Coin World News Report:
Compiled by: Peyton
This week, we had the opportunity to discuss the investment environment of cryptocurrencies with Mike and Carl from 6th Man Ventures. We delved deep into topics such as the Solana ETF application, the need for more applications in the cryptocurrency space, the potential of AI and DePin, and the challenges of cryptocurrency airdrops. Enjoy!
The Background Story of 6th Man Ventures
Dan:
Could you share with us the background story of 6th Man Ventures? What important experiences in the cryptocurrency field led you to venture into risk investment?
Mike:
At the end of 2017 and the beginning of 2018, I entered the cryptocurrency field full-time. Prior to that, I had worked in the media industry for several years and in the financial technology field for nearly a decade. I founded a company in the Web 2.0 space. From the perspective of a baby boomer, I found that financial technology often just put a new coat on old things, while cryptocurrencies were truly exciting as they were creating a whole new system. However, when I entered this field, I wasn’t an engineer and I wasn’t sure what to do. Every answer to a question raised more questions.
I founded The Block and encountered numerous founders, entrepreneurs, and investors in the ecosystem. After running it for a few years, I realized that even though I was working in an ecosystem centered around money and capital flows, I wasn’t participating in it. In 2021, I partnered with my long-time college friend Serge Kassardjian to establish 6th Man Ventures. Our investment philosophy is broad, not just focused on a few core themes, but seeking opportunities under a wide mandate. Serge and I both have backgrounds in media and financial technology and have been internet natives since college.
Our goal is to support the creation of more cryptocurrency-based applications.
Since our establishment in 2021, we have primarily focused on investing in the application layer.
The inspiration to start investing came from our personal experiences investing in projects like NFTs, NBA Top Shot (2020), and Bored Apes (2021). Through interactions with the on-chain community and insights from numerous developers, we decided to start investing. This process has flourished since 2021, and in 2022, we launched our second fund. We are now registered investment advisors and institutional investors, typically making seed or series A investments in application projects across multiple blockchain ecosystems.
Dan:
And Carl, what made you transition from being a product leader to wanting to play this role in investments?
Carl:
That’s a great question. The framework I’ve followed since graduating from business school is that I aspire to achieve 10x growth in certain aspects of my career every year, whether it’s in finance, networking, or skills. In the venture capital space, I found an opportunity to not just play a game of 10x growth every day, but a game of 100x growth. We’re constantly looking for the best and brightest founders, helping them develop ecosystems, and collaborating with them in the early stages of their startups. I find it incredibly exciting.
When I entered the venture capital space and started talking to Mike and others, what surprised me was how straightforward their responses to my questions were. As a product manager with six years of experience, I always followed frameworks and theories, focusing on customers and the problems to solve. This approach is particularly unique and beneficial in the venture capital space, helping me discover tremendous opportunities and establish long-term relationships with founders. It is this game of 100x growth that brought me into this field, and I have never regretted it. I absolutely love it.
People often ask me if I miss the days of being an operator. But the 6th Man Ventures team consists of five people, and we are still builders and founders. We are working hard every day to expand our influence and improve our work. So even as investors, we still wear the hat of entrepreneurs.
Solana ETF
Dan:
Since there are five of you at 6th Man Ventures, it seems like you really need to find the sixth! Before we started the podcast, we received some interesting news: VanEck announced that they have submitted an application for the first Solana exchange-traded fund (ETF) in the United States. We are not regulatory experts, so I won’t force you to make any predictions.
But in general, Carl, what do you think this means for the industry as a whole? When Bitcoin ETFs were launched, everyone was talking about Ethereum. Now, with the impending launch of Ethereum ETFs, the question is, who will be next? And it seems like Solana might be the answer. What does this mean for the Solana ecosystem?
Carl:
I think it signifies the resilience demonstrated by the ecosystem. Solana has faced various challenges, including regulatory hurdles and the collapse of FTX. However, developers and founders have been continuously rebuilding and moving forward. This announcement is proof of that resilience.
If you look at the core metrics of the blockchain, Solana stands out. The number of transactions processed, the value exchanged on-chain, and the industry partnerships all indicate that Solana is likely to receive approval. This is recognition of Solana’s success.
