1kx - Lasse Clausen (Episode #62)

Speaker A: Foreign. Hello and welcome to Senior Studio hosted by me, Ben Jacobs of Scenius Capital. With this podcast, we aim to give listeners inside access to the best and brightest investors in the crypto asset management industry. In each episode I will chat with a leading crypto and blockchain venture fund hedge fund manager as we explore the complexities of operating an investment fund at the bleeding edge of innovation. In this episode I sit down with Lasse Claussen, co founder and Managing Partner of one kx. With Lasse at the helm and roots Dating back to 2018, 1Kx has become one of the industry's most reputable venture firms with a deep research thesis driven investment approach. The team recently released their second iteration of the Cost of Trust thesis, which frames where they believe the largest crypto outcomes will come from over the next few cycles. Last say is a true professional with a firm grip on the evolving crypto venture dynamics. I learned a ton from this episode and I'm thrilled to share with the Senior Studio audience. Let's get into it.

Speaker B: Ben Jacobs is a partner at CNS Capital Management. All views expressed by Ben and the guest of this podcast are solely their opinions and do not reflect the opinions of Seniors Capital Management Guests and the host may maintain positions in the assets and funds discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only.

Speaker A: Hello everyone, we are back. Thank uh you for tuning in to this edition of the Senior Studio. I am your faithful crypto, uh, dedicated bull market, bear market, choppy market, exciting market. Uh, host Ben Jacobs of Seniors Capital. As you all know with this podcast, we love to interview crypto's best and brightest top CIOs at hedge funds and VC funds that are navigating the never boring crypto markets. And today's guest is as OG as they get. He has been running uh, his firm One KX since 2018 and they've done a fantastic job and have fact some of the most innovative and exciting companies and founders in the spins. So without further ado, I'm excited to introduce the audience to lasse Clauson of 1KX. How's it going Lasse?

Speaker B: Hey Ben, good to be on. Thanks for having me.

Speaker A: Why don't we kick it off with important foundational stuff. Um, how'd you get into crypto? What's your background and what led to the founding of uh, 1kx?

Speaker B: Yeah so before 1kx and before crypto, I was a software entrepreneur. Um, our other founding partner, Chris as well, he was my CTO. Uh, so we have going on 15 years of working together experience now and you know, normal people on the weekends they go to brunches and parties and I wanted to know what it's like to pay with a mobile phone. This is in 2012. Um, there was no PayPal app. There was no way to pay with a mobile phone other than Bitcoin. And I happened to live in Berlin and there was at the time the first place in the world you could actually buy something. Right. With Bitcoin was like a decent burger and fries. And I just tried it out as a new payments platform. Um, I wasn't really convinced back then already as about Bitcoin as a payment system. And I think even today it's, it's not really a point of sale kind of, um, uh, payments, yeah, network. Um, and so I didn't think it was very useful to be honest. Um, and uh, you know, the store value narrative also came later for Bitcoin. Uh, fortunately I was at a dinner in 2013, I met some people working on the Ethereum project and that seemed kind of high level, more interesting. Had a few Bitcoin left on my phone. I put in an Ethereum ICO and that this is Internet of Money. That concept is very, very interesting, um, because even at that time, you know, we integrated payments into the tech companies we were building and it was incredibly hacky. Um, so really just understanding on a technical level how money is just offline, it's not on the Internet, it's in banks and credit card companies. And the way that uh, until crypto money came on, the Internet was just really a hack job. And so I thought this was very interesting. It's going to take a while to um, you know, to build in the plumbing for a new Internet of Money. And kept checking in on the industry. And then end of 2016 I saw really a lot of progress again. And then Chris and I, we actually looked at building companies on top of blockchain, broadly sort of application layer. Entrepreneurs, um, realized very quickly it is definitely too soon for an Uber on the blockchain just yet. Uh, but we actually got uh, very excited about the potential of this technology and we sort of saw the big picture that has unfolded over the, you know, ten years now. Um, it was kind of quite obvious to us particularly we had a company where uh, the market understood the product, they wanted to use it, but they didn't trust us as a VC funded company and a marketplace. And they're basically saying, well your product is great and free now, but once you have network effects and lock in, you're going to charge us a lot of money because you're VC funded. So that's the first time we ran into this sort of wall of um, you have a great product, people want to use it. But there is this abstract concept of trust that's sort of like a blocker here. And looking at the ability to create new incentive structures, new ownership models, uh, that just seemed extremely interesting because it really directly tied into our experience as Web2 entrepreneurs.

Speaker A: Very cool. And so you decided to launch one KX and kind of walk me through what the last eight years have been like. Navigating, you know. And I know it's a lot of ground to cover, but just how's it been, you know, from being a first time venture fund manager to scaling uh, a very institutional one, industry's top firms.

