Tokemak, Sustainable Fashion, Crypto Jobs, Regulatory Scrutiny and VC in SE Asia
The Tech Tok Weekly #28
It’s Tech Tok on a Tuesday: Part Deux. I just wanted to test out how the newsletter does on different days of the week, so expect later versions to arrive in your inboxes on random weekdays.
I had no idea C3PO was considered a fashion icon, but there you go.
Tuesday Musings
There has been a lot of hand-wringing and fear over the investing strategy of the likes of Tiger Global and SoftBank (let’s call them ‘scale VCs’). Their model is essentially the traditional VC model – but on steroids. Traditionally, VCs invest in many start-ups in the hope of finding that one diamond in the rough that will essentially make up for all the losers in their portfolio and give the fund a 3-4x return. In a world where private capital is abundant, scale VCs have realised that applying huge scale to the traditional model (i.e., funding as many start-ups as possible, as fast as possible, regardless of price) can enable more diamonds to be found quicker. The fund’s overall returns may be 2x, but this is achieved in a much shorter time span, and allows for greater liquidity than is usually possible.
There is, however, still a substantial place at the table for the traditional VC model. Due to their scale, Tiger Global and their ilk have to sacrifice the close attention given by traditional VCs to many start-ups. While the scale VC model may suit the start-ups that want to be left to their own devices, a lot of founders value the expertise and guidance offered by VCs. The funding may not be as voluminous, but for many, $20 million + expertise and guidance > $75 million + find your own way. Therefore, while the VC model is definitely being disrupted, scale VC is not a death knell – and may actually be an opportunity to exit at inflated valuations.
Meanwhile, this week…
Tokemak attempts to solve DeFi’s liquidity problem, sustainable fashion is a mirage, and there is a strong case for engineers to leave jobs at the FAANGs and enter the Wild West of crypto. Moreover, the scale of innovation in the crypto space is jolting regulators into action, and 500 Startups’ Vishal Karnal shares his thoughts on the Southeast Asian VC market.
The entire DeFi ecosystem – decentralised exchanges, money markets, stablecoins – is powered by liquidity. Liquidity, however, is a tricky beast. Acquiring it is costly, most market making power is held by whales and institutions, and capital is brutally competitive, rushing to wherever the highest yield is. Liquidity mining also comes at a huge cost to protocols – for example, Compound has distributed more than $271 million worth of COMP tokens, compared to $29.1 million earned in protocol revenue, essentially operating at a loss. Tokemak aims to solve this problem by creating a ‘liquidity infrastructure layer’. Each asset supported by Tokemak has a ‘Token Reactor’; i.e., a hub through which deposits of that asset are pooled, forming a connection between Liquidity Providers (LPs) and Liquidity Directors (LDs). LPs deposit assets into the protocol through the reactors, and LDs stake TOKE into the protocol to decide where the liquidity is allocated. LDs can allocate their staked TOKE to any number of Token Reactors within the system, and then vote for the exchange they would like the liquidity from a reactor allocated to. The Tokemak protocol bootstrapped itself by first allowing participants to commit ETH or USDC in exchange for TOKE, then enabling yield farming, and finally allowing token holders to select the first 5 reactors to be supported by the protocol. By creating a straightforward way to provide liquidity, Tokemak democratises and simplifies the process of liquidity provision, which is very complex today.
The protocol has accumulated $203.1 million in PCA from Degenesis and the Genesis Pools, consisting of $122.6 million worth of ETH (60%), and $80.5 million in USDC (40%).
#2 There's No Such Thing as Sustainable Fashion
Fashion companies that portend to be sustainable inevitably get good press. Allbirds, Patagonia, and Eileen Fisher are all held in high esteem by consumers worldwide, with phrases like ‘Silicon Valley darling’ being bandied about regularly. How sustainable they actually are, though, is up for debate. A report from Stand.earth reveals that none of the 47 largest fashion companies are on track to halve their emissions by 2030. The biggest problem (that remains relatively unsaid) is that fossil fuels are central to the supply chains of these companies. Their manufacturing facilities are powered by coal, they rely heavily on fibers derived from fossil fuels, and their products are shipped globally on vehicles that emit greenhouse gases. 80% of a fashion company’s emissions come from their manufacturing plants and another 10% comes from shipping. Stand.earth graded each of the 47 companies, and the highest grade received was a B- by Mammut, a small Swiss company. Gap, Inditex, Ralph Lauren, REI, and Lululemon all get Ds, and the vast majority of companies scored Fs. Even the highest scoring companies, like Nike and Puma, are not moving their supply chains away from fossil fuels quickly enough. To make widespread changes, fashion companies need to switch to renewable energy across their supply chains by choosing suppliers that use renewables, use zero-emissions shipping vessels, shift away from oil-based synthetics to fibers with a lower carbon footprint like bamboo and hemp, and also need to invest in recycling tech that turns old fibers into new ones.
