Jump-starting crypto: road ahead to building applications in web3

In this episode, Aakash, Principal at Matrix Partners India, talks to Shanav, VP of investments at Jump Crypto, about what builders in the crypto space can look forward to and other interesting trend lines for 2023.

Tune in to know more

Aakash:

Hi, and welcome to Matrix Moments. Today I have with me a dear friend, Shanav, who is a VP of Investments at Jump Crypto. This has been a pretty eventful year and as we turn towards the end and look forward to 2023 we’re going to talk more about what can all builders in the space look forward to. And from our vantage point as investors what are some very interesting trend lines that we’re super excited about. But before we get to that, Shanav, talk to us about Jump Crypto, all the work that you do over there to enable builders. And more importantly your journey at Jump Crypto since the start of last year?

Shanav:

Yeah, for sure. First off, Aakash, thank you for having me. A little bit about Jump Crypto, Okay, so Jump Crypto is an R&D shop built around three core pillars, the first of which is trading which is where we started in the space providing liquidity on majority of exchanges in the space and enabling seamless trading for retail participants. From there we’ve gone on to become builders in the space, contributing to core infrastructure in a variety of different ways. And finally that leads into what we do on the investing side which is supporting projects with capital and feeding into the rest of the things that we do as an organization.

Aakash:

Perfect. And you mentioned Jump being a journey of seven years. For you this journey started sometime in 2021. Talk to us about more of how did that come into being and that's a question I typically like to ask most of my guests that what got you excited to get head down into doing what you're doing today?

Shanav:

So my journey in Crypto started much longer time ago, it started in around 2017 when I sort of got my first bitcoin, I was still in college back then. Went through that whole process, started interacting with the space, got rugpulled in my first scam which is right of passage for anyone in this space. But stayed very close, I spent a lot of my time researching the space, writing research papers, publishing them independently and so on. I then post-graduation ended up spending some time in consulting working on M&A advisory and those sorts of things, so still very close to the investing space and spent a lot of time moonlighting continuing to write crypto research papers and publishing it and so on.

And then through that process I ended up spending a lot more of my time doing that than doing anything else. Also ended up perhaps not the most prudent decision but investing all of my earnings into crypto, got pretty lucky like most people in 2020 where that capital base grew to a size where I felt like I could spin out on my own go full time into the space. And ended up launching a small fund of my own in 2020. So as I grew I was in the process of spinning a venture vehicle beneath the liquid token fund when I ended up speaking with some of the folks at Jump Capital which was a sister fund which was subsequently rolled into Jump Crypto.

And ended up speaking with those folks who were building out their team there and as I got through that process and ended up deciding to join this organization that was at the forefront of the space and never looked back since.

Aakash:

Yeah. And I think it’s been an amazing journey, I think since 2021 and all of 2022 no shortage of exciting events in the space. But especially in 2022 if you were to look back it’s been an eventful year, we have gone through an environment of quantitative tightening and there have been ups and downs through this journey for every one of us in the ecosystem. When you look back and when you think of what could be key learnings that the ecosystem could take forward for what lies ahead for us what would those be?

Shanav:

So I think, Aakash, there’s like two ways of looking at what’s happened in 2022. A lot of people will look at the price action and judge crypto on the merit of prices. And then there’s another group of people who I imagine would judge crypto on the level of development that we’ve seen since the start of 2022. A lot of folks in the former camp which is a lot of people who are outside the ecosystem looking in see it as a detrimental year for crypto, prices have gone down, things look like doom and gloom today.

But if you look at it from the point of view of like builders and the number of people that have entered this ecosystem that are building in this ecosystem and the growth of infrastructure from the beginning of the year to now it’s actually been pretty remarkable. So I think today we’re sitting in a space where we’re primed to go into 2023 with a lot of the infrastructure beneath our feet or a lot of people building that core infrastructure out for the next leg.

At the same time I think what’s starting to happen now we have the smartest people in the world working on this infrastructure and now we’re slowly starting to see people think about what does the application level look like. Because without adoption at the application layer the infrastructure means not much. And so I think looking back at where we are now people love to heuristic of comparing crypto to the internet because it’s something that sits very well in that.