Speaker B: Um, yeah, it's been an incredible journey. We started relatively small, uh, we had an American, um, big investment firm back us and help us set up the fund. Also uh, remember that in those days it was really, really hard to get an auditor and an attorney to actually structure a, you know, a crypto fund. And um, we really were able to formulate, you know, why do you need a blockchain? Um, which especially at the time, you know, 2016, 2017 and then going into 2018 was still very um, vague, sort of. There's a lot of excitement about the potential, but I think not too many people were able to sort of articulate why do I even need a blockchain and not a database. And what we were able to identify back then and formulated in our, you know, Cost of trust thesis 1.0 is that roughly, you know, trust underpins all economic activity and trade. It's also very expensive. So for reference, there's 35% of US employment is trust. Establishing functions. Auditors, notaries, attorneys, escrow agents, law enforcement. And blockchains are roughly uh, trust machines. They create trusted outputs. They allow strangers that don't trust each other to trust each other now because the technology is open source and there's no platform risk. And so that was uh, we were quite successful with that in attracting also institutional LPs because sort of we turned this very uh, technical argument like oh, blockchains have great consensus algorithms, et cetera. That was sort of what most people were pitching you on back then into really an economic argument and sort of scoping out the whole surface area of how big this opportunity could be. Um, because trust also it then affects uh, many, many different areas namely uh, finance.

Speaker A: Right.

Speaker B: So whenever there's a lot of money involved, this is where you usually have a layer of trust and intermediaries that are um, you know, charging a lot of money. And so we were able to attract um, great long term lps and since now have several sovereign wealth funds, pension uh, funds, endowments. So really the you know most conservative type of LPs um, uh, that are in the long run and I think in for the long term and I think that's extremely important because you you know as you know it's a very uh, it's you know it's always exciting asset class, it's always up, it's always down. I think there's several attempts of trading or timing themes or even trends and we uh, think that is really it's a 10, 20 year disruption of a uh, lot of industries where people paying a lot of money for trust intermediaries and um, with that have you know scaled and continuously just grown the firm. You know from very, very early humble beginnings to now we're um, you know oscillating between 25 people around that number and um, invest globally, you know, have fantastic LPs ranging again from several wealth funds to pension funds, uh, endowments, um, and some very notable people from the tech NVC industry. And um, yeah have really been able to successfully navigate also three cycles in this industry.

Speaker A: Right.

Speaker B: And I think this is uh, been our ambition from day one is to really be a 20 year firm in this industry which is generally in venture capital investment is not an easy feat. And I think particularly in an industry like this you um, know we've seen the turnover of firms, um, and uh, how quickly sort of the leadership positions change between uh, each cycle and um. Yeah so we're um, we're very excited to be part of this industry, you know, still standing strong among the top ranks and just continue investing, very disciplined. And uh, the way we pitch it is basically we're entrepreneurs but we're the first institutional check into crypto and blockchain related companies and businesses.

Speaker A: So I definitely want to spend the bulk of the conversation around your new thesis, which is the second uh, iteration of cost of Trust. But before that I kind of want to just zoom in on the current landscape in crypto venture and uh, just crypto more broadly because we seem to have gotten almost everything we wanted. Right. We have regulatory clarity, we have increasing fundamentals, um, banks and institutions and everyone adopting our technology. But the vibes are off for a ah, lack of a better term. So I'd be curious to get your read on like why there is that prevailing feeling uh in subjective conversations with uh, VCs there seems to be a dearth of new founders entering the space. LPs seem to be focused on getting access to the next and greatest AI frontier modeling company. So would love just your thought on like the state of the industry and the sentiment in it uh from that like more meta, vibey oriented framework.

Speaker B: I think there's obviously it's a nuanced answer, it's very complex. Uh, but a few thoughts uh, that I have is the first one is that uh, this as an investment, uh, vehicle or as an asset class has always been very, very uh, retail driven since uh the early days. Right. Which was also a fantastic opportunity, was open access and enabled literally anyone in the world to participate. Um, again if you compare that to the web two markets or investment in general, uh, if you're a retail person you get to invest in SpaceX at uh, maybe an inflated valuation after you know, decades. Um, so the industry was quite retail driven and uh, it was also unclear how the value capture, where it really unfolds. I think the FAT protocol thesis was quite prevalent and uh, in the, in the sense that we have a new Internet of money and now the, the low level protocols of that Internet are actually investable and as we're seeing also you know with the, with the, the existing Internet protocols there's obviously incredible network effects and there's usually one or two that survive. Um so you know it was definitely an overfunding in general in layer one blockchains because the prize was so big. But uh, also the, the staying power is so difficult. Um then I think what was extrapolated that sort of, you know broadly you have digital tokens as the, as the investment vehicle, as expression of ownership control and, and, and, and, and ownership or you have equity businesses. And it was also unclear um, for a long time where is the line if any.

Speaker A: Right.

