Why not put your money to work? Ladies and gentlemen, thanks so much for tuning in to the Crypto Tape. I'm your host, Frank Chaparo, head of content and special projects at GSR, and I'm pleased to be joined by Robert Leshner at Superstate, and of course, a fellow podcaster in his own right, probably one of the greatest luminaries of the podcast multimedia circuit.
Well, we like to say that we're the number two podcast in crypto, because who's going to actually keep track or check?
There's no metrics. Yeah, we think we are. In our capacity as content creators, we kind of see through the engagement with our content where we are in the cycle. And obviously, my show is new, so people are a little bit more excited than if I was back at my old shop. But we're still so far from the halcyon days of what they called crypto YouTube and the million view clicks and the 10 million view clicks. And I think it speaks to what you were talking about, Robert, which is the fact that retail's gone right now. It feels that way. And during the halcyon days of crypto and crypto podcasting, I think people were tuning into things because everybody was getting rich, right, all at the same time. And it was like, hey, what insights can I glean that will help me get rich, right? And so there was just so much general excitement that was in the air and it bled into podcast. It bled into everything. And so from here, it's not that moment at all. It's more, hey, what are people building? What are they doing? What's interesting? What's worthwhile? What should I pay attention to? I actually think it's a renaissance of the crypto podcasting moment.
There's a juxtaposition, right? Because you see it in your business, it represents almost the zeitgeist of this cycle, which is tokenization. I didn't think it was going to be the zeitgeist of this cycle, frankly. I thought this was going to be like a continued boring corner of the market that a couple wonks paid attention to. Totally. But it wasn't going to be like the mainstream focus at all. It was almost an accident that tokenization became something that I think a larger group of participants started talking about and paying attention to. And that, I mean, it's also the result of everything else that was exciting kind of disappearing or finding itself in the proverbial dustbin of crypto history. NFTs and these are things that both of us were very excited about just a few years ago, maybe still are, but aren't driving the headlines that we see. And I think because of the institutional element of tokenization, maybe the engagement on crypto Twitter and retail has lowered by a lot. These institutional conferences, these summits, these conversations, the amount of capital pouring in from the institutional side has never been higher. And it's just beginning, frankly.
It's just beginning. And it's like we always talked about how maybe interesting or unique it was that crypto was a retail driven market. And I almost wonder if this moment in which we're stuck in the doldrums, the trough of disillusionment as they call it, we're in this trough. Is that trough a byproduct of the institutionalization? The institutions actually brought us into a more melancholy, sanguine state.
I don't know if it was the institutions. I think it's just a function of perception following price action, right? And objectively, prices are for Bitcoin pretty much exactly where they were a year ago, right? We're right now mid to late November. Mid to late November, Bitcoin was 80, 90. Going to 100K, right? Right now, we're at 93 and everyone's so sad. This is the same price we had 12 months ago. Well, a lot of people are saying this almost is the epitome of, with the Trump administration serving as this regulatory catalyst, a buy the rumor, sell the news event. Or it's a neutral event if you look year-over-year, right? Most crypto prices are actually similar to where they were a year ago. It's not that things are bad or things are good. It's just that we've basically tread water for 12 months. Not much has happened, right? Not that much has happened when it comes to the underlying Bitcoin protocol. Not much has happened when it comes to the Ethereum protocol. Not much has happened on Solana. Not much has fundamentally changed on any of these platforms. The things that have changed is what's happening at the application layer. What are people starting to experiment with? What are the use cases that are evolving? And things like tokenization haven't really been commercialized yet. They haven't really become a part of the crypto price narrative or cycle really yet. And so I think we're almost pre-product market fit and pre-narrative for these things still. Even though the interest from the institutional side is entirely focused here, it hasn't really had any impact on retail, hasn't really had any impact on capital flows.
