An Evening 
with the Coinbase Institutional Team

We sit down with Managing Partner at Multicoin, Matt Shapiro, and Managing Partner at Coinfund, David Pakman, to discuss the institutional crypto landscape and other hot topics on the minds of crypto investors.

April 15, 2022

Matt Shapiro, David Pakman, and Brett Tejpaul discussing institutional cryptocurrency

At a glance

Brett Tejpaul - The Head of Institutional Business at Coinbase is joined by two crypto industry veterans.

Key takeaways

  • Matt Shapiro - Managing Partner at Multicoin, a thesis-driven investment firm that invests in cryptocurrencies, tokens, and blockchain companies that are reshaping trillion-dollar markets.
  • David Pakman - Managing Partner at Coinfund, a cryptonative investment firm. Prior to that he was a Managing Partner at Venrock for over 13 years. He led investments in Dapper Labs, Dollar Shave Club, and Flow.

Written by

  • Coinbase Institutional

Brett - How did you get involved in Crypto?

Matt - I started in investment banking and raised capital for special situations. I found the hardest part was building trust among the parties. In 2017 I started to look closer at crypto.

David - I come to crypto from the tech side. I worked at Apple, was involved in a few startups, and then became a VC. Having a computer science background I understood that the double spend problem is a very difficult problem to solve and so I became very interested in bitcoin. Not being a public markets person I did not fully appreciate the monetary policy implications. In 2014 I read the Ethereum whitepaper and that was interesting because it was a decentralized compute network. I started mining ethereum in 2016. And last year I joined Coinfund. Coinfund has been in crypto since 2015. We have a seed fund in its 3rd vintage, a venture fund, and a public hedge fund that invests in public crypto.

Brett - A lot has changed in the last couple of years. Take us through it.

Matt - A lot has changed. The biggest thing that changed is that in 2017 nothing worked. 2018 and 2019 were incredibly challenging. The market was constantly telling you “No, you are wrong.” Prices were down. A lot of people that jumped into crypto ended up leaving. So the biggest change is that things now work. And that really only happened in the last 18 months. The other factor that changed is education. Raising capital for a crypto fund in 2018 and 2019 was hard. You had to sell “why crypto” and then “why are we a good manager.” Now people know crypto. The conversations are no longer “tell me about bitcoin” but rather “how do we get diversified exposure.” We’re fortunate now to have amazing LPs that a few years ago it would have been hard to imagine would have ever been interested in crypto.

Brett - David, you spent 10 years as a traditional venture investor. Compare and contrast that experience with the experience of being an investor dedicated to crypto.

David - In venture and in tech you look for waves, or sets of technological innovation that you think everyone is going to adopt. I have seen 3 of those. The personal computing wave in the late 80’s, early 90s. Web1 in the mid to late 90s. Web1 was not controversial. It was widely thought we would all connect to computers. Web2 in 2008, which was cloud, mobile, and social. That also was not controversial with one exception I can remember. A president of a large fortune 100 tech company told me people would never store their data off premise. Now we are at web3. We are rebuilding the entire web stack using public blockchains as the baselayer. And for some reason that is super controversial.

Half of my silicon valley friends would disagree that we are rebuilding the web. But we are. So the arbitrage is the prize. The fact that half the people in tech don’t agree that the wave is happening now is what makes this opportunity so exciting. What’s changing is that the number of people who see this opportunity everyday is starting to tick up. What matters is how many high quality software developers believe it and are starting to build web3. And that number is growing massively. We have somewhere between 30,000 and 300,000 software developers working on web3. That is a relatively small number as there are 30,000,000 software developers in the world. But those people are rebuilding the web. The size of that prize is trillions of dollars. And that would be enough to get most people to go all in on crypto. But crypto is also going to change the financial system. And NFTs are going to change the entire intellectual property stack. When you put all of that together it is the biggest economic transformation any of us have seen in our lifetimes. How could you not be all in on crypto?