And to extend that analogy I think we’re probably at a point today where there’s is a lot of people sitting with dialup internet connections, I think of this as like the browser based meta mask which is slunky, which requires like multiple clicks to execute anything and works for a certain set of applications but doesn’t work for like the broader set of consumer applications which require a lot more seamlessness to work. And we’ve entered a phase where we’ve gone through a lot of experimentation, people are building on top of this infrastructure, they’re building like increasingly complex applications that serve this small group of people.

I think we’re in a position now where like the next leg at least as it relates to application development and adoption is going to relate a lot more to solving problems that exist in the rest of the world with crypto rails versus necessarily building just for this narrow group of audience. Because what needs to happen for like all of this to really scale is that you need to have a lot more people be able to self-custody funds, be able to in a very seamless fashion transact against or interact with applications. And that's going to happen when a, people start thinking of building crypto into traditional problems and solving those traditional problems and when people start building that set application level infrastructure that enables easier discovery that enables easier adoption of self-custody and those sorts of things.

And at the same time a good builder character is like I think in crypto because of how fast the adoption happened we’re at a position where we’re almost driving the car while building it behind us and so that also means that the infrastructure is going to continue to scale and there’s a lot of interesting and exciting stuff happening at that level as well.

Aakash:

I told you, I think on the infrastructure side I think fully aligned in the fact that there is still some amount of catching up to do which we typically used to call enterprise create and been getting there but I think we’ll get there. But it’s high time now that we start looking at as you call it out how do crypto really start affecting traditional businesses end users. And on that topic, I think initial applications of block chains were more centered around money and finance, last few years we’ve seen some headway we made around applications for art, gaming, multiple other pieces.

When you mentioned that for the real adoption to happen block chain infra needs to start touching real businesses what are some business models that you are excited about when you think of it and from your vantage point that would probably play out over the next few years especially let’s say 2023, what could some of those potential business models be?

Shanav:

So I think actually to answer this question it makes sense to take a step back and really like I think today in crypto people have a lot of preconceived notions and assumptions that everybody takes for granted of what crypto is and what it does. And so when you talk to someone -- we often talk to founders who are pitching like the nth level derivative of like it’s built on top of Uniswap and Aave and all of these basic primitives that people assume as a given. But if you really peel the onion back it’s like what does crypto do.

In my mind it does three things, one is instant peer to peer financial settlement, the second is verifiable ownership and asset programmability and the third is shared compute for non-financial non asset level data. And so if you think about like – well, these are the three things that crypto does really well and rather than thinking of like crypto as a catchall that you can hit on every nail it makes sense to really build around what do these three things really enable.

So part of what I think, part of the way in which I think adoption will unravel relates to how quickly self-custody is adopted. Because in the current state of self-custody I think you can have a certain subset of applications built, as self-custody becomes easier to use you can have a broader subset of applications built. And what I think is going to happen is you're going to have a certain set of applications that come at the same time as easier self-custody and both can be adopted in tandem and then what you're going to have is more adoption leading to more people adopting easier self-custody leading to more applications leading to that – you know.

Aakash:

The flywheel starts kicking in.

Shanav:

So the two things I talk about like the one thing I want to talk about is like how does self-custody adoption happen, like what is the kind of infrastructure that we need to exist for self-custody adoption to happen seamlessly. And then what are the business models once we have self-custody adoption that makes sense from a revenue generating perspective that then feed value back to those businesses to continue operating continue scaling potentially have the sharing of economics that everybody loves.

So on the self-custody adoption side I think one thing that’s extremely underrated in this space and that's happening today at least as an experiment is what Solana is doing with the Solana Mobile Stack in Saga phone. The biggest challenge with anybody I speak with in let’s take gaming as an example because a lot of studios. The first thing that comes up is, look, man, we can't touch crypto because that introduces three more clicks to our users. And every click is percentage point drop off in retention which they can't afford. And so having your key pairs stored in the secure element of your mobile device opens up self-custody to everyone, the friction of downloading self-custody, interacting with your self-custody wallet at every click as an independent sort of pop out is essentially eliminated.

And I think that kind of innovation is going to be extremely important, another example of folks building really powerful stuff in this space are the guys that backpack, that are building a single wallet through which you can interact with any block chain and through which you can have like application discovery, application cross compatibility all of these sorts of things. So those kinds of things as they start improving like just the set application level infrastructure of letting users adopt this in a frictionless way is going to move the needle forward and open up more business models as you go downstream.

