The FTX Podcast #107 Crypto Bahamas Su Zhu Cofounder of 3AC

Thank you. Thanks for having me.

Sure. Yeah. I mean, it feels like 20 years ago, honestly. It's kind of how time flies in crypto, but I guess back then DeFi, the primitives were just being formed and the building blocks for what we have today on a multi-chain world. People weren't sure yet what would become dominant and what would become obsolete by new technology. And I think a year and a half later, there are obviously huge changes in the markets where layer 1 protocols like Solana, Avalanche, and others have come out, and also there has been a lot of interest in different parts of crypto, not just financial apps but also cultural apps such as NFTs and so on. So I think the market and the crypto industry in general has really blossomed in this period in ways where it is very much following Amara's law, which is that we are underestimated in the long run as the technology. So I think every day now, just recently with StepN, with this idea that people are going to buy these shoes and then walk around and it's not mine through walking, it's now becoming that. To me, that is like an Axie moment almost, where Axie kind of proved that play-to-earn was a new model, and now you have walk-to-earn as a model, and I think this will just continue. So for us as a firm, not as much has changed. We kind of try to be as zen as possible throughout the market. We definitely continue to invest in the major themes that we see are important. And I also think that it is more clear now than before that we are in a multi-chain world. We are also in a cross-chain world. So I think we are focused on infrastructure but also focus on applications still, as our core.

I think we invest broadly in web3 as well as store value thesis in crypto. And our DNA is a trading DNA, meaning that we do trade a lot of Bitcoin and Ether and other large coins. And the general model that we believe since the beginning is that we trade to make more coins. So that's a philosophy that has served us well because we always make sure to put profits into investing more into crypto. And I'd say that's one of the only things that sets us apart from a lot of trading firms from that period where many firms did well but they mainly invested in dollars or in the real world, whereas for us, we really saw it as a privilege to be able to have a front-row seat, courtside view, whatever you call it, to the show. So I think that's the privilege that we felt we had. I think this is similar for you guys at Alameda, right? Where you were a top trading firm and are a top trading firm but then recognized that through that seat you have the possibility for so much more.

Yes, very much so. Very much so. So for us, we have a much higher threshold to be very bearish than most because we've seen so many people get priced out of the market over time. And I think the funny thing about 2018 really is that people think the lesson is that you should have sold and bought the bottom, but really what it is is that if you just relax for a few months, it'll be fine in a lot of cases, right? And also that when there's a lot of despair, you can start buying. You don't have to follow the despair as well. Because actually, I saw a lot of people in 2018 after they pulled all the way down, as it went up, they would start selling all the way up. So even before Bitcoin broke 14K, by then a lot of people were fully out of Ether at under 200 or they were out of Bitcoin already and they were out of Sol or out of a lot of things. So I do think that I have this theory that people always learn the wrong lesson from history. And I think it's happening again where people learn the lesson of 2018 that you have to sell, but it's actually, in my opinion, not the lesson of 2018.

Well, I think we were very fortunate in that we started the company very young. We were 24 at that time doing EM foreign exchange, but about a year later we had only our own capital, partner capital. So after that, it was always quite thesis driven and we were not beholden to anyone as an LP basically. So because of that, we felt that as crypto is a trend, it's something where it's important to see one's role in the ecosystem and see one's role in history as well, because I think we are all part of history at this point and part of what's happening around the world. And so for us, it was just a very strong sense that part of history meant many things, but especially that there's incredible opportunity in volatility and also incredible opportunity just by attendance. Think about the opportunities that we've had, that many of us have had at our age, just by being there and believing. It's incredible. And I think crypto is kind of like justification by faith almost, in the way that it's evolved. And I think a lot of the mistakes I saw from people were that they were almost too good at market neutral trading, but they would really dig into that and define themselves that way, and there would be a lot of angst at the fact that people could just buy coins and then relax and stake them and make a lot more money in dollars. And I think it didn't have to be that way for them because they had seen that just by the fact that there was so much volume, so much activity, that they could also participate not just through arbitrage or through this trading or that trading, but also through belief in the ecosystem. That belief would in fact be rewarded. I think that was something that we had a strong sense of and that we would not easily give up as a conviction.