Mike:
Yes, the change has been rapid. In December 2022, there were jokes that there were only 75 developers left on Solana. But within a month or two, a group of dedicated and resourceful individuals proved that the chain is not synonymous with FTX and SBF. There is a passionate local team building real technology and infrastructure. Now, Solana is one of the most widely used blockchains with practical applications in various use cases.
It’s exciting to bring this story to a wider audience through an ETF. We have already seen interest in this asset from institutional sales inherited from FTX, involving billions of dollars in SOL transactions. This asset has generated a great deal of interest.
Investment Philosophy of 6MV
Dan:
You mentioned some interesting aspects of developer statistics. Those who are familiar with the inside story know that this metric is not perfect, as it only counts a subset of GitHub activity, which can be easily manipulated. For example, correcting spelling errors in the readme file also counts as developer activity, making it a low-quality metric.
What statistics do you focus on when making data-driven decisions? Which metrics have the greatest impact on your assessment of ecosystem activity? Additionally, considering that this industry is often influenced by mimetic valuation, how important are fundamental drivers in valuing these assets?
Carl:
This is absolutely crucial. When investing in mature ecosystems like Ethereum or Solana, the main risk lies in whether the founding team can bring the right product to a growing market or create their own market. When we invest in early-stage ecosystems like Sui or Aptos, we not only assess the risks of the founders and the market but also evaluate whether the protocol or blockchain can create tenfold value each year.
When evaluating investments in emerging ecosystems, valuations tend to be lower due to higher risks. However, the founders in these ecosystems are often passionate. We look for clear cultural backgrounds and outstanding founders. For example, in the ecosystem based on the Move language, we see a group of excellent developers inspired by the Move language, many of whom are transitioning from Web2 to the crypto field.
Key factors we consider include the culture within the ecosystem, on-chain transaction volume, and development ease.
If there are no available tools, and developers need to build everything from scratch, the time to launch a product will be longer. Teams raising funds need to consider this, especially in terms of their funding reserves. On platforms like Solana or Ethereum with strong developer tools, rapid iteration and testing are much easier.
Mike:
Additionally,
when evaluating Layer 1 ecosystems, we look at the depth and breadth of developer and user adoption.
Developing a robust and comprehensive economic system on Layer 1 is crucial for sustainability. Without it, there may be no need to use that Layer 1. For example, Bitcoin has always been a store of value tool, but now it is developing its own ecosystem. For Ethereum and Solana, we see widespread and in-depth use cases and capital across various application areas.
Alternative L1 Layers
Dan:
Carl, regarding Sui and Aptos, have you seen any signs of one of these ecosystems surpassing the other? They are often compared because both are application chains and have interesting backstories originating from Facebook’s DM project.
From your perspective, have you seen any of these ecosystems taking the lead?
Carl:
That’s a good question. It’s like investing in Apple or Android. Many people refer to Sui as the “Apple of the blockchain world,” while Aptos takes a more neutral approach, with fewer things built by foundations and more empowered by the ecosystem. Some developers prefer APTOs, due to the foundation’s focus on empowering developers rather than building products themselves. Instead, some founders prefer Sui because they appreciate the technology and value the foundation’s delivery of actual products, which helps accelerate ecosystem growth.
Ultimately, this hinges on the core spirit of the ecosystem. Whether object-oriented or capital-driven, these are secondary to the overarching approach and philosophy driving each ecosystem’s development.
Ethereum’s Layer 2 Roadmap
Dan:
You’re absolutely right. There’s a significant disparity in foundation positioning within the chain. Considering the teams building Ethereum, the Ethereum Foundation (EF) has consistently emphasized the vision for settlement layers and pushed activities towards Layer 2 to increase value.
When a team wishes to build on Layer 2, faced with growing options like Polygon’s Agglayer or the ZK Sync ecosystem, how do you handle the challenge of choosing which Layer 2 to build on?
Carl:
In the Ethereum ecosystem, one of the most challenging aspects of Layer 2 selection is the abundance of choices. A year ago, you might have chosen Optimism, Arbitrum, or StarkWare, but now there are even more Layer 2 solutions emerging. We’re discussing this issue with some portfolio companies.
When evaluating Layer 2 solutions, we focus on the breadth and depth of their economies—how many launch partners they have, the capital from core foundations, and operational timelines.