So on the business model side I think like we were talking about earlier I think it makes sense for businesses to start adopting crypto reels, so businesses built around crypto reels solving problems in off chain business and then that feeds into more self-custody adoption which feeds into more net new applications which are crypto native entirely. So a few that I’ve personally been excited about is on the D5 side, I think what we’ve seen so far is like people building further up the vertical stack with the assumptions we were talking about what I think is going to happen is people start thinking more about what do stablecoin reels actually enable, what does instant peer to peer financial settlement actually enable.

And a very simple model that we’ve come across is one where you have global debt market settlement. And so the basic premise being that there are higher rates in one jurisdiction, there’s lower rates in other jurisdictions. There’s a lot of complexities by the way in this business model where you have a lot of FX hedging to do and all of these other things that eat out of the end margin and bring it closer together but there’s still some delta to be had. And when you introduce primitives like stablecoins which essentially enable this kind of transfer and more interestingly once you can sort of take the position of that debt the acknowledgement of that debt, tokenize that and make that a liquid market. Right, your three-year loans instantly become semi liquid.

And those kinds of innovations are really exciting because it solves a problem where today you have to go through three banks to have that settlement, you need to wait like T plus how many ever days and through stablecoins you can have that settlement be much faster. You can take the IOUs back and now you introduce liquidity where there wasn't much liquidity before.

And so I think when you talk about like self-custody adoption like what really leads to that, this is one of the things. You have a genuine use case where the only way I can enter this system is if I adopt a self-custody wallet, deposit my funds into this. Now I see sort of genuine not like the exaggerated view that we’ve seen in the experimental phase of crypto. And now you have more users hooked in it, now you can introduce more primitives on top of that. So rather than building like the nth like x leveraged options platform, right, I think these are the kinds of innovations that will introduce to you the adoption have like genuine business models behind them.

So there may be taking a segue away from like the financial applications that you alluded to like entertainment. I think a huge thing that's going to happen in this coming year is a movement of a lot of IP coming on chain. So this starts with stuff like gaming, it extends to a lot of other things like college fan tokens, ownership across a variety of different planes. So maybe thinking about gaming first because to me I think that makes the most sense. We’ve gone through a phase of like experimentation and gaming which has given it a really bad look in the media amongst crypto people. Like whenever someone talks about gaming and crypto the first look you get is oh, that thing again.

But I think gaming is going to look a lot different than it did previously, it’s going to look a lot different than this play to one model, these financial incentives model. It’s going to look a lot closer to what game loops look like today. So to give you an example, Axie infinity at its peak had 2 million active users, the two yearsthat are coming on chain today have on average about 5 million active users. And so you have folks who have proven IP with genuine users bringing all of that activity on chain. And we’ve seen like some of this play out not necessarily in the gaming space but in terms of traditional applications at the user level bringing users on chain and seeing incredible conversion.

Like if you look at Sweatcoin as an example, right, a very fundamentally sound business model in that they connect users to brands in a somewhat indirect way but eventually there is revenue flow into that ecosystem. And they have about 20 million wallets on near today of the 120 million users on the traditional Sweatcoin that's about a 15-20 percent conversion rate which is pretty powerful and in a short window, in a short window and in a matter of a few months.

Now you extend that to like the rest of gaming and you see the size of studios that are coming in today a lot of it is not really in the public domain but from the investors point of view I'm sure you and I have seen like the kinds of powerhouses that are coming into the space. Folks generating on the order of magnitude of a few hundred million dollars in annual revenue, few million daily active users bringing all of this IP on chain. I think that's going to be a massive space, the thing that I think is going to require a lot of innovation is the set application level infrastructure again. Today a lot of studios have built on this the excitement and fervor around on chain games and Web3 games. A lot of these guys raise massive amounts of capital and you ask them like what part of your game is really on chain and there isn’t really an answer.

And so I think one thing that I personally think a lot about is like what does that infrastructure look like, what are the kinds of things that really enable folks to build those seamless experiences where the number of clicks for users or for gamers is the same as what it is today. You have the added benefit of having your asset living on chain and then you can have frequent state updates between your game server and the block chain and have both of these things live symbiotically and now you introduce like the ability to have asset programmability on chain, introduce all of these other experiences and game loops that weren’t possible before.