Sure. I mean, I think that both Kyle and I have a deep held belief that crypto is part of a movement that is bringing a lot of freedom to the world, and it has good and some bad consequences depending on who people are. There's a lot of disruption happening and there's a lot of technology creating inequality and also creating a lot of disintermediation. But with that said, I think for the individual, for the average person who wants to learn, who wants to grow, crypto has really leveled the playing field. Whether that's young developers in India that have done extremely well in DeFi, creating projects, or NFT artists in Iran, in places that they don't have to say who they are. We can all kind of move toward a more pseudonymous world and also a more distributed world. So one of the books that we kind of hold as our Bible almost is The Sovereign Individual. And I think from that perspective, the key thrust of that book was really that every 500 years there are mega political changes that happen around the world, and these are led by technology disruptions that are far outside the realm of people deciding how they feel about such technology. Meaning that in the 1500s era with the advent of the printing press and the advent of the gunpowder revolution, it did not really matter what the aristocracy felt about it. It was something that was going to happen anyway, and the way that it evolved would have profound implications. And that's what I believe we are in today with encryption and peer-to-peer technologies. I think we're probably still not even past the first inning of a lot of this disruption because the endgames of this can be very tricky and very interesting to think about. And so I think it's important that despite the fact that a lot of people come to crypto just to make some quick money or to buy some cute pictures, at the end of the day they are also participating in something that's very profound. And I think the beauty of all movements like this is that they don't even have to know it, but just by seeing the incentives and seeing the communities form and seeing what's happening, they contribute to it already. And so for Kyle and I, we feel that this, while disruptive, is something that's very worth fighting for, and I think it will be a future that is far more innovative and also far more distributed than it was before. The analogy I like to give is the Dark Ages. The Dark Ages is known as a period that was very bad, but after the fall of the Roman Empire, the average farmer actually began to control his own land. He had zero taxes and he started to live much longer as well, and the technology of agriculture actually improved a lot at that time with the plow. So I kind of think of it almost like, are we entering the Dark Ages but in a good way? Where we may not define success as the same way as we used to. We may not define success as a company that takes half of all a user's profits or earnings. That may not be success in this new world, but it may be something else where people have more control over things. And so I do think that crypto is part of all of that, and we want people involved to also understand that this is something worth fighting for in the long run.

So I think there are a lot of key battles that will happen over the next few years. I think we need to win the unhosted wallet battle in crypto. That will be a tough one. But I think the key is to make sure that crypto is not put in the same boxes as previous financial regulation, and for people to sort of see past that and see the potential of the technology to improve lives and to improve financial inclusion as well as to improve the way things work. So that's a very key battle, and I think that it is a battle that in free nations it will be won because in free nations, the Bill of Rights and so on, it's considered unalienable rights. So I think they will be able to argue from such grounds to ultimately stunt or limit the impact of hosted wallet rules and these kinds of things, just from the right to privacy and the right to be secure in one's person. I think that's a very important battle to win because without that battle, I do think that what crypto is is quite different from what it could be. In the extreme negative scenario, where it goes to extreme high travel rule and things like this, it becomes a permission chain again, it becomes a permission database, and you haven't actually done anything in many ways. So that's the biggest battle, and I think we will win it in the places that matter. And I think the thing that as stewards of the space that is important is to help highlight the ways that crypto is improving the world and improving the ability to transact, as well as the ability for creators to reach their fans without intermediation. These are the benefits of disintermediation. And also to show that the kind of regulations that people want to put against crypto, if they zoom out, they see that the existing world is not subject to the same scrutiny as people are putting on crypto, and that the reasons for this are obviously not that crypto is specifically causing those things, but that crypto is being attacked, for instance with sanctions or things like this, to use it as an excuse to stunt technology. This has been the historical pattern for many technologies in the past. But I do think as crypto becomes everywhere, we will see the opposite within 30 years, where I think regulation will actually preference crypto over other things. We saw this with the car. In the beginning, everyone said you're going to run over everyone with cars. But then within some time, they started to make jaywalking a crime. The idea that when you cross a street as a human, that the car has priority over the human on the road, that the person who happily walked on it just a few years earlier. And so I think we'll see the same thing in crypto. I think this will be when we know we've really made it, where governments actually come together to protect the unalienable rights that we already have. That's the natural worldview of a libertarian. And so I think we will in the endgame come to this world where governments are trying to uphold your ability to transact. And so if someone is hurting your ability to transact, governments will actually be a force for protecting that right. Not all governments, but many will see this as a rule of law that people come to count on and come to value as well.

