Interview with Pantera Partner Paul Veradittakit: Crashes and Opportunities in Those Bear Markets

Editor of this issue|Colin Wu

Pantera is one of the largest and earliest VCs in the blockchain industry, with a current fund size of US$5 billion. It is also an important investor in Terra. In this conversation, we discussed with Pantera partner Paul Veradittakit and SynFutures founder Rachel the macroeconomic situation, investment opportunities in a bear market, the reasons for the collapse of Meta’s new public chain and 3AC Babel Terra, and some of them were quite exciting.

Colin: What do you think of the recent market conditions?

Paul: The bull market in 2017 was mainly driven by retail funds under the ICO model. The 21-year bull market is mainly led by institutional investors, and more and more institutional capital has entered this field, even pension funds. As for the decline in the market, the essence is the profit-taking outflow of funds, and we have never experienced a downward cycle in the context of economic recession before. The current market is closely related to the Fed's policy and the global macro economy, but I think most of the negative expectations have been obtained. Fully priced, the turning point of the market does not necessarily have to wait until Bitcoin is halved, after all, it is a bit far away. The merger of Ethereum may be able to become this turning point, decoupling the currency market from the global macro situation. After the previous panic selling hit the bottom of Ethereum at $800, a large part of us really felt that the bottom may have been reached, and mergers and other factors may push the market up, of course, the volatility of the process is inevitable.

Rachel: I started my career in macro research. I agree with Paul that much of the current price action is closely tied to Fed decisions. At present, the nominal neutral interest rate in the United States is close to the target set by the Federal Reserve in June, and the price pressure on inflation has been eased by falling oil prices. There are also concerns about recession. I think the U.S. balance sheet is very different from what it was a decade ago and cannot sustain high interest rates for that long. On the bright side, I think the worst seems to be over, Web2 institutions and people looking to enter the space are increasing, so maybe the crypto industry has a chance to recover earlier than the general market.

Colin: Do you think the Ethereum merger will happen successfully and what will be the impact?

Paul: I think it will be on time, even if the delay will continue shortly after September. Most of the time developers will just give you a vague time period, they don't like to promise a firm date. However, I think this time around we may be able to see the light of day with a relatively certain date. Consolidation of Ethereum is very important to allow more participation, but also reduce the supply, because people will want to participate in staking to obtain income. The merged Ethereum will attract more developers and consumers, further driving ecological prosperity.

Colin: Do you think ETC or ETHW supported by miners will succeed?

Rachel: As long as there is support from miners, exchanges, users, etc., it can actually fork successfully. This is also the beauty of an open blockchain. But I do have some doubts about whether it will grow into a very successful public chain. BTC's fork BCH, even with so much support at the time, was not an easy task. Today there is much less support for Ethereum forks than BTC forks. Secondly, unlike Bitcoin, Ethereum has a huge ecosystem in which DeFi, NFT, and games exist. How to convince all ecosystem builders to move in that direction? I do have a lot of questions about this.

Colin: At present, VC seems to be more cautious about investment. Although a large number of funds have completed huge fundraising, what do you think?

Paul: There are now more funds than ever that have raised capital. And most of these funds will still be targeting seed and A rounds. Even in this bear market, we are seeing many serial entrepreneurs and many Web2 entrepreneurs joining. A lot of people are trying to get into an early seed round, I should say between $1 million and $5 million, and for companies raising around that size and valuation, the upside is there. As the market stabilizes, we will start to see more and more Series A and B deals. What is Pantera doing? We're very focused on seed rounds right now, usually around areas like DeFi and infrastructure. In the last bear market, we were the second largest investor in Polkadot.

We are very interested in DeFi. As the industry matures in terms of market size growth, we may start doing more research in the application layer. As the space becomes more and more global, we will start to see many of the types of companies that have been successful and have established infrastructure in the U.S. start to emerge abroad. So I think there is still room for innovation in terms of custody and trading in CeFi and DeFi, maybe KYC and REGTECH (Regulatory Technology). It can be foreseen that there will be more and more needs, such as obtaining more information, maybe more customer data. So I think there's a need to prepare for a regulated world or now start to see more institutional investors coming into the space. They will need more data to make decisions. There's a lot of data on-chain and off-chain, so it can be put together and possibly tied to credit and things like that.

I think fragmented data blocks will become more and more important, and of course, I think there will be many different markets that will be disrupted by blockchain. A lot of what you see in the US also exists in Asia/SE Asia. We're also interested in consumer-facing products, and we recently invested in a company called Optic, which is akin to Chainalysis for NFTs. If NFTs are going to grow, they will definitely have a trading market and a derivatives market. At this time, users need to be able to distinguish the authenticity of the NFT they hold, and this type of infrastructure tool can really help the development of the project forward. By the way, there is also the insurance field. Insurance will be another huge market.

Colin: What do you think of the popular Meta public chains (Apots\Sui, etc.)?