The sector churns out around 80 billion garments a year, for only 8 billion people on the planet. The growth of fast fashion was made possible because synthetic fabrics are so inexpensive. Brands switched from costlier materials like cotton and silk to polyester and nylon, which are largely derived from fossil fuels. This made clothes more affordable for consumers, who bought more and more products.
#3 The Community Garden: The Case for Leaving FAANG Companies for Crypto
Dan McCarthy, a talent partner at crypto investment firm Paradigm, makes the case that software engineers should leave jobs at the FAANG companies for crypto. There are 4 reasons why engineers join FAANGs: compensation, a lack of ideologically attractive alternatives, cutting-edge research, and opportunities for immigration.
Firstly, today, the option is to either join a start-up or work at a FAANG. Start-up equity can either be lucrative or worthless based on the performance of the start-up, and stock options can take up to a decade to reach liquidity. Comparing it to the compensation offered by FAANGs, the risk/reward offered by start-ups is not usually worth it. In a token-based model, on the other hand, tokens require no exercise cost, are directly tied to the value of the company’s tech product, are governed by transparent smart contracts, and are completely liquid. The incentives to join a crypto company, therefore, are immediately heightened.
Secondly, many engineers also do not naturally identify with the way all our content is controlled by a small number of platforms. Crypto is a viable alternative for people who want to work on complex, meaningful, cutting-edge problems but also care about privacy and transparency.
Thirdly, crypto offers individuals a much larger opportunity to influence the direction of a project or blockchain technology itself, which is much more alluring to engineers than influencing the shading of a button at the FAANGs.
Lastly, however, immigration is the one benefit that crypto cannot meaningfully tackle, and will still be a major draw for many engineers.
A side effect of crypto technologies’ entry into the mainstream will be a significant decentralization of the engineering talent market. If you’re at a FAANG today and you’re working on making an application 0.5% faster or more scalable, the cost-benefit calculus of leaving to join a crypto startup has, and will likely continue to, become a lot more attractive.
#4 Crypto’s Rapid Move Into Banking Elicits Alarm in Washington
Regulatory pressure on the crypto economy in the US is amping up. As DeFi continues to increase in prominence, innovation is increasing at a pace that regulation cannot match. DeFi products are being offered to retail consumers with a simple, easy-to-use UI/UX that encourages rapid adoption, but the hazy regulatory nature of these products, as with BlockFi’s product or Coinbase’s Lend offering, is generating significant scrutiny. In a nutshell, these companies offer products like credit cards, loans, and interest-generating accounts. It is the latter that is attracting attention due to potential consumer and financial market vulnerability. The problem with these products is that they are not FDIC-insured, and operate like a bank but without the necessary approvals. With BlockFi, for example, consumers can obtain interest of up to 8% per year on crypto deposits; BlockFi takes these deposits and lends the crypto to institutional clients who use the assets for huge arbitrage opportunities. Not being classified as a bank means that BlockFi can avoid following onerous banking regulations and maintaining capital reserves. While the likes of Coinbase’s Brian Armstrong are up in arms about the regulatory attention, these products are technically bank accounts since they fulfil all the roles played by banks. Even though crypto is the new, cool kid on the block, existing regulations do have to apply to it, and the industry needs to find a way to adapt to the regulation – or gain sufficient market presence to change it.
“These things are effectively treated by users as bank deposits,” said Lee Reiners, a former supervisor at the Federal Reserve Bank of New York. “But unlike actual deposits, they are not insured by F.D.I.C., and if account holders begin to have concerns that they cannot get money out, they might try and trigger a bank run.”
#5 How a VC Kingmaker Spots the Next Big Startup
Early-stage VC 500 Startups, based in Southeast Asia, was founded in 2014 on the premise that the region, home to a population of 600 million and a number of rapidly growing economies, was on the same track as other emerging markets like China and hence represented an unmissable investment opportunity. On this foundation, they decided to target entrepreneurs who were tackling hyper-local problems based on business models that had thrived in other parts of the world. In an interview with Rest of World, managing partner Vishal Harnal says that the focus is on looking at the new models of commerce that are emerging in markets like China and India, and which of these are particularly applicable in markets like Vietnam or Indonesia. An example is taking mom-and-pop stores online, which is being done at great pace in India. Similar models are being adopted in Vietnam and Indonesia, where a number of companies are doing something similar. The challenge (and the promise) is in adapting these models to the specific market – and the ones that pull this off are the clear winners. The five key themes that 500 Startups is looking at now are:
Sustainable Cities: opportunities in EVs, mobility, battery tech, energy efficiencies, alternative food, etc.;
Rural Digitisation: digitisation of the largely rural Southeast Asian economies;
All-Commerce Ecosystem: omni-channel experience that links the online and offline world;
Human and Machine Productivity: digitisation of ordering, procurement, supply chain management, etc. by MSMEs;
Healthcare: focus on self-care, upskilling, etc.
One of the benefits of hindsight in Southeast Asia is that investors have seen how these models scale in other markets, and they’re more familiar with the unit economics, because many of these companies are now publicly listed. And you can apply some of the lessons in Southeast Asia to actually build a better generation of companies than what exists in the U.S. or China.
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