I think there is definitely the possibility of without violence this time, because the force of coercion and physical violence is not as strong. A printing press, for instance, there are locations where you have to print, there's a physical element to it. Whereas in crypto, in some cases the people are known and where they are, but many cases they're not. And also there's an accelerationism to the government's logic too, where if they push against it too hard, then it forces the industry to evolve into very private technologies and in an even more subversive direction potentially. And so I think there's already an accommodationism that has come through most governments where they want to, at the end of the day, the question is what is a government? Is a government some entity that is separate from what people are, or you individuals? And what gives government the right to tell people to do things? There's this fascinating idea in ancient and medieval times, and well before as well, which is that who can create laws? Back then, the rulers had no concept that they could create laws. They thought law was natural, or law was a holy concept. So the laws are already known, and governments don't create laws, they simply try to uphold laws. Laws like thou shalt not kill. And I think that being the case, as crypto becomes popular with people and part of people's lives, what is the cause for governments to be still against it? Well, of course, it's the instinct for government to retain the privileges that it's had. These privileges include seigniorage and money and inflation, but also incumbents being able to capture value from users and from citizens in certain ways. This will be a tricky battle, and I think there will be a lot of skirmishes on this. But I think the government's will to fight this will be more limited than people expect. I think it's already been more limited than people expect, where within just a few short years where everyone thought crypto was dead, now you have many politicians pro-crypto, many places trying to become crypto jurisdictions. And again, part of the reason is because the voice of what people do is starting to matter because of technology. Whether it's the Arab Spring, whether it's people being able to record on their phones what's happening in a country, propaganda doesn't work anymore in the same ways. And so those are all mega trends that are very in favor of peer-to-peer capitalism, peer-to-peer money, peer-to-peer culture.

