then people started monitoring it and like not gaming it as much and It was just kind of going up slowly. I feel like the Solana stuff came to even more where it was like, oh Here's the metric that everything's measured on So what if we come up with these crazy ways to like that's usually the end of a bubble, right? Like like once when it goes not the creation of a little baby That was like that was like the kickoff of the book I know I don't know but my point is like once you start getting kind of a shelling point around a particular metric It doesn't get gamed for a little while Like there's like a certain amount of time where it like it becomes a good real standard bearer But then someone eventually realizes that it's the thing to game and then you get this like kind of capital bubble around that So like AI you're having that happen with tokens per second right now Which is also a fucking useless meaningless thing because like the choice of architecture means the tokens aren't really the same There's not fungibility of them. Sure. I think it feels like right now There's a more and more fixation on revenue. And so you're seeing like, you know token terminal if you're looking at there's just revenue There's annualized revenue. There's price to sales price to earnings. So it does feel like we're sort of Morphing more closer to traditional revenue and underwriting metrics, which is a good sign However, these metrics aren't totally normalized in the sense that you know, for example for Uniswap Does Uniswap have revenue like obviously the token holders aren't capturing anything so the revenue is flowing entirely to You could say like cost of goods sold is like 100 % because all the revenue is going to the liquidity providers I would say, you know One of the biggest issues is that you have like protocols that are not businesses and people are trying to strap like business metrics or accounting metrics on them and they're just not like Ethereum Bitcoin like people are like, oh like, you know fees paid like is that revenue? No, it's not revenue, right? Like I don't think anyone thinks that like the transaction fees on Bitcoin or revenue. Are they on a theorem? No, but like I've seen platforms that like talk about That alongside something like Uniswap and it's like none of these really makes sense It's just like someone trying to build not to knock anyone particular company But someone trying to build a company about standardizing data is like, oh great Let's like standardize how we look at everything and I don't think it fits personally I don't think these protocols living on top of blockchains are necessarily businesses or need business metrics. I don't think it's that helpful I think like projects and For success like how many people are you know doing X Y & Z and like it won't always translate to the thing What do you think are metrics that should be adopted in lieu of? You know revenue or price of sales or whatever all the stuff that people are doing to try to account for You know particularly in defy I think for layer ones. It's a little more nebulous I think it comes down to exactly like what the protocol is, right? So like a great example is even taking two things that like seem like there's the same Let's say like Uniswap first like synthetics Well, both of them are for trading like, you know, one of them, you know is for trading spot tokens And one of them is more like derivatives, right? So like would you say like total notional traded like that might look crazy, you know to use that as comparison like I guess my point is like even two things that look the same are gonna be vastly different when you think about how you judge them or measure them and so All I'm trying to say is like, you know, let's slow down and not trying to come up with one size fits all metrics I don't think there is some like EBIT type But they will love defy broadly it trying and and when people get any shelling point on one of those That's when you see capital formation happen because it's like hey look there's this metric we can optimize it we see the growth curve right like growth implies you have a number or a set of numbers and a derivative like a gradient and The gradient can go up and you're like, yes or more money in it and I do feel like there's like a Psychological human behavior element to this and crypto somehow plays with that in a lot of ways and that that's some of its beauty Is that the fact that it kind of plays with these I think the revenue thing also is like a good I agree like it's really difficult to sort of compare across different types of companies, but generally it's a good heuristic for Understanding like product market fit and desirability just showing willingness to pay right like you can't fudge it because I'm literally burning money I'm spending money to use this this protocol saying something with like, you know net dollar retention at revenue retention overall It's like user retention Like yeah like it I think that's generally sort of a good heuristic because it's showing that if people are actually using these things consistently because they want to use it not because ideally you sort of you're tying out the I'm inclined to agree with this is that although it is an abuse of nomenclature I think you're better off thinking of protocols as products and thinking about like if you can just applying very kind of dumb Simplistic like yeah, they don't work perfectly, but they're way better than just like finger in the air What's TVL and kind of how do I feel like the vibes are trending for this particular protocol? I think it at the very least it keeps you honest if you look at the era Pre when people had concrete metrics that they were looking at like protocol revenue and things like that There were just a lot of things that had you know, take for example, then you have and you had 4chan economics Whatever was posted on 4chan was the truth totally totally and also like not looking at like net of emissions Looking at like willingness to pay net of emissions Like you just end up with this crazy town where it's like Oh, there's basically like a negative cycle where people are making money by using your product You're like, wow, I've parked my good fit There was basically an entire year where every hot product in crypto was that it was people it was being like wow Look how much adoption this is getting when it's really just people clicking a button that pays them every second to be very fair That is it's like it's so funny enterprise SAS bubble also had the same thing It was just the way the capital is distributed.

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