Nothing said on Empire is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the Blockworks team may hold positions in the companies, funds or projects discussed.
All right, everyone. Very excited about this. So, we've got Avichal Garg, co-founder of Electric Capital, back on the pod. I think you might hold the record for most times on Empire. You're at least top five now.
Yeah. Yeah. Yeah. Yeah. Well, there's like an incentive in, you know, podcast. It's like if you bring the views, then we'll have you on more. We bring the views. So, Oh, amazing. Great.
Well, you know, I only I only I do like your pod. I do. I do like I don't do I purposely don't do that many actually.
Do you have any are you and like rivals? because you're both like you both have good takes and you're public figures and
Uh we're uh I mean he's actually a really good friend of mine.
We gotta get the drama, baby.
Drama in public. We're we're we're fremies. Nice. Nice.
But I you know I really I do enjoy the reason I like going on his pot too is um he's just he's just opinionated and uh he's not afraid to assert opinions and um it's fun just like as an intellectual exercise to disagree with him to you try to steel man the other side of it because he's a really smart guy.
Totally. And so you're like, what is the strongest argument for the other side?
And I've now spent enough time with him that sometimes I will purposely like I know how to needle him a little bit, you know? And I, you know, I mean, you have friends, right? And so like, you know, you know how to like get under each other's skin a little bit. So I know how to do that with him a little bit. Makes it really fun.
That's great. Um, okay. So we are recording this in San Francisco at your guys's office. So first off, thanks for having me here. Um, I wanted to do this with you because we're at an interesting moment in time where basically AI has sucked up all of the attention, capital, human capital, financial capital. Um, you know, we're on the precipice of the three largest IPOs maybe in the history of the world, SpaceX, uh, you know, Anthropic and OpenAI. And um you probably more than any other crypto VC or than most other crypto VCs are both at the center of crypto investing and have spent maybe two decades at the center of Silicon Valley investing. I think your angel, you know, record is, you know, pretty good. Um so I wanted to just get your take on like broad sense of how you think about crypto in light of AI sucking up all the attention and capital.
Uh there's a lot of ways to cut that. Um I mean something we think about a lot. I think um undoubtedly AI is the center of the universe right now. It's interesting though as an investor um that is very difficult right because what you really want to do is be like the right time to be investing in AI was 5 years ago or 10 years ago. Um and it's really hard to do right now unless you are willing to throw a lot of money around and take certain kinds of bets. Um you know for example investing in OpenAI at 100 billion was still a good investment right um but if you're an early stage investor then what you really want to be doing is investing in the things that are not hot today um which I think crypto is not hot today, fintech is not hot right now. Um you know there like those kinds of categories I think are actually from an early stage perspective more interesting in many ways than AI right now um because AI is just so so noisy and I think that one of the lessons we've learned on uh being on the crypto side for a while too is um that's not when things get like this parabolic is like not the time that you want to be putting a lot of capital to work. You kind of want to be really patient or you want to be investing so early in things where it's you're practically like pre-incubating them because it's like it's just going to take so long for the thing to work. So we just did one of those. It's sort of at the intersection of crypto and AI. Um but actually it's it's very difficult to invest in AI right now. And I think it's actually like pretty not that difficult to invest in fintech uh in crypto right now.
Yeah. So, it actually sort of it pushes us away from like let's let's let's go focus on the things that a lot of people aren't focusing on and aren't really popular right now.
Yeah. Interesting. How do you um how do you decide what those things are? Do you have like, you know, big team meetings where you're like, what's the second order effect of this and the third order and the fourth order? Or do you have, you know, the smartest founders in the world come pitch you guys and you say, "That's a good idea. I'd never thought of that." Or,
Yeah, a little of both. Um and so I think part of it, um I I'll give you a concrete example, right? So, we were just talking about this. So um if you think about the side effect of of all these AI tools and models and all these things that are you know going to be able to hack all the things um then clearly like cyber security starts to matter a lot more and how do you how do you secure the code and there are lots of different ways to do that and I think one of the ways that it would make a lot of sense to do that is um through formal verification um and so you can sort of think through like uh you know what are the consequences of what's happening in the world and what are the effects of that and what does that mean um And and for us, we try to find things that are that are gonna have some sort of like technical moat or gonna have something where it's like hard for the average person, for the average VC to to sort of get up to speed on it. And something like formal verification, um Curtis, my co-founder at Electric, um has gone down that rabbit for years. We we did the series A of a company called Certora which does formal verification for a lot of um uh DeFi protocols and works really closely um with with many teams across Solana and ETH and and the whole ecosystem. Um and those guys are world experts like Mooly Mooly is one of the godfathers. He's a professor was one of the godfathers of formal verification.