So I think that's going to be a huge trend, I think it’s very dependent on the level of effort that these folks put into it, there is a very real possibility we go through this massive funding cycle and people don’t think deeply about the problem and you end up with games that look very much like what they are today. But if that set application level infrastructure is built out and the folks building the games take the time to really think about it I think we can have or like I think by the end of next year we can have like tens of millions of more users on chain almost interacting without even knowing that they’re interacting.

Aakash:

And I think which is very relevant, right, that for end users eventually it boils down to what we would always call CX, the consumer experience. And for them you almost always have to extract out the underlying tech because that's not what is appealing for them, what’s appealing for them is that hey, as you mentioned gaming it needs to be great IP. It still needs to be an experience which I'm already used to which works very smooth. You can't have a clunkier experience than what I'm used to, right?

Typically you would always do a 10x on the experience and not degrade it.

Shanav:

Yeah.

Aakash:

But I think just VC always have this infatuation as investors with the under the hood sometimes, right, and as application growth happens I think one emerging design pattern has been this app specific blockchains or app chains. From your vantage point when you think of it what are some of the pros and cons around app chains and how do you think this market landscape would evolve in the coming years?

Shanav:

Yeah, totally. I think there’s been a longstanding debate on the monolithic block chain versus you have like the modular blockchain in between as a scalability solution. And then you have the app chain on the far end of the spectrum. So I think like there’s many forms of scalability, there’s people think about like vertical scalability, people think about horizontal scalability and what app chains does is essentially split shard states by set application specific logic and so on. I think that there’s certainly like loss of some of the natural composability that we’re under the monolithic architecture and the traditional arguments that people make for app specific chains are like specific modifications to consensus and all of these other nitty gritties which I would argue like not in all case is necessary to play out.

What I think could be particularly exciting for app chains and this is something that we’re working on hot off the press with one partner that we’ll be public at some point but is the idea of thinking about something in what I call like application secure chains not necessarily application specific chains. So application specific chains make the argument that you need like some consensus level optimization for that chain to make sense, for that specific use case. In some cases that makes sense, right, you may need a lower bar for security for applications that have lower value flowing through them and so on. But ultimately as they scale you need the same bar of security come back up again.

And some of the applications have optimizations around where the consensus feeds into the application so maybe have some token that’s liquid within the application and feeds back in consensus, I think those are all like very exciting academic discussions. What I think is a lot more practical is the idea of application secure block chains introducing what I call like economic sustainability in L1 architecture. So if you think of like any L1 let’s maybe put the application and the monolithic argument aside look at any L1, think of any monolithic L1 the only reason it is economically secure is because the value staked is higher than the value that passes through the ecosystem.

And the reason that the value staked is high – so if you think about the applications or the block chains that went through this ethereum as incumbency was the first one. People estimated that over time ethereum is going to be the premier destination for block space. So there’s natural speculation on that token that value stake becomes high enough to secure the value that passes through. You think of the next generation of block chains that came about there was natural capacity constraints with ethereum where it reallyscaling was not really there yet from a infrastructure perspective and these became very viable alternatives.

Again the reason that the value staked was higher than value passes through is because there were very reasonable estimates that these are going to be the next destination for block space and there’s no doubt that over the next 5-10 years like block space is going to become incredibly valuable. And so it makes sense for people to take these directional bets that at the end of the day these are going to be premier destinations for block space therefore they deserve this valuation and therefore value staked is higher than value that passes through and that makes sense.

But now when you look at the next generation of block chains eventually you're going to have multiple execution environments, I think it’s very clear today that no single block chain is going to be able to manage all of their capacity. And so for the next generation of block chains that comes in the question becomes a lot less certain of which ones of these will become premier block space destinations. And so then when you think about it like where does an L1 token gain value from, it gains value from fee value accrual, it gains value from this prediction that it’s going to be a premier destination of block space.

So I think one really exciting paradigm that you can bake into applications secured block chains which in my mind is a little different than applications specific block chains is that you can essentially have cash flow generating applications at the center of the ecosystem. And that value can accrue back to the L1 token so value then is not just tied to speculation of how --

Aakash:

It is actually tied to the value creation and --

Shanav:

By the way it doesn’t work for everybody, tomorrow if I came up and said I'm going to build this new L1 that's going to be backed by this new decks which trades tokens that I created that's a long shot argument. I think this works really, really well for applications that have proven themselves, that have adoption either on chain or off chain. If you think about some of these businesses that are building off chain that have shown that people are buying their virtual assets and they bring those trading platforms to the center of an L1 ecosystem or even ones like DYDX proved itself in the space and now has built its own application specific block chain I think the value of that economic security that comes from the application in my mind is what’s really exciting about that paradigm.