The worst-case scenario is being the sole protocol on L2, where you might as well launch your own application-specific chain. Ecosystem culture is also crucial as it’s community-driven. For instance, Berachain might be more suitable if you’re in social gambling or casino sectors. Conversely, other Layer 2 solutions might be better for heavy financial applications. The key is aligning the community with what you’re building to find a rocket ship-like ecosystem with significant growth potential.
Mike:
I’d like to add that you should consider the incentives offered by L2. While this shouldn’t be the primary decision-making factor, it’s crucial if you have limited financial resources. Incentives can accelerate your development but also come with transition costs. We see teams migrating between different Layer 2s or from Layer 2 back to Layer 1, as seen with the DePin project’s move to Solana. This relates to considerations of branding and ecosystem. For instance, Blast offers a casino and gaming feel, whereas Optimism and Base focus on social finance. Arbitrum provides trusted neutrality with its substantial financial reserves. The ease of asset movement between chains implies diminishing importance in selecting a chain. You want to be part of a community and ecosystem similar to your product to maintain liquidity and continuity.
Application Chains and Composability
Dan:
An interesting point you both mentioned is the shift from applications to application-specific chains and vice versa trend. Some of Ethereum’s DeFi stalwarts like MakerDAO, Uniswap, and Aave have hinted or discussed launching their chains. This trend raises a question: is the application chain a natural mature path or a product of Ethereum’s design and scalability issues?
Carl, do you believe applications should develop their application-specific chains, or is this solely due to their path dependency on Ethereum?
Carl:
It depends on distribution and value capture. When considering which Layer 2 (L2) network to launch on, we evaluate how it will help the project expand its user base and market influence. Once you’ve achieved significant brand recognition, users, and liquidity like Uniswap or Maker, insufficient performance on an L2 network becomes a burden, increasing user costs. Customization is crucial, but capturing more value is key. Instead of paying fees to external validator networks, owning your validator network captures these fees. Custom application chains allow for cost structure control and customization. While composability is a superpower of cryptocurrencies, its importance varies. In some cases, strong composability within the ecosystem may suffice, reducing the need for external composability. As the ecosystem grows, internal composability can support market expansion and capture more value. While the shift to application chains is expected, achieving strong composability across application chains is crucial for maintaining a seamless user experience between L2 networks or application chains.
It’s time to focus more on applications rather than infrastructure.
Dan:
We’ve delved deep into this. I’d like us to step back a bit. When browsing your website, I clicked on the portfolio page and noticed you don’t have an infrastructure tag. You can filter by all existing categories like AI, consumer, DeFi, developer, gaming, and currency, but infrastructure isn’t one of them.
What are your views on funding applications in the cryptocurrency space? Why do you choose to focus solely on applications?
Mike:
Yes, the main reason, as I mentioned in the introduction, is that applications are the area we’ve deeply understood and consistently focused on throughout our careers. I’ve been either a developer of applications and end-products or a salesperson. Our mission is to make these blockchains adopted and used on a large scale, and we believe this can be achieved by widespread adoption of end-user applications, whether for individuals or enterprises. Presently, we invest in projects that enable infrastructure, often taking the form of applications like wallets. However, we don’t hold overly strong views on which application areas we like. We have seven to eight broad application categories including payments, DeFi, gaming, and social. We look for emerging areas with ample room for growth. We know each market will be highly competitive. We’re looking for those who act quickly, have strong convictions, and strong product and engineering genes in the founding team. We prefer those who instinctively understand these crypto ecosystems because this will be the initial driver for attracting the next layer of users.
Carl:
One thing I’d like to add is that we do indeed invest in infrastructure. For example, we’ve invested in Helius and Jito, which are very exciting projects. However, our investments in infrastructure are not just for infrastructure’s sake. We see many portfolios companies using Helius. Helius and their team focus on enabling applications and attracting millions of users to the cryptocurrency space. Jito also has a large consumer base. Our infrastructure investments are consumer-centric. While we do invest in infrastructure, it’s not for the sake of investing alone. We need to bring billions of people into the cryptocurrency space, and relying solely on infrastructure won’t achieve this.