Formal verification for those who don't know it is the idea that you can turn it's very hand wavy so Mooly I apologize but it's it's basically the idea is you you can turn code into mathematical statements and then you can mathematically prove whether or not your code does what you think it does and historically it was used in places like um aviation or or um space programs like satellites or or NASA and the reason you would use it in those contexts is you have a relatively because it's very expensive computationally to do these things and it's a lot of work um like from human labor to sort of construct these these proofs basically. But um you know you would do it in places where you had relatively small amounts of code but the consequences of a bug were catastrophic, right? Like you send a probe to Mars and if you have a bug in it the thing crashes and you're like well I just lost right like 18 years of work, right? And so you really want to make sure your code is doing what you think it's going to do, right? You don't you don't have bugs. And it turns out um smart contracts in DeFi are a perfect fit for that, right? relatively small amounts of code but the consequences are like you know it secures you know billions and billions and billions of dollars and so that's a perfect fit for that and so works with a for example um but now all of a sudden those techniques um become extremely important because if if models or whatever you know the open equivalent is going to be you know these things that that can hack all the things um you know you got to go back and check all the medical device software you got to go check you know every like bank software you got to think about how do you harden your systems from um voice emulation right so like I can I can socially engineer people and so now my entire customer support group can be socially engineered and so how do I you know there's like all these points of of cyber security you know uh vulnerability now um and so all of a sudden I think formal verification becomes super important.
So if you have that insight then you say well that's probably not a thing that your typical VC is thinking about right there they're just it's like difficult to think about what the hell is even formal verification so an idea like that. Is that you guys in a room whiteboarding saying second order fact, third order, let's go find the best or is it someone who you know maybe you've had a relationship, they come in and they both.
Yeah. So yeah, a lot of it is I mean a lot of um it's it's sort of like preparation meets opportunity, right? And so it's just like having talked to enough smart people, you start to build some intuitions and then um you know it's like some some person that you've invested in is having a dinner and you go hang out and they invite one of their friends and their friend is really smart and then their friend says something like, "Oh, that's really interesting. I never thought of it that way." and you take it back to your other smart friends, you know, that you work with and you have that conversation. And so it's it's pretty organic. It's hard to um you know, we try to put some structure around it. It's like, okay, let's go do a market map or let's go have this conversation about this topic and whatever, but a lot of it ends up being organic and you sort of have these moments of insight and brilliance where you're like, that is a great insight from that person.
And then that sort of cascades into like, oh yeah, we really should be thinking about that.
Um and then you have to intersect that with like where where are you uniquely positioned to win, right? And so for us it turns out understanding cryptography and distributed systems and um you know Curtis and I both worked at um Facebook on on large scale machine learning systems and so we kind of understand that world and so you start to then say okay well you know like if we're going to go try to try to work with a founder um to build something because usually we're we're first money in can we do we have is there a reason the founder would want to work with us versus Peter Thiel or Mark Andre or you know Sean or Alfred at Sequoia and so we we have to feel confident that if we go talk to that founder that we are we are uniquely well suited to help that person win, right? And so then you got to intersect those two things. So it's like you get some great insight about the way the world is going to be and you intersect that with what are you what are you uniquely good at and it turns out something like formal formal verification we're like uniquely well suited to do.