There's a few elements that we can unpack there. The first of which is you kind of nicely zoomed out over the year time span. If we maybe look at October as an example, prices were obviously dragged down by the cascading liquidations that we saw from the FTX stuff happening offshore. RWA growth was up 10% or 8% something in that ballpark in the month of October, while most some coins went down 80%, 90%. The flash crash took most things down 80%. Putting that aside, with Ethereum and Bitcoin both being down double digits, there's a question that I have and maybe you have a similar question, hopefully have an answer. Why isn't that RWA growth accruing value back to... because it is growing? Maybe it doesn't have that product market fit yet, but why don't we see a more of a mirroring?
Well, this is not going to be a satisfying answer, but this is my own personal view of how crypto markets function, right? Fundamentals don't matter, right? When you look at or talk about most crypto assets, they're not driven by a discounted cash flow, right? There's pockets of the market that vaguely are, some of the DeFi assets nowadays people are saying, oh, what's the market cap relative to buyback and burn or fees or value accrual in some fashion, but for the most part, 99% of crypto markets are not based on fundamental analysis. They're not based on valuation. They're based on more complex capital consolidation and momentum based things, right? They're based on social consensus. They're based on the memetics of it. They're based on flows, sentiment. They're based on all these things that are not fundamental valuation analysis based, right? And so when you ask, hey, there's these great fundamentals happening with RWAs. How come that hasn't changed the price of the base layers like Ethereum or Solana or the applications that they're being used in like Aave or Morpho? It's because I don't think those things fundamentally are traded on fundamental value, right? And so as you start to see growth going into them, it's hard for that to translate directly to a reaction in the price, right? Good or bad. And so I don't think there's that much in the RWA space that has gotten this retail flow in terms of valuation and attention yet. I think there's a couple tokens associated with projects in RWAs, but they've always been highly mispriced, either too high or too low.
It's funny because you can look at two projects. You live and die by the lack of fundamentals.
Absolutely. Like you can compare Centrifuge to another and you're like, well, they have the same metrics but one of them is valued in the gutter and one of them is valued all the way up there, and it's not based on fundamentals, right? And so I just don't think it's a fundamental market. And so I don't know if that's going to change, when that's going to change, how it's going to change if we start to see RWA start to go parabolic over the next four years, what that's going to lead to, right? In the same way that stablecoins, you could say, were part of the Ethereum narrative, right? But it didn't directly... at least Tom Lee tried to maneuver into it with his debt, but it's hard to say where that went until we saw Circle's IPO, and then it was directly tied to Circle's equity value and now to Tether raising capital at a hypothetical $500 billion valuation going into Tether equity. But besides those two things being equity issuers, you never really saw the wild growth over the past six years going anywhere into the fundamentals of different tokens.
It raises a question since you've brought up Circle's IPO, the extent to which the seemingly now short-lived IPO capital markets Cambrian explosion of DAOs sucked the oxygen out of the market for tokens.
Yes, I think in a sense it has, right? But I think a lot of the capital also came from new sources, right? To be a PIPE investor in the first place, you have to be in an institution, right? Like the investment banks aren't letting Joe Retail invest in a PIPE. So the primary capital was not being drawn from crypto markets per se, right? The secondary capital, I think, was right. I think there's a lot of people that were buying Bitcoin, right? Well, you did have a lot of crypto market participants that were institutional participating in the PIPEs, but I guess you're right that a lot of those same actors wouldn't be longing Solana and Hyperliquid with 50x leverage.
Yeah, I think a lot of, and this is just based on my own Twitter feed, right? I think a lot of the new capital seemed to have come from traditional equity market investors who are like, 'Oh, I'm buying BitMine.' And they're posting the tickers in a way that they don't post tickers for crypto assets, right, with the dollar sign. The amount of what seemingly looked like retail but not deriving from crypto market flow was really high. It was like a new audience was tapping into these through Robinhood, right, through their brokerage accounts, not through the market structure they currently use for crypto. So I think a lot of the retail debt flows actually weren't even coming from crypto. It was coming from new participants and it drove up crypto markets especially in Ether, right? But in the same way that a lot of the flows in Strategy over the last however many years weren't really the people that were trading on Coinbase and Binance, it seemingly was a very equity focused crowd. And now I think we're in the position where because the performance has lagged equities by so much, that then almost creates a circular, self-fulfilling prophecy that things will go lower because things have gone low.