Speaker B: And there was these themes or people that invested on also sort of, you know everything is going to be a token network. Uh every application we're completely going to replace companies. It's all going to be daos run by tokens. And uh, you know what's becoming clear is that um, open source protocol token networks, they have one in a very very big way but at very low level infrastructure main layer ones and some defi primitives and then everything on top. This is where Traditional companies have been better in you know, distribution, making things usable for normal users that uh, you know, really need a tangible benefit of using these things other than sort of some decentralization claim or even the concept of ownership. Right. That was a big um, I think uh, thesis that just the fact that I'm owning my game uh, is sort of allows new bootstrap crypto games to sort of take over from existing ones. Because that sense of ownership is so important that you know, people will leave all their friends on Call of Duty and move to a decentralized version of that. And I think now we have uh, you know we, we think crypto has entered the monetization phase. So the infrastructure build out phase is done. We are entering the monetization phase. And again like you said, we have some amazing examples of how far these industries come of great M and A event outcomes. Um, things like polymarket, uh, literally being one of the I think most important sources for market data now. So we've come a very, very long way, um, ah, particularly when it comes to you know, real world usage. M hyper liquid, uh, you know, being a mainstream product now. It's not just sort of crypto people trading crypto. It's really, it's a lot of people in the world trading all sorts of uh, financial instruments via perks. Um, and so I think that's a little bit why the sentiment is not as, you know, as euphoric from people who've been in the space a long time. Because I think there was not a lot of clarity on what exactly will capture uh, or is investable. And um, I think people that were overexposed on tokens, um, especially into the application layer that hasn't done so well. Um, and we see this really clear bifurcation where low level protocols and defi primitives, anything where a lot of money is at stake is being held in smart contracts, et cetera. But trust is you know, really, really paramount. That is best structured as a token network. And then things that you know, require distribution, great go to market, great uh, usability. This is where companies and equity opportunities have performed better. And again there also unfortunately those are reserved because of uh, accredited investor laws, et cetera. Those are reserved ah, for you know, for accredited investors, et cetera and funds like ours. Whereas the, the ability to participate for a retail investor is, is, is again zero. And I think that's why that sentiment among this sort of uh, you know, retail driven um, token investor crowd is, is, is not very bullish because a lot of the things that Particularly the more application layer that invest was invested via tokens hasn't performed well and we actually don't expect it to do well.

Speaker A: What do you think of uh, your competitors, some of which who've begun to extend beyond crypto? Uh, like do you think they're reaching just because there's a finite amount of high quality opportunities in crypto or mainly crypto maybe doesn't seem as asymmetric as it once did because it's kind of one in some ways and is consensus that it is a uh, viable technology. How, how do you think of those peers? Uh, and is it just like a strategy they're using for survival or one that you think is more just opportunistic and shiny object chasing?

Speaker B: Um, you know I obviously want to be mindful about speaking uh, about what my competitors may be thinking.

Speaker A: Uh, but how do you think about it?

Speaker B: I think it's definitely, it has been easier to uh, you have these markets in the very early days before you get into the very concrete monetization and application phase. Um, and blockchain uh, has been there, right? So everything's possible and everybody's very, very bullish. Um, and that's important because you want uh, an abundance of funding to fund innovation which it is unclear, um, for most people really what ways will win and what products will win and what are the applications. And so you have these early days of euphoria, right? It's quite common. And uh, obviously it is much easier to raise a fund in that sort of sentiment in that environment. And uh, us one kx personally we think it makes a lot of. First of all we have a very clear thesis on why we think the opportunities crypto related, blockchain, related, cryptography, uh, related technologies are almost endless. Again our surface area here is roughly 35% of the economy. Um, it is, uh, and you know this is where we have the NoHo, this is where we have the network. This is where we intricately understand we're very, very bullish about that. But those easy days where um, you know we're doing something on blockchain and everything has been outperforming a blockchain for the last five years straight and you can just raise a fund very quickly or other things easily. Um, we, we don't mind that because also if you look at venture capital, vintages matter a lot. And it is quite simple, um, that you know, whenever the uh, the fundraising of VCs in that industry is very, very low, those are the vintages that outperform, um, with a caveat what is also important that you have high uh, talent quality, which is the case in this industry. But it is a new kind of entrepreneur. It's um, in again in the early days, the infrastructure build out phase versus the monetization phase which we're in now, those entrepreneurs were typically crypto native. Um, for example the quality of evangelism, technically evangelism was extremely important. Um, and uh, what we see now though is that you really need to compete with uh, you know, with Web2 entrepreneurs. And that's where the crypto native entrepreneur is struggling a little bit. If you, if we just see the quality in terms of execution discipline. Um, we are really, really excited about this talent that has been coming in for the last couple years and that we have been funding that are basically Web two entrepreneurs that see a very specific problem in their industry among their customers, among the users and they're leveraging blockchains exactly to solve their problems and build an application that has use cases. And so the, you know, you had to evolve as a VC firm, you had to expand your network, your brand to entrepreneurs that were outside of the crypto industry. Ah, we definitely have in our, you know, we definitely hear from fellow crypto funds that they're uh, they're not seeing a lot of deal flow and they're sort of uh, ah, this is low, not a lot is going on. Um, we've been having more deal flow than ever before. Like we have a hard time keeping up. Uh, in fact we have uh, 15 deals every week that we just cannot process. Um, but it is also because we, you know, this is overused VC phrase, but we really, you know, try to see where the puck's going. And we've been doing that since we started almost 10 years ago. And we always thought about it as a layered Internet, a bit like a cake. Ah, low level protocols, infrastructure, very cryptography, heavy middleware and then applications, uh, and particularly financial applications. And you have a different breed of entrepreneur that's uh, good uh, for each sort of layer of the cake. Um, and yeah, we're very excited to see a lot of web3 talent, uh, that's come into the space. Um, and that just has uh, ah, to be honest, a different level of execution than a lot of uh, than a lot of founders had in that more evangelical, more network building kind of phase. Uh, where you're building right, a protocol or layer one blockchain. It's obviously very, very heavy, uh, technology component to it. But then the rest of it is really, it's the art and Science of network building, which is quite different than I have an application, I have a business, and I need to build up a sales pipeline and you uh, know, train uh, 30 salespeople to go make friends on Wall street and, and become integrated into finance.