AI & DePin
Dan:
In this cycle, the two most promising verticals are AI and DePin. What are your thoughts on these areas, and how are they developing?
Carl:
For DePin, we’ve proven we can build decentralized infrastructure for new networks. Teams like Helius and HiveMapper have shown how they enable people to run hardware to create networks. The unresolved issue, however, is how to build demand. Many top DePin protocols have impressive founders and teams but relatively limited revenue. We’re still early in building demand. For DePin, proving its demand is the primary challenge. We closely watch how teams effectively achieve profitability and distribute value to token holders.
In AI x cryptocurrency, we see various transactions. Successful teams focus on solving a specific problem and do it well. The data layer remains open, providing opportunities for data collection, storage, and annotation. Filecoin and Arweave are major decentralized storage providers, but neither has built a compelling solution for AI data use cases. Distributed storage holds significant potential in AI data.
Mike:
Similar to DeFi, in the DePin field, simply mimicking or referencing the valuation methods of similar projects doesn’t work. Many DePin protocols with hardware have lower valuations than those without. We take a long-term venture approach, believing in long-term demand. We’re optimistic about various DePin fields, but we take a five to ten-year perspective on these investments.
Airdrops
Mike:
Regarding the idea of airdrops, you’ve done excellent research in this area. Carl, could you detail why you conducted this analysis, how you compiled the data, and what conclusions you reached?
CarlWhen I joined the company to oversee the second fund, Mike aimed to instill a strong research ethos within the organization. We focused on areas with numerous questions but scarce data. In this cycle, airdrops naturally became our research focal point. We sought to answer two questions: How much supply should I airdrop, and to whom? Analyzing the data, we uncovered some intriguing insights. Airdropping to core communities led to significantly higher prices 60 days later compared to widely distributed airdrops. Tokens airdropped to non-users experienced twice the sell-off volume compared to those airdropped to users. Airdrop size showed no significant impact on price performance or volatility.
We recommend favoring core users and generally opting for smaller airdrop sizes. Additionally, many current airdrop methods do not achieve their intended effectiveness. For instance, giving tokens to those who have never used your product is not an effective way to attract them; instead, converting them into customers first is advisable. We also suggest reserving more tokens for future incentive measures rather than heavy initial distribution.
Dan: Let’s expand further. An intriguing approach to providing on-chain liquidity for your token is utilizing DAO treasuries for liquidity provision. However, the challenge lies in where to source liquidity providers (LPs) on the opposite side?
Carl: We haven’t delved deeply into this issue yet, but there’s a lot of capital in cryptocurrencies seeking returns. With the right incentives, others may be willing to provide LP on the opposite side. There are various methods to address liquidity issues beyond simply airdropping more tokens.
Mike: We’ll post a link to our report in the show. It’s a highly informative read, particularly valuable insights on targeting core users and airdrop sizes. Besides straightforward token airdrops, there are multiple other ways to secure liquidity, requiring more creative thinking in community building.
Cryptocurrency Token Unlocking Issue
Translator’s Note:
Cliff (lockup) refers to a period before stock or equity grants begin to unlock, during which no shares or equity will unlock. Vesting refers to the gradual unlocking process within a stock or equity grant plan, where all granted shares or equity are gradually obtained over a period.
Dan: That’s also interesting. You briefly mentioned the token unlocking report, which I haven’t read yet, so I’d like to hear a quick summary. Conceptually, when you join a traditional startup, your equity incentives typically include a one-year lockup and a three-year vesting period, totaling four years. In the cryptocurrency realm, we’ve significantly shortened this time. For instance, EigenLayer’s recent total vesting period is three years, with a one-year lockup and two years of vesting.
In the cryptocurrency space, you’re dealing with a liquid asset, unlike traditional startup companies requiring liquidity events to realize any value. How do you view this dynamic, and what are the findings from the token unlocking reports regarding teams and investors?
Carl: We studied the impact of significant changes in circulating supply on price and volatility. Not surprisingly, larger unlocking events often lead to significant price declines. Different motivations come into play when people acquire tokens, but some immediately sell.
We recommend limiting the increase in circulating supply to no more than 1% at any given time. Daily or weekly unlocks can prevent simultaneous large-scale unlocking, thereby reducing the time of price declines.