Brett - We have a big 6 months ahead 
 of us. We have the Ethereum merge. A lot of emerging activity. How should we think about TAMs and the opportunity ahead of us?

Matt - Everyone generally misunderstands the TAMs of these markets. People don’t think exponentially. And everyone is rooted in their own experience and the biases that come from that. One of them is, the world is the way it is and no one asks why. One of the reasons why is because it is physical and regional. Everything is regional. There is no such thing as global. The world has never seen it. Banks are regional. Stock exchanges are regional. Telecoms are regional. But digital native software is not. That's why 3 billion people use Facebook. But interestingly, 3 billion people cannot buy Facebook stock. Not through any fault of their own. Simply structural nuance and geography.

Crypto changes that and puts it on its head. Crypto is a global operating system that can run the world. If you think it's going to be worth only $50 billion dollars I think you're probably crazy. This thing can power everything David just said, from intellectual property, to the trading of assets, to the internet. All of that on a truly global basis. So it's remarkably interesting. It probably wouldn’t surprise you to hear us say that we love Solana. There is a reason for it. The market is clearly telling everyone that this is an opportunity to compete with Ethereum. It doesn’t mean that one has to succeed and the others have to fail. We are probably in a multichain world. But it is very clear that there are going to be different use cases that require different technical traits. Ethereum is really good at some parts, Solana is really good at other parts, Avalanche is good at other parts still. The way that we look at the space is you need scalability if you think crypto is going to get to billions of people. And Solana is very technically interesting because it uses parallel processing, which is very different from other protocols. Over time we have leaned into that. We have led all of their private rounds. We own a ton of it in our hedge fund. We continue to be very long Solana.

One of the underrated aspects of L1’s that we think is very valuable that the market generally under-appreciates is composability. When you use Ethereum today, or when you used it back before the high fees, it was amazing. It was an iPhone-like experience. You go to Aave, you deposit money, you don’t have to ask anybody, you take out a loan, you have super fluid collateral. People are building on top of it and because they are open systems the pace and rate of innovation is incredible. That's the magical experience. And when you add sharding and L2s and complexity you're building up a lot of technical debt. You fragment liquidity and decrease the rate of innovation. With something like Solana you can scale a single layer and optimize for composability and optimize for global liquidity pools.

Brett - David, anything specific you would like to point out with regards 
 to L1s?

David - I think they are like operating systems or maybe cloud computing platforms. We have three major OSs – Windows, Mac, and Linux. And then another 4 to 8 specialty operating systems, like Nintendo for example. We have 3 major cloud computing platforms and then 4 - 8 speciality platforms. How many base layer L1s will we have? I’m just connecting dots but probably about 3, and then maybe 4 - 8 speciality ones. That feels conceivable. I don’t think we’re going to have 1. I know we can’t have 1 because most of the largest ones today are solving scalability issues through sharding which will not work for super high frequency gaming, which is a core use case for blockchains today. So we need a non-sharded scaled solution. But it remains to be seen which will win out. We need at least a couple. I think they will be highly interoperable.

Brett - Let’s talk about DeFi. How do you both view the space?

David - There may be 100 - 200 million wallets in the world. But there isn’t a bank in the world that will lend against digital assets. So crypto users built these platforms because of the need to be able to borrow against their digital assets. I think it’s less about “let’s attack wall street” and more “I would like to borrow against my digital assets but no one will let me do it.” So they put it in a digital contract. And when things come from a place of need they tend to have more power and passion behind them. So until banks begin to lend against digital assets, and in the US that doesn’t seem like it will happen for a while, we’re going to see a lot more innovations coming out of DeFi. What will compound and improve DeFi are NFTs — more illiquid digital assets that have value. $25 billion of NFTs traded last year, we are on a $60 billion dollar run rate this year. It’s a big market, it's getting bigger, and it's accessed exclusively by retail. There’s not a bank that will lend against NFTs. So what's coming next? DeFi for NFTs. So there is just too much need for DeFi to be a zero.