Speaker A: Those are all fantastic points. Uh, some of the best articulation of uh, what I think is going on right now that I've heard. Do you think these founders, like, maybe they worked in some component of traditional finance, they were crypto curious, so they studied a little bit. Um, do you think now they like the smarter ones, are seeing what's possible through blockchain, through a couple winners, or that the tech is actually there to support it? And now they're like, okay, I want to take the best parts of crypto, the ease of use, like the programmability, the permissionlessness. And now is the time to marry this non, this Web2 problem. What, uh, crypto and AI technology to build something novel is like, is that kind of like how you're seeing them come m, uh to the space right now?

Speaker B: Yeah, we see that that's been happening for a while, um, and we like it. It's more use case led. Right. Again, we're in this concrete uh, monetization phase, application phase. What does this allow my customers, my users to do? Um, and this is great where I think Web2 entrepreneurs, the concept of product market fit has been very, very strongly ingrained in the thinking from day one. That's your biggest problem. You need to go there. Whereas in, and again in, in building Blue Ocean, uh, in the early blue ocean days of crypto, you had to sort of uh, extrapolate a little bit more. And, and you know, if you again, this Henry Ford thing, if I asked my customers what they wanted, they would have asked for a faster horse.

Speaker A: Right.

Speaker B: And so that phase was very, very important. But I think now we've mapped out this uh, really, really big again surface area of where um, you know, this, this industry can, can disrupt other industries or this technology can disrupt industries. And now we have these uh, sort of in comparison laser focused entrepreneurs. They're focused on problems they um, know exactly how to address, uh, them how to use the technology. And then um, most importantly also they just have very, they're very, very good to go to market. And these things.

Speaker A: Do you see them still pursuing tokens and like a protocol layered solution as, and like giving users ownership in it? Decentralizing a bit. Do you still view those as like primitives that are where the puck is going or do you more so think it's like just grabbing like, you know, elements of blockchain that uh, don't necessitate, uh, a token but are still valuable to cutting costs, reducing rent, minimizing trust, broadening the reach, et cetera.

Speaker B: Yeah, so this is a very, very important, very nuanced question. It's very use case specific, very team specific, uh, industry specific. And this is obviously where we help, um, particularly. And so our success has been that uh, Web two entrepreneurs understand us as the firm to go with them through that journey and to help them figure that out. Um, whereas before there was this broad assumption, I'm doing something crypting in crypto, I'm launching a token. And that uh, just assumption that is definitely gone and is, you know, also for us for years. It is very, very specific on where you're building in the stack. And again, if you're building middleware, um, you know, let's say making it easy for Wall street companies or financial firms to integrate defi yield in a safe manner via SDKs and libraries, you don't need a token for that. Right. It always comes back to is this a really heavy trust component involved here? Is this low level infrastructure where lots of money is at stake, where lots of value is at stake, uh, and is, are the actors, the user, suppliers, et cetera? Is trust ownership here a heavy component or is it not? Is it just pure functionality? I need this to work very well for me and solve my problem and, and I'm happy to pay for it. Right, and then you generally go with the company.

Speaker A: Got it. Okay, that makes sense. Let's, let's start digging into the thesis. So maybe before we jump into 2.0, uh, it would be good to kind of get uh, an overview of what the cost of trust 1.0 thesis was and what you were investing in in support of that thesis. And then how that kind. Why you decided to write cost, uh, of trust thesis 2.0 because you recently released it. So there must have been a lot of thinking that went into the decision to okay, this was true because that was true. Now this has to be true and this is what we're going to be looking for.