Yeah. It's crazy because if you zoom out, right, crypto is basically flat year-over-year. Equities are up, and gold is way up, right? And so it only looks bad on a relative basis.
I mean, for ETH though, right? I mean, if you look out four years, QQQ over the last four years is up over 100%. ETH, I think, down 14%.
Yeah. But Ether's implied and realized volatility is just so much higher than the NASDAQ. Like ETH goes up and down 50%. You know, when people sneeze, right? So I don't think that's even that big of a deal. Like, in the past three months, Ether was $4,900 and it was in the twos.
No, that's fair enough. But then that raises the question of will only appreciation in crypto assets result in retail coming back? What else would get them back into the lion's den?
It's a great question, right? I don't have a crystal ball. I am not a macro guy. I'm not a markets guy at the end of the day. I'm pretty much a technology guy. And so I think the answer is going to be a couple things potentially, and with a big caveat that I'm probably wrong, right? One is a totally new meta in crypto that appeals to a huge audience. Like NFTs, we were talking about this before the show. NFTs were one of those things where it was like, oh, a whole new group of people that never got involved in crypto can now do crypto things, right? A lot of people came into crypto because of that, right? A lot of people have come into crypto over the years through the ICO mania in 2017. They've come in with Bitcoin going to 100K. They've come in from these different things that become mainstream conversations, right? And so the easiest Occam's razor answer is there's going to be something new that comes along that becomes a mainstream conversation and reason to come into crypto, right? I never could have predicted ICOs. I never could have predicted NFTs. Maybe some people were predicting Bitcoin 100K for a really long time, but there'll be something that comes in that evolves, that gets people excited again. Something new, something hard to predict. Maybe it's AI related, right? Where it's like, oh, we finally built agents that use crypto and Chat GPT rolls out a crypto integration and everyone's like, oh man, this is why I need stablecoins. Or this is why I need chatcoin or whatever it is, right? And there's a reason for another 50 or 100 million people to say, I'm onboarding, right? That's base case A. Base case B is actually something totally the opposite, which is what we're doing in Superstate, which is people build infrastructure that enables new applications and new use cases for assets to trade. And they come in to trade something like equities and don't realize that under the hood it's operating crypto, right? And they're onboarded invisibly. They're onboarded without realizing what's happening. They don't know the market structure. They don't need to know the market structure. They don't care about the market structure, but they're using crypto. And this is actually an idea that people have had for a very long time. This is an idea I had when I founded Compound in 2017. It was like, oh, we're going to build a smart contract layer that will become the backbone of new financial applications or fintechs or whatever have you. And there's a lot of teams that have said this over time and not that much has played out, but we're starting to see it. We're starting to see it with Stripe. We're starting to see it with Robinhood. We're starting to see it in all of these places. Not at product market fit, but at ideation and initial product development, and that's exciting. And so I think path B is like, yeah, there's crypto infrastructure running behind the scenes and everyone's using it and they just don't really know.
One thing that seems different and I'm sure you're seeing this on the Superstate side is that despite the depreciation of the underlying tokens in this part of the cycle, the development hasn't seemed to slow. If you remember 2021, it's growing as we pointed out before, it's still increasing at an unbridled pace. And even within the hollowed halls of these big institutions, in 2018 and in 2021, they stopped or the heads of the blockchain initiatives left and went on to do other things, moved into different units. That's not happening this time around. I mean, despite the effective bear market that we're in, JP Morgan is striking up a deal with Bass, that would have just fallen apart in 2021. And things unraveled in 2021 and in 2018 in a way that they're not today.