Going back to just this crypto opportunity versus the AI opportunity. It feels like the only thing to invest in is some variation of AI, right? That's the that's the the moment that we're in today. Whether it's the memory, you know, SanDisk and Micron or it's you know you know retail allocation to you know SpaceX or it's you know the squeezing in a last round of Anthropic before they go public like up and down the capital stack that is the the flavor of the of the moment. How you know the the thing that is definitely not the flavor are crypto tokens. Yeah. How do you view even this you know this idea that you just brought up a formal verification this is crypto meets AI in a sense right? How do you view like the pure play crypto opportunities today?
Yeah. Um we are still very very optimistic about that. I mean that's for us when we when we first got off the ground in um in 2018 with angel investors before that but that was sort of like when we formally created electric capital. Our the thesis paper that we wrote which I think has turned out to be true is uh we called it programmable money. We said like what this stuff is really uniquely well suited for is moving money around and that's what it's going to be used for. Um and we call that programmable money. I think that that basically turned out to be correct. And when you look at it through that lens, I think similar to, you know, I think both crypto and AI share this thing which is that um at the end of the day like what isn't AI? Like what isn't AI enabled? It's just going to be in every business. And I think similarly for crypto it's like well everything needs cryptography in a world that agents are doing all the things or everything needs cryptography if you're talking about moving money around. And it turns out um money and liquidity and and these kinds of network effects are one of the few long-term defensible things in any business, which is why every business is trying to become a wallet.
And so if every business is trying to become a wallet and move money around and that's such a core part of their business, then it's that's going to happen on crypto rails. So,
You know, we kind of look at it as like, well, every business is going to be AI and every business is going to be crypto and then the technology just sort of disappears. To your point around the specific crypto tokens. Um, I think the the crypto as money thing we still think is still relatively early. Um, and so that means things like Bitcoin and ETH as as perspective stores of value. Um that means um underlying rails that move these assets around in various forms and I think that's things like uh potentially Solana or you know um some of the L2s on ETH um things like EigenLayer where you might build sort of semi-permission networks for certain use cases that that um are compatible with ETH and settle ultimately on ETH in in interesting ways um or even applications that use the idea of tokens as participatory mechanisms. And I think we're just starting to see the beginnings of that when we think of like Hype and and Venice um as examples of that. Um but all of those at their core are really about um moving money, capital formation like it's it's it's the entire fintech stack basically. Um REI is another good example. It's another one in our portfolio um where it's a reinsurance business. It's a fintech um you know Cayman Island registered regulated. It's a just a reinsurance business. It's a phenomenal for people that don't know reinsurance. Um, reinsurance like Warren Buffett has made billions billions of dollars on reinsurance. The idea is insurance for insurance companies. And um it's a it's a phenomenal business if you do it right because it's just law of large numbers. It's you know it's like I'm going to underwrite the insurance companies that do workers compensation in Maryland and Florida and California and like what's the likelihood that all of a sudden there's something like catastrophic that hits all the workers compensations policies in these places? And so it just ends up being a spreadsheet formula and you can make a bunch of money and the the rough math of it basically boils down to um some leverage multiple on top of the treasury rate.
And so you can get like 5 to 7x leverage on treasuries basically the way the regulations work. And so if rates are like 4% you're making like 20%. Um which is pretty phenomenal as as like an IRR on your business. Um, and what's interesting about REI is they've built a a protocol on the back end that uses the stablecoin markets as their capital market function. So like typically in a reinsurance business, what you have to do is like go raise a bunch of money from Blackstone or from insurance, you know, from pension funds to finance this whole thing. And what REI is doing is saying we'll create a smart contract. Anybody on chain can deposit stables, we'll offboard those, finance the business. And you get real yield. You get like real 12% or real 14%. This is not like Terra Luna stuff. It's like there's something productive, right, happening in the world with this that you get paid. Um, and so you look at those kinds of things and you're like that's real, right? That's that that's what we talked about for a long time. That's actually real. Um, but I think a lot of like crypto Twitter is stuck in this um like L1 wars or like memecoins or like that's and that's just I think slowly dying. Yeah. Um meanwhile I think you have things that are like Hype or VVV or REI which are real. There's like something productive happening there. There's something interesting happening there. and the tokens and the infrastructure are all actually useful in some fundamental way. And I think we're just starting to see the beginnings of that. And so, you know, there's it's like very the future is here, but it's very lumpy. I think people don't realize that that stuff is real.