Paul: They're maybe incorporating some technology, especially around sensitive data, financial data, things like that. The developers I talk to are a little excited about using Move compared to Rust or Solidity. So there's some stuff there that might be making some headway. We haven't started contact yet, it's going to be an uphill battle, we want to wait and see how the ecosystem develops. But at this stage, it is actually difficult for new public chains to come out and gain market attention. However, Meta public chains have two characteristics: they are more private, especially for some project use cases involving sensitive data\financial data. The second is their development language Move. I asked some developers about their experience with this language, and most of them said that they were more pleasantly surprised than Rust\Solidity. Although I think the market has entered the tail end of the new public chain, I think they still have some potential, despite the tough competition. Pantera’s funds do not currently have their risk exposure, because in view of the tail market of this new public chain, we tend to wait and see how the ecology develops. If the data shows that the ecology is attractive and the time is right, we will definitely seize the opportunity.

Rachel: We are also very concerned. From the perspective of builders, entering a new ecology requires a lot of resources and time costs. It is necessary to observe whether the network ecology can attract users. There are huge incentives. At present, L1 is already very popular, and the ecology of Ethereum is prosperous and far ahead of other L1s. Moreover, the design of the public chain is essentially a trade-off against the impossible triangle, which requires a major breakthrough in technology, otherwise it will take a lot of effort to get new adoption.

Colin: Pantera is an investor in Terra and sold 80% of its holdings before LUNA crashed, can you expand on that?

Paul: Initially we bet on the team and what they've done around payments in the past. Later they kind of shifted to focus more on DEFI, including Anchor etc. Luck also plays into any investment here. For us, we did not foresee the subsequent development of Terra. It's one of those things that none of us can predict. Obviously there is a lesson for all of us. And Celsius and 3AC, from deeper due diligence to risk control to transparency, which is why DeFi is really cool compared to some things that happened in the past. In the end, though, we will all progress together as an ecosystem.

Paul: We know 3AC, but we don't overlap in business, not because we don't think they're smart, it's just that there's never really been a good fit for us to work together. They are exposed to more risk than they can afford. From what I've seen in the public, it's very unfortunate, especially for some customers.

Colin: Is the reason for the failure of 3AC similar to that of Babel Finance? During the 312 incident in 2020, the lending industry was also facing a huge crisis. Why is Babel Finance collapsing again now?

Rachel: According to our understanding, 3AC invested in GBTC and UST, and then took a large risk of using leverage. The market fell sharply and there was liquidation. This is similar to Babel Finance and others.

If you ask me what I think about this and why Babel is crashing again, you can always blame all of this on their being too bullish, and the recklessness and lack of risk management that the industry keeps talking about, etc. But the truth is, it's part of human nature, the greedy side of human nature, amplified by asymmetrical incentive structures.

This is not only in the crypto industry. At the time of the financial crisis when Lehman Brothers collapsed in 2008, everyone began to talk about the incentive structure of these practitioners. If you take a big risk, you may have the chance to win huge prizes. But if you fail, the punishment is mostly just losing the award or current job and then possibly starting another career soon. This is the asymmetric incentive structure . Babel Finance failed once, but will soon be able to start again. After the lessons learned by Basis Cash, there is Terra again. People are used to it, especially in the emerging crypto industry. It doesn’t matter if you fail, especially if you have nothing to lose originally, you can start another one right away. But once you take more risks, you can easily gain a lot of fame, wealth and everything. So what ultimately causes everyone to take more risk is the intrinsic incentive structure. I am in the DeFi field and believe in DeFi. But what if you ask this question, I would say that pure DeFi itself is not the ultimate solution. The transparency and credibility of DeFi can bring many good things to the industry, but it is only a means to an end, not an end in itself. For you to work around these types of incentive structures, you really need to rely on some sort of anti-human norm. Not just government regulations, but self-regulation by the industry itself. For example, similar to the requirement in traditional finance to set aside a certain amount of funds as a risk reserve, there are some restrictions on what you can do and how to protect users. So I would say that as the industry develops, some type of regulation, whether it is authoritative regulation or industry self-regulation, will emerge, and the transparency of DeFi and other similar blockchain technologies will help the regulation in place, and then move towards A broader direction that demonstrates a healthier financial system.

Rachel: I have a question for Paul. I'm also curious how you made the decision to exit your Terra position.

Paul: Number one, just money management around risk. I think when you see a position rise that high, the price has exceeded the value of the fundamentals, then you evaluate whether the corresponding position size makes sense, and then understand its concentration in the entire portfolio, and finally decide Reduce your exposure a little bit. However, this process is not like an exact science, but a bit like an art.

Rachel: With the ups and downs of the market over the years, do you have any advice for projects and builders in this market condition?

Paul : I think now is the best time to build during the bear market. No longer will your employees enjoy making big money from trading or speculating, and everyone is focused on building, trying to get the product to market, or trying to be fundamentally profitable. That means, maybe focus more on B2B than B2C, and then really try to figure out other ways to build exposure. Build a team and project foundation, especially around products that support the next bull run. If you're an exchange, make sure you can support the next wave of use cases that are expected to come during the next bull run, and make sure customer support and all that stuff is up to par.