That's right. It doesn't feel like it's the end. It feels like it's the beginning. Right. Like at Superstate, we've spoken to every single bank, every single asset manager, every single custodian, every single firm on Wall Street. Every single one of them has a genuine interest in crypto at this point. How they implement that, some are farther along than others, right? Some know more about it than others, but every single firm on the street today, every single one has people internally focused on it. And they're deciding how to approach it. They're deciding when to approach it. But every single one of them, 100% of them, have an openness to this market that they didn't have before. Now, it doesn't mean they're going to be longing Bitcoin, right? But every single one of them wants to use crypto and/or blockchain in some way at this point.
And it doesn't feel like the innovation theater of 2017, 2018.
No, no, it's not. They're hiring engineers.
They're hiring engineers. And the other thing is that in the nomenclature of it, right, 2017 everything was blockchain, not crypto, but they're embracing the idea of digital assets now.
Well, I think stablecoins got everyone over the hump. Yeah. Right. And stablecoins are the first asset that... and again, I hate this blockchain or crypto thing because in my opinion, anything that uses a blockchain is crypto and vice versa. There's no one using wallets that aren't cryptographically signed, right? Like all of this is crypto. I think stablecoins got everybody over the hump. And it was the product market fit of stablecoins, right? It wasn't until stablecoins got to be where they roughly are today, which is when they broke like a hundred billion, $200 billion, that's when they became large enough to care about.
And it was the passing of GENIUS Act.
And it was a suite of regulators in the US that became accommodative. Right? It's not just the SEC that flipped from antagonistic to supportive. It's also all the bank regulators. It's the OCC. It's the Fed becoming more amenable. It's all the different constituents involved. And all of that sort of stacked up to be this tipping point, I think, for a lot of institutions to say, okay, this is a significant technological improvement. There's a significant efficiency improvement. We can route value with almost complete finality extraordinarily fast and extraordinarily cheap and extraordinarily efficiently. Why wouldn't we be using this, right? Like why wouldn't we, right? And they don't feel like they're going to get fired for doing so, you know? Whereas in 2023, anyone felt like they were jeopardizing their own career inside one of these institutions to raise their hand and say, I think we should be using crypto, right? Because enough people could have said no. And enough people could have said no because they felt that their regulators and the legislators, the stakeholders outside would have said no, right? And so all of this has changed and I think the dam broke with stablecoins and now it's breaking into the tokenization of securities and it's breaking into all of these other use cases.
So what does that mean for you guys at Superstate? I mean, what is the level of penetration right now? I think for a lot of people maybe, and this isn't pejorative, but from the outside looking in, it's kind of like different things cropping up, different partnerships or initiatives. How does that maybe translate into our broader capital markets moving into one direction? Does that question make sense?
Yeah, it does make sense. So here's the way I would summarize it today. Right now, you have, and I'll speak about two topics. One is how it works with products that we're the issuer of, and then also our focus on equities and the US equity market structure. So in terms of our products, like we've built a tokenized T-bill product and we've built a tokenized high yield product. These have been growing constantly for the last year and a half since we launched them. We're at about $1.4 billion of AUM split between a T-bill product and a high yield product that are tokenized. And I would say these are live and growing and seeing continued adoption every single day. We're seeing incremental DeFi integrations to provide new utility and use cases to them. And we're just seeing growth, right? I would call these almost mature, right? It's kind of like a year and a half into stablecoins. There was like a billion or two. It was growing. It was not yet huge, but you knew that there was something there and there was no impediments to them. That's where we're at with our tokenized funds. Earlier this year, we started to go into the market for tokenizing public equity with a product that we launched called Opening Bell. This is much more complex because there's already an equity market and there's already an incredibly vibrant and successful equity market that's hard to change, right? It's hard to change because there's already a lot of workflows between exchanges, custodians, broker dealers, the DTCC, transfer agents, and all of the regulators above it. There's a lot there. And so innovating on this is a lot slower and a lot harder. Where we're at right now with equities at Superstate is, we're a tokenization company that partners with issuers to partner with public companies to be their agent to tokenize their stock. So the other model that exists out there is a startup goes out and buys the top 100 stocks and puts them into either 100 SPVs or a single trust of some kind and issues tokens against them and they're like a third party. It's not like the company's creating a token of their stock. It's a third party going out buying up stock and then saying, hey, this is a liability or an issuance from me, the startup. So put that aside. The Superstate model is we enable the issuer to tokenize their own stock. So a public company that trades on the network.