Speaker B: Yeah, so we basically started the firm uh, on, in 2018 on the inside that where blockchains really shine and what the addressable market is. Addressable surface is roughly the market for trust. Um, this sort of very abstract but omnipresent concept that uh, trust underpins all economic activity in trade. From swipe with credit card, this is where Visa MasterCard come in. Ah, to you Know settling uh, billion dollar bond trades, um, every economic activity there's some layer of trust involved. And um, to give an idea of the scale of the opportunity, the, what we found was a paper that looked at the US labor market and found that 35% of US employment is trust. Establishing functions, auditors, notaries, attorneys, escrow lawyers, uh, um, you know, the court system, et cetera, et cetera. So that allowed us to roughly to put a rough number on, on, on this opportunity. And um, the insight was that what blockchains actually bring to the table, the 0 to 1 is they're essentially trust machines. They manufacture trust at almost zero cost because they're open source, they're transparent. Right. So solvency is a guaranteed assumption of the system. You don't need to worry that anybody can run away with the money. Um, and the second part is also that you don't have what's called platform risk, right? Meaning that um, three guys in the boardroom can raise fees on me, cut off my API access, et cetera, uh, if I'm you know, technology dependent. So and then within, within this broader, you know, framing the surface area of the, the market for, for trust, the cost of trust, um, we identified three segments that we thought were the most immediate. It was decentralized finance, it was payments and it was web three. And web three was uh, a little bit a broader, our definition. I think that was also one of our key insights. And um, what we've seen in the meantime is that yes, DEFI is one of the most important um, segments of what blockchains really do with a lot of success. If you look at our on chain revenue report, the majority of the fees are actually generated um, by DEFI protocols. So that was the right call. Payments became very, very true in a very big way with stablecoins. Right. We have um, you know, data by some metrics, uh, stable coins are doing more transaction volume than both Visa, MasterCard combined now. So those have become also true and, and that has become also true in a very big way. And then Web three, the framing back then was quite broad. I think what happened in the meantime, we've seen it bifurcate into basically what is now called Deepin that was also back then included. Right. Decentralized physical infrastructure, uh, compute, uh, you know, mobile networks, uh, et cetera, et cetera, et cetera. So physical infrastructure marketplaces that are running on with some sort of decentralized primitives in it. And the rest of Web3 was also basically the thesis that anything with a token and ownership distributed uh would win also in consumer applications. And I think that is um, you know the area where I would say the proof is sort of the weakest. And yeah, I think whenever the asset class is not just moving up and we have sideways markets with a bear markets, it's great times to reflect. Uh, and I think the industry has been doing it and again it's a bit in limbo. It's sort of unclear where exactly the value is captured. Where do you really produce durable venture outcomes? And so we started this exercise in saying hey, we are almost 10 years in the market now the industry has more years of, of of data. Let's really look into what has worked in, in creating lasting um, in lasting venture outcomes. And also in combination with again our proprietary data which is by the way public on our website is the onchain uh revenue report. So very, very good cleaned up data of what is actually generating real revenue on chain. Most importantly also cleaned out by incentives.

Speaker A: Right.

Speaker B: Because this has obviously been you know uh, protocols need to grow, they incentivize usage. And so how do you exactly know what is real revenue and what is incentivized revenue? And our data team has been doing that effort. Uh, we feel it is uh, the most high quality data you can get in the industry. And with that insight as well we really uh, felt confident to establish what has produced lasting product market fit, particularly the things that have high revenue. Uh, continuous high revenue in this market um is a very, very strong indicator of lasting product market fit of basically uh, venture scale outcomes. Because we can also look at the top venture outcome of that category and what came out of it is a very nice sharpened uh focus so broad cost of trust sort of surface area and then a much more focused uh, uh quadrants. So vcs, we love quadrants um that are uh, almost annoyingly simple but uh, we feel very true. And what we have is on the Y axis we have trust related enablement zern ones and on the X axis we have you know, cost reduction. Ah and what we call it a bit of a mouthful is trust intermediary rent compression. And you can really see that the things that have lasting staying powers are in the top uh, in the top right of the quadrant. And I'll go through an example, I think that's the best way to make this more tangible. By the way the report, uh, the thesis is on our website including uh charts where we map past outcomes and then we also have a forward looking chart where we project um, in, in in future industries, um future segments. Uh there Will be a lot of disruption. Go into more detail in a second. But I'd like to illustrate this quadrant. So 0 to 1, uh, you know, allows me to do something that I wasn't able to do before. Plus it also very tangibly reduces my costs and my headaches and my, you know, delays. Uh, is with international US dollar banking, right? And again we see that stablecoins is one of the biggest winners of this industry and in an, you know, in a just remarkable big way, uh, you know, in, in the process of replacing you know, some of the most important payment institutions in the world, which is Visa, MasterCard and other credit cards. Um, and here, you know, to illustrate it is very clearly the enablement, the zero to one is that I'm now abroad. I may live in a country where my paycheck next week is worth half or you know, 15% less, uh, every week. I don't have access to a stable currency. And that is such a foundational um, you know, trust related enablement. Because again a currency relies on a lot of trust. It's really the faith of uh, of your uh, citizens into the economy, into the institutions, into the government. And now all of a sudden as long as you have a mobile phone, you literally have a, the equivalent of a US dollar bank account because you can just convert it into stable coins and hold it there and have a stable currency. So that is a massive enablement. And then more tangibly, and we felt that was a missing piece in that this industry needed to look at is it also needs to be combined with a very tangible reduction in cost fees, headaches, uh, you know, delays, uh, what we call uh, trust intermediary rent. Uh, and here we have the very tangible example of correspondent banking. So international US dollar wires where uh, you know it is extremely hard to get a bank account for US dollars as a non US entity. And then if you actually have the uh, offering, Correspondent banking has actually declined by 10, uh, by 30% of the last 10 years and it has gotten more expensive. And so you're paying conservatively 340bips. Sometimes uh, with forex spreads and other things you're paying 550bps for international wires. And so that would be one very, you know, example of okay, trust intermediary fees are being reduced here. But it's not just money, it's also delays. And I don't know if you've had the wonderful experience of wiring money around the world. There are two, three days where people just don't know where the money is. It's Stuck somewhere between the intermediary bank and others. And you uh, have delays, you have callbacks, uh, you know it. That would be another example of these costs that you have uh, from, from these intermediaries. That's why you know one of the biggest winning uh, use cases is international US dollar wire transfers that are being replaced by stablecoins. And that again coming back as a nice example of this quadrant that we were able to work out is really is this a zero to one? Does this enable me to do something that wasn't possible before here in a very big way. I now have access to a stable currency which before I didn't. And the second part is also every day I'm sending hundreds of wires and uh, you know they're charging me three and a half percent every time and it also takes four days for the stuff to arrive. And this is also being compressed to almost zero now. Um, and that combo is where we really see in blockchain, you know you create very, very lasting outcomes.