Matt - I would agree with a lot of that. What resonates with me is the software aspect of DeFi, like Curve software. Software is much better at solving some of these problems than humans. When you think about DeFi, all it is doing is pairing the supply and demand side of the market. If you open it up the global pool and do it permissionlessly look how big these things get. And right now the interfaces are not great but there is still $100 billion floating around a day. What happens when these things scale? Imagine an app where you use Plaid to send your money to a protocol and they swap it for USDC. You send that USDC to Compound or Aave. You get a different asset back. What if 100 million people use it? I think you could easily have trillions of dollars of value in DeFi. I think we’re just getting started with DeFi on a global basis. I think we’re going to see really interesting structured products. For example, I may own an asset and wouldn’t mind writing covered calls against it. But I don’t do that today because I don’t know how and I’m not big enough to work with a market maker. But with DeFi we can pool assets and automate a lot of that.

Brett - Lets stay on the topic of NFTs.

Matt - NFTs are super polarizing. I think they are underexplored. They are going to a core part of the crypto space. They are going to be tied to intellectual property, royalties, and licensing. There is a lot you can do with an NFT besides have it be your profile picture. It's also been one the best things for crypto. More people, both retail and corporations, have been onboarded into crypto because of them. We happen to be sitting in a room with people who understand monetary policy. But most people don’t care. The argument to get into crypto before used to be “let's talk about the monetary system and how it works.” But that's the best way to make sure someone never talks to you again. But now, as it turns out, people want to play games. They want to engage with an ecosystem. They want to buy art. At the end of the day it's just a way for people to communicate with each other, which is what humans want to do. We want to form connections. And people are finding ways to do that with NFTs.

David - This is proof that we are talking about web3. Because in the same conversation about monetary policy and operating systems and replacing the banks we are talking about gaming and digital collectibles. If you were talking about the internet you’d be talking about ecommerce or social media or online banking. With web3 we’re talking about everything. It’s not just this narrow innovation around finance. Wth NFTs we’re talking about selling intellectual property in a digital form. Going back to the definition of intellectual property, it was created to create property rights around an idea. But then the internet came around and digitized everything. It became impossible to own anything because we don’t have any way to manage those rights. So we went away from selling digital rights to renting them. We rent movies with Netflix. We rent songs with Spotify. But with blockchains we can create property rights around digital goods.

So we’re going to go back to selling them which is what we did for the past 200 years. We sold ideas. People owned the rights to movies, music. We stopped for about 8 years but we’re going to go back to it. This is something we have done for a century or two. And we are going to do it again. It shouldn’t be that controversial. What's new is there will be a global marketplace for these ideas. And that's a really big idea. We’re talking about many trillions of dollars in value. We’re talking about fonts, contracts, digital art, movies, and books.

Audience question: When your investors ask you about regulatory risk how do you frame it?

David - I think we are past the point of binary risk. In most western markets we are witnessing a secular political derisking. There is going to be regulation. There are going to be guidelines. But it feels more bipartisan than it did before. In this country, the president's executive order on crypto assets was not “crypto is bad. We need to shut it down.” It was really more that they felt it was an innovation sector that needs to be supported and studied. So I think there is some regulatory risk depending on what you are doing but it doesn’t feel binary anymore. And it feels like net-net it is probably pretty positive. And yet, in the tradfi world there are a lot of people not entering the crypto space because they are waiting for regulatory certainty. Which is not about to come anytime soon. So you get paid for the risk that you take today if you have the view that it is no longer binary.

Matt - I totally agree. I would add that in the US the regulatory environment is not bad, though it is uncertain. The worst outcome we could have would come from under-informed people making policy. So I think a well thought out lobbying effort is important. And we are starting to see it. And we are starting to see senators and congresspeople who want to get educated and be smart on the topic.

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