As you mentioned, we indeed adopted the traditional structure of a one-year lockup and three-year vesting period. However, stocks in startups do not have an immediate liquid market.
In the crypto space, blindly adopting this structure is not ideal. We suggest no lockup period to avoid significant sell-off pressure events.
Market makers can absorb some level of selling pressure, but not if all selling occurs simultaneously. Instead, consider starting vesting after one year, rather than unlocking most tokens at once.
Interestingly, when we observed the relationship between circulating supply and Fully Diluted Valuation (FDV), we found that ecosystems with circulating supply below 70% performed worse in terms of price and had greater volatility. Those with circulating supply exceeding 70% performed better. Data suggests that faster token releases actually improve price performance over time.
Dan: That’s very interesting. I strongly agree with your conclusion of a one-year waiting period followed by a one-year unlocking period. It becomes a self-fulfilling prophecy that those who sell first get the highest prices, perpetuating a cycle as everyone discusses upcoming unlocking events. It’s a fantastic analysis.
Carl: A final piece of advice for founders: Pay attention to who your investors are. Some investors aim for quick liquidity and exit, whereas long-term holders like us are different. Consistency with the right investors helps reduce the likelihood of significant sell-offs on listing day. The reputation of the VC firms you collaborate with is crucial, especially concerning token ownership.
Liquidity Investments and Venture Capital
Dan: Carl, your insights are insightful. Another idea that comes to mind is that the cryptocurrency market is highly cyclical.
You are long-term investors, sometimes even looking at markets ten years ahead, especially in the DeFi space. What role does this play in your decision-making process? If we examine the interaction between liquidity markets and risk markets, it seems that risk markets are heating up due to high valuations, while interesting opportunities exist in liquidity markets. Do you consider this an important indicator of the market cycle phase?
Carl: Most venture funds allocate some capital to alternative investments, including liquid assets. Similarly, many major liquidity funds also have side pockets for venture investments. Different market cycles present different opportunities. Although the pricing of venture investments has become very high, indicating some intriguing liquidity opportunities, we still invest in outstanding teams at fair valuations, such as seed or early seed rounds of $20 million or less, particularly those with high-quality founders.
We maintain an opportunistic approach, leveraging emerging liquidity opportunities and increasing our venture investments when the market cools down. However, our investments need to have a billion-dollar potential. We focus on founders with grand visions, even if their initial product scale is modest. Valuation is important but not at the expense of partnering with the right founders pursuing billion-dollar opportunities.
Advice for Founders
Dan: Excellent. One last question, what advice do you have for entrepreneurs?
Mike: At the highest level, specific advice for founders of crypto companies revolves around establishing the unique nature of your cryptocurrency company:
1. Stay Calm: The crypto market is financialized and more unstable than traditional tech. As a founder, you need to exhibit calmness amidst the chaos for employees, investors, customers, and stakeholders.
2. Bias for Action: Similar to the AI field, cryptocurrencies operate in a rapidly changing innovation cycle. You need to launch products quickly, iterate, and respond swiftly.
3. Stay Committed: Focus on a specific problem. Successful investments often focus on revolutionary use cases, such as StepN’s “earn while you walk” or Magic Eden as the preferred brand for cross-chain NFTs. A steadfast stance on primary missions is crucial.
Carl: I’ll quickly add a few points:
1. Maintain Passion: Be passionate about your work. Passionate founders perform better because they have more energy and drive. Focus on what you believe is a lifelong career, even if it’s not as popular in cryptocurrencies.
2. Innovate Thoroughly: Pursue ideas that are ten times better than existing solutions, not just 10% improvements. It’s challenging to secure funding for minor improvements.
3. Simplicity Over Complexity: Simplicity is key in product design and communication. People have limited attention spans, so simple information ensures better communication.
4. Believe in Your Vision: While venture capitalists and other stakeholders may offer advice, sometimes this advice may be wrong. As a founder, trust your instincts and take responsibility for your decisions because you’ll need to face the consequences of those decisions.
Dan: In summary, believe in something; we’re changing the world, so join us. I love it. Mike, Carl, this has been a fantastic discussion. We’ll include links to your report and information about your company in the show notes. Gentlemen, thank you for joining us.