Yeah. So, what do you think uh what do you think we got right and what did we get wrong? Right. Because it feels like, you know, originally we thought all things would become cryptoified, right? We had, you know, the, you know, the Uber on the blockchain. We had the, you know, all games would become crypto games. Basically, you'd own every skin and it would live on a blockchain. It feels like that maybe was the wrong idea, but the right idea is that capital markets are hundred times bigger, a thousand times bigger than anyone in crypto realized and that all capital markets will move on chain.
That's right. Yeah. Yeah. I mean, that was um I mean, to toot our own horn a little bit, I think we were basically right about that. We didn't programmable money. We didn't do much beyond that. Um we never did um like social stuff or apps or Uber on chain. We never did any of that stuff. we basically just did programmable money. Um, and I think we were we were basically right. Um, now that doesn't mean I think that's I think that stuff can happen um eventually, but it just goes back to this idea of well, it's because all of these other things may have elements that benefit from this infrastructure. They need to move stables around, for example. Um, and this is going to be the rails that all the stable coins move on. Um, or um these tokens allow you to own a piece of the product and the network that you're participating in. So that that's what I think is so interesting about like the VVV token mechanics where you sort of get this like you know free usage for the LLM by holding the token and you're getting effectively getting like a share of the upside in the in the protocol and we we talked about that a lot in sort of like 16 17 18 era of participatory capitalism right and I think it's actually happening um and so
Right say say one more line about that go a little deeper into why why that's exciting and what is the thing that is exciting there
Well the the intuition always was you know It it somehow feels um maybe unfair is too strong a word, but you sort of have this intuition that's like well the first hundred or the first thousand Uber drivers really should have made more than 15 bucks an hour if the thing ends up being worth 100 billion. Like they got the network effect off the ground. They're they're the supply side of the supply and demand marketplace and they didn't really get to benefit. And how would you do that? Like do you give those people equity in the thing? How do you you know it's just like mechanically speaking? How do you even do that? Right? There's SEC rules around shareholders and do you give them profit interest? you don't want them to like vote on your governance stuff, right? It's like how do you do that? And and tokens actually solve that, right? Like you can own a piece of Hype and and they're doing buybacks and and there's effectively economic value that gets created by the product and you can be a heavy user of the product and you can benefit from the overall success of that ecosystem um using tokens and and um the real value there I think is that that that it's it's about capital formation. It's about capital flows and and so even in that use case I think it's programmable money. What you're really it's like a it's like a type of equity. It's not equity in a traditional sense, but it's a share in the profit of the thing. Um, which is enabled by this infrastructure. And so those profits can flow across those rails in a way that you just couldn't with Uber or Airbnb. You can with Hype, you can with VVV.
It's so it's so interesting you say. I think a lot of people think that Uber on the blockchain because everyone's heard this idea, right? And people look at it as a thing that didn't work and you would say it actually is working. It is literally working.
It just turns out it's really hard to build an amazing product.
Correct. That that's what crypto folks maybe got wrong.
Exactly. Is that it's really really really hard for every you know for every Uber there's 100,000 startups in Silicon Valley that died.
So it took it takes a long time to get to a Hyperliquid. It looks like Yeah. I mean you mentioned VVV a couple times like maybe Venice is another breakout thing. It's hard to hard to build a breakout app.