Speaker A: I think it's a great framework to assess things by and as an American uh, who has access to good banking infrastructure. Good. It's not frequently now that I live in Europe I do have to move money and understand the friction. But I think for a lot of Americans they don't see these pain points as cleanly as those that are in foreign markets or trying to do cross border uh, do. So I think it's a great example but one that maybe Americans just miss the importance of uh, as a result of it just not being a problem they encounter on a day to day basis. Um, what would be an example of a category that is getting funded um, that receives like a lot of hype in the industry or maybe ah, abroad that actually sits in the weakest, the bottom left quadrant of your cost of uh, trust thesis. Like why, why would this category um, not really solve the uh, trust intermediary rent seeking problem and as well as not enabling some new activity that was previously uh, or impossible.

Speaker B: Yeah, I think a very very big one is basically broadly decentralized AI. Now we do think there are very specific segments where uh, it is very very important. Um, and the trust component, uh, and security is a major factor. But I think broadly you know, decentralized AI compute, decentralized uh, inference like those things are, you know, first of all where is the trust component here really? Is it that this abstract concept that maybe Claude may shut me out one day, does that really matter to me even as a company? Um, no, it matters maybe on a government level uh maybe an intelligence services right. This is where we have you know but, but for most users the vast majority that trust component is just not very tangible. Um and then second the costs are you know there are economies of scales and so these uh hyperscalers really do have an advantage. There's no you know there's no rent that you're charging in the middle because hey I'm the, I'm the trusted bank here and you have no other options. It's a hyper competitive market and you're really not able to, to compete and offer again right? Where's this rent compression, this fee, this cost compression? That's very, very tangible from me. It's just not there. And so um, yeah we, I think that that framework allows us to be very very sharp about where we think lasting uh outcomes are generated or when a high level decentralization you know applies here. And decentralization sort of solves everything or is, is a you know is a need for everything and we just don't think that's specific enough. Um and, and those are think really good example where um you uh. It was a lot of over investment, was a lot of hype. Uh again I think also the demand from retail to invest in something in because they've shut out of private markets Claude is not investable for me as a retail person. OpenAI uh uh SpaceX XAI it's all very very late when it's on the public markets that I can invest in. So I think here founders that offer decentralized AI as, as sort of almost as a mean to invest into uh and and and and and for a while I think uh some investors uh ate it up.

Speaker A: So looking forward what are some of the themes that you think are emblematic of opportunities for rent seeking behavior uh and 0 uh to 1 primitives to really unlock uh and maybe it took all this years of infrastructure build out and now like the commercialization of the asset class to really start to take root in order for these categories to fit square within the thesis.