Aakash:

Yeah.

Shanav:

Then of course you need like all of the things around interoperability that can be feasible substitutes for composability and have the experience still be similar, have liquidity access still be similar. But to me that's a really exciting part about like application specific is more application secured.

Aakash:

No. I think so if we’re to summarize at one end you have the application growth, the flywheel kicking in and the interesting view on app chains tied to application security which plays out. Just shifting gears more and still going back to the older world where it was as I said block chain applications were more skewed towards money and finance last year we saw a lot of growing interest and participation from financial institutions in our space. Going back to what you were talking about earlier that initial applications of block chain were more about money and finance and just skirting back to that 2022 we saw a lot of growing interest in participation of financial institutions in this space.

When you look at trends on that front what are some key trend lines or key shifts or needle moving shifts that you forecast could potentially happen in the short to medium term and what could potentially be something which is a fuel to that fire, like some of us believe that ethereum moving post merge to approve a stake makes it more ESU viable that has been increasing some participation in peeking interest and potentially it does when we talk to some of these financial institutions.

From your viewpoint when you engage what do you think could be – because the same way as users are important for the ecosystem to grow and mature I believe that institutions are equally important and that's typically been the nature of how things have come into fruition and being. Do you see these financial institutions now growing and getting deeper into the Web3 and the crypto space and what would be some key triggers for that to happen?

Shanav:

Yeah, totally. So I think on the one end I think we’re actually pretty deep into financial institutional adoption. We went through like a whirlwind over the last few years at the start of the whirlwind everyone was like when financial institutions come it’s going to be big and then we went through it so quickly that when we look back we almost don’t realize how many financial institutions had actually adopted it. Actually think of like financial institutions in two buckets like one of the folks who are making independent directional bets who are actually investing in the space directly using LP capital and then the other is the folks who are offering financial products. So basically packaging this and offering it as an index or offering it to their customers who want to use it.

For the second bucket I think it’s unfortunately always related to price action, when price is doing well customers of these institutions want it. They just deliver it, right, they just want to make their fees and that makes sense. I think for the other bucket we’ve already seen a lot of adoption with these institutions more people building businesses around investing in this space and enabling the next sort of leg of innovation. And I think that interest is always going to be tied to innovation so as you have like I think there will be a point where it’ll become undeniable where there are applications with so many users with so much revenue generating potential or realization that it’s going to be impossible for folks to ignore that.

And I think everything else, all of the other motivations like all of these new cycles that flow through crypto Twitter are going to be very short lived in inviting that participation. Someone may get excited to deploy a small amount of capital which will be magnified in the crypto space as another news arch but to really have that sustainable capital coming in from the rest of the institutions who haven’t already adopted is going to take like just real businesses forming in this space.

Aakash:

Got it and I think in total agreement with that. Lastly if you had to leave potential builders who are tinkering with the idea of jumping into this space or are considering starting their journey what would be that one message that you would want to leave for them as we get into 2023?

Shanav:

Yeah, I think the one message that resonates with all of the builders that I work with is that people don’t even look at charts every day. So if you want to build in crypto like don’t look at the charts, don’t look at what’s happening with price because that's either going to make you like extremely motivated one day and extremely demotivated the other way or when it goes to the downside you're just going to want to leave because you came in because you were looking at the prices.

And so I think everybody or a lot of people do come in because of prices which is fair but once you understand the technology and commit yourself to the space thinking about building in an entirely price agnostic way is really, really important and I think we’re going to see a lot of people do that. At Jump we hosted a hackathon last month in Chicago in the depths of the bear market and had hundreds of people show up every week of that hackathon and that stuff is really encouraging to see. No one is talking about prices, no one is talking about what’s happening in the market, people are just talking about how to move the ball down the field.

Aakash:

Yeah. And I think that's the most heartening thing to see for us as investors. And on that note I think we’ll do a wrap on this one. 2023, super exciting. Thanks, Shanav, and I think the last message that Shanav called out you're building this space head down, build, don’t look at price charts. Thank you, thanks, Shanav.

Shanav:

Thanks Aakash.