Yeah. REI I think is another good example where you can you can participate and and you know I think um to me it's so funny because um if you're on Twitter all day what you would think is that uh crypto is dying but it's because everybody's like paying attention to price charts um but those are lagging right and if you go spend time with founders uh you actually or you go spend time with the institutions in in New York that are talking about moving all their stuff you know tokenizing and moving all you have like such a different perspective of what's happening in the And that's where we spend all of our time. We're very It's I always laugh. We talk about it internally. It's just we're pretty low-key on Twitter and we're pretty low-key in terms of like media in general because I think it's too easy to fall into this trap of thinking that that's real work. That's not real work, right? The real work is like spending time with founders. The real work is figuring out how to raise the next round of money. The real work is building a good product. And so, we try to spend as much of our time on that stuff as possible. And if you do that, I think you just have a really different perspective. And so I look at things like Venice or Hype um or REI and I'm like, "Wow, it's actually working." The stuff we were talking about 8 years ago is working um all the infrastructure is in place. And so if you have the ability to build a really good product, you now have tools in your toolkit that actually a lot of people don't even understand yet. the idea of using stable coins as a capital market, the ability to have your your users actually share in the upside of what you're doing, the ability to distribute these products globally like um I was just uh was Keone from Monad was uh was just tweeting about this um and um I think he's totally right is you know the one of the side effects I think that people don't understand about of what's happened with crypto is you now have the ability to build a a financial services company or a fintech um and not have to start it in the US Like historically you basically could you if you look at Revolut or you look at any of the fintechs Ramp or Braze or whatever they could only really start in like one or two markets um and then you had so much regulatory overhead to scaling that business that it was extremely cost prohibitive and it was very very difficult like Revolut was UK and then they're not breaking out of the UK. Yeah. They they try to go to other markets and every now and then you get like a new bank in Brazil but it's like pretty rare. Um most of them actually happen out of the US Robinhood and Coinbase. It's because the market is large enough. You have one giant US market. The regulatory regime is the same. You try to do that in Europe, it's really hard. You try to do that in Asia, it's really hard. And those markets are small. But now with crypto, what you have is actually a sizable enough global market of people holding stables and they all have um you know, EVM or Solana-based wallets. Um, and so I think you have a large enough market that you can build financial products for, get to scale, and then back into competing against companies in the US, which is a huge advantage for startups. Like for the first time, you don't have to go raise $50 million and get all the licenses and um, uh, you know, figure out how you're going to be competing for CAC against like BlackRock or Fidelity, right? Right. like all of a sudden you have tens of millions of people that have stables and have wallets that you can reach and the mechanics around how you acquire those customers are completely different. um the way you build your business the infrastructure is completely different and and you can actually get to scale you can build a Hype scale business um which is real business and once you have that like if you look at what what um Jeff is doing it's it's phenomenal execution he's like got the ETF going he's got the SEC on his side right like he is doing exactly that playbook and typically when you see that happen it's not one and done it's like that's it's not like oh Hyperliquid is the only person that's ever going to figure out how to get to scale on a business and then back into the US and have like a real regulated credible business. I think that's the first of many. Right. So, back to the idea of like I think there's so much opportunity now because all the things we were talking about 8 years ago, the infrastructure is actually ready to go. Um that there's no better time, but but people I I think a lot of people that spend most of their time on social media are not going to realize that that's happened until it's already happened.
I agree. Right. And so 5 years from now, all people will wake up and be like, oh, the right time to be investing in crypto tokens that are have real fundamental value was 5 years ago.
There's actually you talk about spending time with founders. I think there's unbelievable alpha I know it's your job to because you have to go meet with the founders and invest in them but there's just unbelievable even retail alpha in spending time with founders because they'll tell you what's actually happening which is the last 18 months was really freaking hard and now the last couple of months most people's numbers have changed.
Yeah. Like stuff is starting to work.
Yes. Yeah. Stuff is really working. So what do you um what are you guys most excited for? So we mentioned Venice, we mentioned Hype. Are you by the way are you guys invested in
Oh yeah, we should call that. Oh yeah, we should also call out please don't listen to me about this is not financial advice.
Yeah, of course. Of course.
Can we cut that and put that in the front? Yeah. Just don't listen to me about anything. I'm not I'm not your financial adviser. Exactly. Um so you guys have the So we should electric you have the venture fund and you have a liquid fund.
Uh the venture stuff can also do early stage protocols and tokens. Um uh pretty much everything that I used as an example we have we're investors in we see investors in Near seed investors in REI we um uh have a bunch of Venice um yada yada a bunch of ETH. We have a bunch of Bitcoin.
Uh we have not announced whether or not we have yet.
All right, fair enough. Something like Venice. Did they raise any venture rounds or it was just you buy the token on the open market?