I mean, I think each firm has their own view on the things that policy should go and the things that should be done. I think it is important to present the views of firms and also to be clear on the things that matter. With that said, there are always differences between firms. Some firms in the space have chosen to go a very global view of things, like Binance for instance, and their view of the world has turned out to be quite true in many ways. And same with FTX, which started also more unregulated and then now is becoming more regulated. And I think for us as a thesis too, we've historically believed in this. So during the bear market, we saw a lot of highly regulated plays where the guys said, 'I'm going to get the first license here, the first license there, and then I'm going to hire 50 bankers and do all this and do all that.' And I just thought, this is not the point. The point is that governments will accommodate the innovation and the actions anyway, not that we will first ask for all the permissions. And I think this whole idea is actually native to the American spirit as well, the frontier concept, which is that you should be doing things where laws don't exist for them, or that the laws are not clear for them, as much as possible in terms of innovation. Because if the laws already exist, then it means that someone's already done it and wrote the law for you. So it's not technology. For instance, when the car was invented, there were no laws about cars. So today, because we are sort of seen the blow-off top in politics and the idea that the legislator is so powerful, the idea of illegal versus legal is an incredibly taboo concept where it's like, 'Wow, this is illegal or this is legal.' But even someone like Gandhi said that if something is legal or illegal, that's just people talking about things. But there are other forms of knowing what should be done or what shouldn't be done. So in many cases, the interpretation of law is far murkier than people think. So in other words, does a law apply in a case or does it not apply in certain cases? I think that these are questions that we have seen in the space. A great example is the Ethereum ICO, where many people were saying it's a security for many years, and now you have even someone like Gensler who wants to claim it's still a security, but it's not decided. No one cares what he says. It just doesn't matter, because again, the people who create laws and these kinds of things, they're also just people talking about things, and they have the monopoly on violence. But when the monopoly on violence doesn't matter as much, or there are forces against it, then we have to start relying on an older form of knowledge, which is knowledge of natural laws or knowledge of natural moralities. And I think in a way, just as the gunpowder revolution and printing press came to an end of the age of chivalry and the age of these kinds of oaths, we're almost entering an age of chivalry again or the age of oaths. Because you think about blockchains, you think about core developers and a lot of what they're doing, it's very chivalric style to me. Someone like Do Kwon saying he's going to bid everything up and he's going to do this and do that, and he's making these bets. His $88 bet is a very chivalric style thing to do, a Don Quixote style kind of thing. And so I think one of the reasons for that is because you do have a breakdown of what are the things that you need the government for and the things that you need these laws to matter for. NFTs are another great example. In theory, some country could now come and pass all sorts of laws about NFTs, but will anyone follow those laws? Of course not. And so this idea that people literally won't follow laws in mass civil disobedience, or it's almost not civil disobedience, almost like civil apathy, that we will see the same as we saw in the 90s with Napster and file sharing, and same as we see now with NFTs and with a lot of stuff, and with de minimis tax. People get $2 of mobile coin, are they going to have to declare it on the IRS? All these things, people will just do what they want to do.

Well, I think that there's tremendous cultural power and pride in the countries and the people of the European Union. I think that there's a big struggle between essentially a bureaucratic elite as well as a sense that we must preserve the European ideals and that this is kind of the final solution for the continent. So the endgame of the World Economic Forum types is very much in this direction, to say we will have command culture, meaning that we will tell you what to eat, we will tell you what to believe, we will tell you kinds of things, and you will be the model European citizen. And it's through these methods of control and through these methods of community collectivism that we will make it through the next wave. And so for that reason, the WEF and the Communist Party have somehow been very close, because there's actually a lot of similarities with communism. So I think the big irony of the 20th century was that in the fight to fight communism, they actually in many ways became more communist than the so-called communists. And of course, The Sovereign Individual makes that point too, that if you look at democratic socialism and communism, they're actually very similar, more similar than they are different from the view of people in 200 or 300 years. So in Europe now, you have this fascinating thing in crypto where the European Union really doesn't like a lot of parts of crypto, but individual nations within it like it a lot more. And then if you drill down even further, individual regions of individual nations like crypto a lot. And so I think that localism versus that pan-Europeanism is very revealing. It's similar in the US as well, where you have mayors and governors more pro-crypto than you have central governments. And so this is the devolution of power back to the people. So while the 1984 writers and people of that time thought we are just headed inexorably toward the panopticon and total control, actually that's not true. Because as Julian Assange says, encryption means that it's much harder to figure out what two numbers were multiplied than to multiply them. And that's in the structure of the universe. So what that means is that in the structure of the universe, it's actually not true that we have to tend toward authoritarianism or mass control as a species. Actually, there are many strong forces the other way, meaning the ability of one person to send to another person a message that a government, no matter how many nuclear weapons they have, cannot read that message. And so I think that's the duality of man. And I think Europe has found itself on the side of the communist side, but I think that it has a lot of power within it to go the other way. That's why we see Lisbon, a lot of activity in Lugano in north Italy, and Switzerland as well, and hopefully increasingly in Dublin and the UK. I think localism is how crypto wins, and eventually this will have many geopolitical implications in terms of both transfer payments to larger polities as well as how people define their identities. So I think at some point the EU may realize this as well and say, 'We can't be just anti-crypto. We can't lead on regulation.' And getting back to your lead on regulation question, I think the reason why places will say they lead on regulation is when they already see it's a defeatist attitude and they say, 'I cannot win on innovation. I don't want to try to win on innovation.' But deep in that logic is that they don't want to lose control. Actually, it's because they want to say, 'There's no other way. Anything you do doesn't matter, so listen to me. Because your innate creativity cannot possibly create anything of value anyway, so I will tell you what is possible and I will give you what is possible. And never mind that other people around the world are in fact creating these things that I will now tell you how to use.' That doesn't work in an international age. People are mobile, so the same rails that people use for globalization, they now use to move around. So if you have that policy like in Europe, people will just leave. What we're seeing in India now with the crypto tax, people just leave. They go to Dubai, they go to Singapore, they go elsewhere. And you cannot start creating laws that don't allow people to leave. If you started doing that, then it's really an emperor-wearing-no-clothes moment, where you can no longer pretend that you do anything for the sake of the people as opposed to the collectivist extortion of power essentially.