Speaker B: Yeah so we clustered uh in sort of two groups. Uh the first one is mature trust markets. It is mainly on chain finance. And so we do think that uh this segment is the most tangible one. It is where also sort of reducing trust intermediary rent, reducing fees is the most tangible. This is where you have lots of intermediaries that are charging uh lots of fees. Um and this is where blockchains are really going to shine and we have that technical maturity plus uh almost regulatory clarity which is an important factor um to really uh, to disrupt this in a very very big way. And I think we, and this was this oxymoron that we mentioned at the beginning that you know, crypto native investor sentiment is not great. But outside, particularly Wall street, et cetera sentiment about this technology is almost at all time highs. Because there is basically consensus that finance in the broadest way possible will run our blockchains. Whether it's corporate finance, personal finance, uh, Wall Street. The financial system runs better on blockchains as a backend than this sort of hodgepodge of different software systems that we have now with tons of intermediaries, lots of delays, lots of manual verification. And so um, that's the first group mature trust markets. It's basically on chain finance. One um, big segment there overall is an enabler. It's just native asset tokenization. Um and so we think less sort of uh, there's a stock and you have that existing four intermediary layer of stock ownership and registration. And then I'm creating another layer, a wrapper on top that represents that uh, we really believe in that native tokenization where the first primitive of uh an asset that ownership is the token itself because that enables uh, you know, composability, uh permissionless trading, uh, using it as collateral. All these great things that blockchains enable, um is really uh, applied to pretty much every asset that exists, uh going forward. Plus it enables also the financialization of a lot of things that before just weren't assets because they were too small for all those, you know, financialization costs associated. So you can think about pretty much every bit, every piece of data technically can be an asset, uh a financial asset and can be used as such. And so that is a very, very broad but very very big category uh market going forward, uh within on chain finance for us native asset tokenization. And then if we go into the second category which is emerging trust markets, it's basically AI agent economy and frontier applications. Um and we do expect those to be a little bit more if you look, if you remember this quadrant to be on the, on the top left center. So meaning very very strong uh enablement, zero to ones. Just a lot of things that people were not able to do before. Um, but the rent intermediation is usually in those markets there is nobody to replace because you're creating a zero to one, you're creating a new product. Um and uh, we see within that uh, particularly AI like if you think about it, the cost of trust or the importance of trust now with AI has uh reached levels Never seen before. Because, uh, the cost of producing fraud, the cost of producing fakes is almost going to zero. And so on this abstract level, like, where does trust really matter here and what is the value of trust? We think actually it's increasing exponentially because the opposite meaning, uh, the opportunity to create fraud is basically zero cost.

Speaker A: Now, m. Great, great, uh, coverage. I want as a final question here before we. We dive into the spicy portion of seeing a studio, I want to just take a step back about venture investing in general and how you started to form patterns around picking the best ideas, the best founders. Uh, what has come to really matter to you, um, as like, critical for making an investment decision? Is it the founder idea quality, tam, where they sit on, uh, the quadrant? Um, and maybe, uh, what are some mistakes that you've made that, uh, you've learned from?

Speaker B: I think it is, uh, the way we approach it is really. It's the quadrant, it's the framework. Does this fit within our thesis? Um, what also that uh, makes us do is a lot of proactive outreach, uh, versus sort of I'm just, you know, letting things come to me and then, you know, I like it or I don't. Um, very, very proactive, kind of now targeted outreach as well. But that's very, very important because we also, um, want to make sure that, you know, these are really the areas where we can also just be helpful and where we have an edge and where we, you know, how are we different than other, other VCs? And I think that's a very, very unique lens. It's very sharp. So that's the most important one. And then the second part is, is founders. And I think this is also the learning because it's something, you know, and you treat it as extremely important and then. But you never stop learning. And that's kind of the. The thing where you do end up backing founders that were not the right ones, even though you had this intense focus on, on being able to, to find the right founders. I think that's continuous learning. We have a framework with over 30 very specific traits, um, that we evaluate. Uh, but it is, uh, one of the most important, if not the most important component is, is backing the right people. There is no, there is no easy framework. Ah, you know, simple, uh, trades. Ah, oh, I went to Stanford xyz. It does not work like this. It's a lot more nuanced. It's a lot more complex. Again, they come in all shapes and sizes and can be extraordinary. Um, and I would say that's really an ongoing learning, just consistently refining uh, that framework that we have to evaluate.

Speaker A: Founders. Yeah. What makes a successful founder? They could be an older founder, they could be fresh out of college, uh, they could be very technical, they could be more commercially savvy. You know, there's examples of many successful founders that uh, fit different archetypes and I appreciate the exercise of trying to have those 30 attributes.

Speaker B: And it's also a moving target. That's the thing, because it changes with the industry. Right. Coming back to the earlier days, technical evangelism, um, being a little bit on the spectrum, being a little bit awkward may have actually been an advantage. Whereas now you, you know, if you're sitting in the boardrooms of Wall street, uh, coming up with a unicorn T shirt, that may, may not be the right way to go.

Speaker A: So have, have you found a, a through line where it's um, you know, a certain attribute, a ah, certain thing that you're like, okay, this is our guy or girl. Or is it just still like constantly different, uh, and just a moving target?

Speaker B: The. It. We've boiled it down to over 30 very specific traits in, in varying compositions and, and importances. Um, and it's ah, but again we think it's evolving. We, we can't say that this is the final, you know, this is the final from work, but we've been able to consistently refine it and we, we expect it also to, to continue it.