So do they set aside those stocks and then...?
It's a great question. So the shares that come through Superstate, you can think of them as bridged from tradFi into crypto by Superstate. We're basically like a bridging protocol. And so where we're at today is we've partnered with a number of companies. We've begun enabling the tokenization of their stock and we're really testing out the flows of the bridge, taking a share from a brokerage account, like from an app on your phone, moving it into Superstate, and then into a token on the blockchain and back again. Taking a token on the blockchain, moving it through Superstate, back to a brokerage account on your phone. And it works. It's a great milestone that demonstrates the technology of it. It's the company's official share, the same CUSIP, the same shares that are traded on the NASDAQ or New York Stock Exchange, the company's official shares as a token, not some offshoot or derivative of their token that a startup may be tracking the synthetic price of it. It's not a synthetic asset in any way. It's the official shares. And so what's cool about this that I don't really think the world has seen great use cases for yet because again, we're still just getting off the ground. But the primary use cases of this are that when it's the company's official shares, every transfer updates the company's official books and records, right? So the company says, 'Oh, my shareholders have changed.' When a token moves, the actual shareholder registry changes from Frank to Robert if Frank sends Robert a share. And what that means is if a company wants to pay a dividend, it's as simple as knowing in real time the balance of all the tokens and saying, okay, I know who my registered shareholders are. I know who should be receiving this dividend based on who holds the tokens as of midnight on this date. Or if there's a corporate governance process, so there's a proxy that gets distributed, it's as simple as knowing who all of the token holders are. And every single token holder is a registered shareholder of the company. To take this one step further, an issuer can do really interesting things with their shares already. Companies go out and file prospectuses to do things. It's just that the way shares are recorded and transferred today is really archaic, but when it comes to a tokenized set of shares, companies can start to do really interesting things with their shares. Theoretically, a company today would have a really hard time airdropping shares to customers who go into the store and swipe something with a credit card. But when they're tokenized and they can be transferred to anyone that has a wallet, right? You could find a situation where an issuer upgrades their mobile app and suddenly actual company shares appear in token to anyone who uses their app. And there's all these use cases that are possible when it's the company's actual shares that are the token.
And we see so many issues. I don't know if you saw recently in the journal a few days ago, the FTC is suing the two main governance companies over their influencing of governance voting. So it just seems like a lot of this is lacking participation in governance, especially on the equity shareholder side. But to your point, there's a lot of middlemen, very archaic, lacking transparency. It's an interesting point that isn't highlighted enough. Most people's minds go to ease of trading, ease of movement, ease of liquidity versus some of these more thorny corporate or customer engagement elements.
Exactly. In the superstate model, you have an issuer and then you have shareholders. When the tokens move, the shareholders change. In the existing equity structure, you have a company and its transfer agent, shares held in the DTC, then held in broker dealers, each with its list of users. Every time a company does something, there are like four middlemen involved. So you're removing all these layers. How will that translate to the relationship between an issuer and its shareholders? It's going to speed it up and make it more direct. I don't know what the end outcome looks like.
But maybe you're getting some hints. Maybe some of these issuers you're working with are sharing ideas, or you're planting seeds in their minds.
We're planting some seeds. To summarize where we are now: we've been testing the bridging. We haven't tested anything else yet, but we will in the very near future. We're going to start rolling out DeFi use cases, shareholder use cases, issuer use cases, and take the lid off our vision of what tokenized equities look like, what they do, what's different from equities in a brokerage account or from third-party tokenized assets.