Well, I think I'm a big believer in youth and the idea that in each wave you need to try to back the people who came out of that wave or people who really grew up in that wave. And so for DeFi, we did that. With NFTs, we did that as well. And I think we'll continue to do that as things evolve, because ultimately, as young founders, we just believe in the idea that talent is often very young. So as we get older, we're not going to be able to see all the trends ourselves. So the importance of delegating that kind of idea generation is really important.

I think there are always good heuristics. I think bear markets do help bring out those heuristics better. So now it is harder because it's harder to tell who's lucky and who was in the right place at the right time and who really understands it and gets it. But I think there's a tendency for very talented young people to want to go their own way. So if I see this attitude of going your own way, I often quite respect that. If they drop out of school, that's always a good sign. Or if they start a project not for the money, that's also a very good sign. So I think those are the markers that we can look for. And there are obviously red flags on the other side of that, like the classic that everyone knows about is that if they need to pay themselves a salary or to buy something, or they have a cushy life kind of thing, that's always a big warning sign. Or if they are very focused on not being in the communities and understanding the products, but on what's going up the fastest on any given day. So I think a lot of the yield farmers in this space, they are still traders, they're flippers. So some may be talented at it, some may ride a bull market, but broadly speaking, it's difficult to scale that, and it's also not the recipe for large exponential growth in my opinion. Less than 1% of them will find that, and most will underperform people who just buy and hold or even just collect.

Sure. There's a really good quote from The Sovereign Individual where it talks about Carl Jung. He met an American businessman who made it when he was 40. He dreamed his whole life of making it and then retiring. And he had a beautiful young family, he was traveling Europe with them, seeing art museums, and just loving life. But then he fell into a depression. He went to see Carl Jung and he wanted to figure out what was going wrong. Actually, I think in the story, his wife had him go to the psychologist. And the psychologist, after looking at it very closely and talking to him, said, 'It's very common because it's actually the achievement once achieved can be a source of pain as well, because the struggle is actually more beautiful than the achievement in many cases.' So I think what I try to tell people, because there are a lot of young people making life-changing wealth for themselves, and I think some handle it better than others because it's such a big shock and big impact. But I think what's important for them to understand is that often it's better to keep on working and keep on doing what you love, as opposed to let money change your lifestyle too much or define who you are. Because as humans, we intrinsically find more virtue in struggle than achievement. Actually, the idea even of achievement is a modern idea. If you think about the hunter-gatherer, he does not achieve. He simply hunts and he eats and he enjoys the time with his people. It's a different way of being in the world. So the idea of achievement is unnatural, and the fixation on them, and especially the belief that the achievement will cause happiness, is a modern belief that creates a lot of suffering and sadness for people. Because once they get the achievement, they then ask themselves why they are not much happier, when in reality they were happier during the struggle. So I think that also helps people who are struggling to see that there is beauty in the struggle as well. Some of the best moments when you look back will be when firms are just starting and things are the toughest. You think back to it, and you wish you could be there again.

Thanks for having me.