Speaker A: Cool. All right, well, let's get on to the spicy question. So what is your flaming hot spiciest? Your tongue is sizzling. Take within crypto, I think the shift,

Speaker B: I don't know, it's very flaming or hot, but I think I just see a lot of uh, our peers, um, not shifting, sort of being able to shift between this early infrastructure phase and now the concrete monetization phase. Different founders, different segments, uh, different approaches. I think you just need to evolve with the industry and you again, you need to try to anticipate where it's going a couple of years ahead. And I think the, you know, those uh, uh, those funds that are just not adapting or have not started adapting basically two, three years ago, I think they're going to have a hard time. We're seeing that in the market.

Speaker A: Flipping the spicy framework. Outside of crypto, uh, what's, what's your hottest take?

Speaker B: Um, I mean, yeah, I think what's uh, definitely concerning a little bit is this K shaped economy. Right. We have sort of just stock markets completely detached from any economic fundamentals. Uh, it's also hard These days inflation data is, you know, how good is sort of data coming out of the economic data coming out of the government now? I think that's a uh, bit of an issue. And the stock market just keeps going up. Um, is you know, people like it, I think it's a broad uh, you know everybody who has exposure is very happy with it. But then also what we've seen uh, in the US and other places.

Speaker A: Right.

Speaker B: That then everybody else, you have an economic divergence.

Speaker A: Right.

Speaker B: And so you have this income inequality gap that's just increasing because you have a lot of people that just are not financially literate. They may not you know, uh, qualify for KYC for whatever, you know, bureaucratic reason. They're just locked out of that uh, public stock market system. And those folks are just getting hit very, very hard compared to everyone else who is uh, sort of collectively uh, moving the stock market up, uh, based on fundamentals or not.

Speaker A: Yeah, it's a real problem. And I think we're seeing the rise of socialism and more even communist type ideas take root even in the most capitalist cities like New York as a result of uh, some people feeling left behind.

Speaker B: Right. And it's also now if you extend that uh, with AI ah to a large group of white collar, sort of like lower level white collar workers, um, and the sort of the social unrest that may came with that may come with that. Um, I'm not the overall you know, um, I'm not that much of a bear on like oh it's going to replace all white collar workers. I do think if you think about you know just with the Internet, what it replaced in terms of jobs but also the jobs it created, uh, you know, discord group moderators, ah, YouTubers, et cetera. So I think we um, humans continuously want the most scarce asset and the most desirable one is human attention is human validation, not by machines. And we will create products that you know, give me that uh, validation that I'm, I'm getting something scarce. And the only thing scars going forward is really human attention and validation and real one. And so I think we will create jobs that uh, uh, uh, offer that um, it's just in forms that we couldn't imagine it. Right. If you think back to the 90s, nobody would have thought of a discord moderator. Full time job, well paid, uh, impossible to imagine. So the same thing extrapolate 10, 20 years forward, uh, all these kinds of jobs that we just don't even, we can't even think about.

Speaker A: Yeah. And even the fact that the uh, Demand for software engineers has gone up, uh, even with Claude and OpenAI just uh, becoming widely adopted technologies. Uh, and everyone was saying low level engineers were going to be replaced. Rather, I think they're more so empowered, or at least that's what the early indications are showing.

Speaker B: I think so as well. I think economic output is going through the roof. Um, there is something to be said about Europe, uh, and just really falling even more behind because there is this resistance for new technologies, uh, this resistance for foreign technologies. Fun anecdote. Uh, European Parliament is very proud that it banned, um, Google and now it's using the European company that's just using the Bing API. So, uh, if you're European entrepreneur, you run out of ideas. Just create a wrapper, a European wrapper for American technologies. And so that everybody on the surface can say, oh, we're not dependent on the Americans. Um, but, but in fact you are and you will just be even more so because you're just create an environment where it's just extremely hard to compete as, and I've been there as an entrepreneur in Europe, it's very hard to compete. And it's mainly bureaucracy.

Speaker A: Yeah, it's incredibly frustrating and I, I've, I haven't endured it on the business side, but on the personal side I've been caught, uh, up in plenty of Portuguese bureaucracy and it is not fun. Um, but las, uh, I really, really appreciate you spending your time here with us today. Great, uh, insight, super excited for this new thesis, uh, to be out there in the wild and for founders and builders to read it and identify with, uh, all that you're thinking about. Where can people follow along with your and 1kX's journey?

Speaker B: Thank you for having me. It was a very fun conversation. And uh, I think really our website, 1KX Capital, I think it's a great place. We put all the content out there. If you like reading, uh, I think it's a great place to start. And from there on we'll guide you to our socials and our X account and our LinkedIn account.

Speaker A: Well, thank you again and for everyone tuning in. Really, uh, appreciate it and hope you got as much value out of this episode as I did and we'll catch you next time. Thank you for listening and we hope you enjoyed this episode of Senior Studio. Please leave us a review and rating wherever you listen to podcasts. If you love today's show for more Seniors capital content, check us out@sceniuscapital.substack.com and shoot me a follow on Twitter. Enypjacobs. We'll see you next time.