DCG, Multicellular Organisms, and Fed Minutes

things just keep happening

hello hello - if you celebrated the Thanksgiving holiday, I hope it was peaceful.

The Predator for the Tech Industry

There was a passage from the All-In podcast that talked about complacency in big tech and David Friedberg said:

“The lack of pain, the lack of risk, the lack of downside, the lack of having no safety net and falling through the pits, removes so much of the incentive to succeed and drive and innovate”.

There was also a tweet from Jack Altman that said:

“One problem tech needs to unwind is that it has become too attractive (lucrative, lifestyle, prestige) to be a full time investor rather than a builder. The ratios are just off and it stops our industry from reaching its full potential.”

I think these two problems are pretty obviously intertwined. Silicon Valley has aged, Big Tech has become people who *do* want worklife balance and time with their families, and I think most people would agree that’s an okay thing. But I would also say that VCs and investors have completely skewed the incentives for what to work on, creating some of the complacency that we see.

I want to tie three threads here -

• There is a research paper that looked at how single-cell alga evolve to become multi-cellular as a response to a predator in the environment. Introduce something to be afraid of, and you’re going to change some things.

• There was also a brilliant video from Frankie’s Cultural Observations that talked about why majority of the male college population has the “skinfade and the North Face jacket combo.” Frankie says that this is the “human embodiment of the culture industry” and a “deliberate manufacture of sameness”.

• Then, there’s a tweet from Anil Dash - “It's impossible to overstate how much the big tech CEOs and VCs are being radicalized by living within their own bubble. The level of paranoia and contrived victimization is off the charts, and they increasingly only consume media that they have funded, created by acolytes.”

All of these things are important to how looking at the “complacency” problem in Tech.

• There is no predator - Especially in the world of zero interest rates, it was exceptionally easy to raise money. It’s pattern matching, B2B SaaS, low risk stakes - people like Adam Neumann (“founders first”). This allowed the industry to continue being unicellular organisms because there was nothing working against them. The systemic incentives encourage them to never evolve.

• The skinfade and North Face jacket combo - Complacency is actually encouraged, in a sense. It’s much easier to build a B2B SaaS product that no one actually needs¹, because software sells (to investors at least). So everyone thinks that they are doing things differently, but really, they all are doing the exact same thing.

• The bubble - The tweet from Anil is pretty self-explanatory, but if you follow some of the bigger VCs or tech guys on Twitter, they’ve become increasingly concerned with “wokeness” and a perceived change in the status quo.

So it’s sort of a combination of all of those things resulting in perceived complacency in Big Tech.² There is a weird complex that exists - one in which there isn’t a natural predator (enabling stagnation, the acquihire culture too), a manufactured sameness, and a bubble that has become a breeding ground for fear.

Also, tech is changing. The world of zero-interest-rates probably enabled more behavior than we can calculate - and the golden age of tech might have ended, where you could take virtually no risk and make a lot of money, like the FAANG guy who is frustrated that he can’t afford a $10M home with his $2.5M net worth. And as Lewis points out “this is who software runs for now tbh entire industry structured basically just to make this guy, and people who aspire to be this guy, happy.”

There has to be some sort of recalibration to risk-reward, and it seems like tech is going through that right now. Silicon Valley will start to care about history - as the article Everything Is Innovative When You Ignore the Past highlights we are not particularly special, but we certainly make up stories to make it seem as such. Perhaps a stretch, but the Fed raising interest rates might be the predator that the tech environment needs to evolve.

Fed Meeting Minutes

So this was a lot of uncertainty.

• The Fed was like “yeah we will be slowing our roll but we don’t really know what’s going to happen.” The labor market is improving, but maybe not fast enough? We will stop, one day? These hikes will hit you in the face, but maybe in a few months?

• The terminal rate is higher, but they want to make sure things are sufficiently restrictive - it’s not about the pace anymore, but how high to get that end rate

It does seem like a recession is their baseline thesis for next year, and they are exceptionally worried about wage inflation driving inflation in the economy moving forward. Inflation expectations are still kind of high, which isn’t great for avoiding entrenched vibes-based inflationary spirals.

So. They want to bump rates up, keep them high - but they are more and more uncertain about the path forward for that.

FTX Update

ahhh

The Tornado Cash developer is detained for another 3 months, while SBF is set to speak at a New York Times event, apparently from the Bahamas, but man, it’s just gross. SBF says that FTX failed due to a tumbling in collateral because of the market crash, dry up of liquidity, and a bank run, but FTX also invested $11.5m in this random Farmington State Bank that has like three employees. It’s just a spiral of stupidity.

• There was also a deepfake SBF that was a phishing scam.

• FTX Property Holdings Ltd bought 15 properties worth nearly $100 million in 2021 and 2022 in The Bahamas

• The lawyers are billing $2,000/hr and it seems like FTX customers will get very little money once this whole case wraps up

• Prosecutors were investigating FTX via the Bank Secrecy Act for months?

• FTX and Alameda of course lost $3.7B before 2022 so they *did not* become insolvent via Luna as Doug Colkitt points out. Also once again, how is the casino losing the game this badly? The paper wealth of SRM and FTT, exposure to Solana as it had its run up - these are just massive losses.

• The WSJ published an intentionally (imo) silly piece highlighting a 25 year old guy named Drake that lost $800 via FTX

• Sequoia has $540 million to invest in the crypto ecosystem

• Binance launched their industry recovery fund contributing $1b of their own money and  released their proof of reserves system. 

The biggest news of this week was probably the Digital Currency Group (DCG) dominoes.

• DCG is a big dog in institutional crypto - they own Genesis, their trading unit for Wall Street dollars, Grayscale, their asset management arm which sponsors GBTC, a trust that tracks the price of bitcoin, CoinDesk, and more.

They are currently in a web of financial trouble. DCG currently owes $2b - with over half of that owed to Genesis, and $350m to external creditors. DCG borrowed money from Genesis to buy more GBTC (web gets weaved) - but a series of unfortunate events blew that up - 3AC exploding, bitcoin falling in price, and GBTC trading downwards - resulted in an implosion.³ DCG stepped in to save 3AC a few months ago, but that resulted in a hole in their own sheet - and now, the potential downfall of Genesis.

So now, they are trying to raise money.

• On November 21, Genesis said it had “no plans to file for bankruptcy imminently but of course, life comes at you fast.

• Genesis hired outside help to explore options, including bankruptcy - they’ve been struggling to find investment, slashing their raise from $1b to $500m. Binance decided not to invest in DCG due to potential conflicts of interest, just to give some insight into how Binance seems to be approaching their recovery fund allocation.

• Barry Silbert wrote a letter to shareholders highlighting that “DCG will continue to be a leading builder in the industry.” But yeah. It’s not looking great.

There was a good survey released by Coinbase that dove into the sentiment of things - it seems that most of the institutional crypto industry is no longer behind number-go-up, but they are settling in for a winter ahead, with 60% planning to buy-and-hold.

Final Thoughts

Thanks for reading.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1. I do want to say that *none* of this is really that easy - I am using generalized terms for explanatory purposes here

2. Also employees should not have to work 18 hour days to be successful. That is not success, and I think the next generation of workers embodies that ideology too.

3. Ram has a good thread and good visual on this here