Chain Venturer: 0xSmac of Compound VC

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Happy Weekend 🙋🏻‍♂️,

Welcome to Chain Venturer, a series of intriguing conversations with crypto investors. As the bear market continues, it’s -actually let’s rewind that-

Are we even still in a bear market?

Last time I checked, trading bots to snipe HarryPotterObamaSonicInu and animal racing gambling are all the hype — truly the future of finance.

Jokes aside, as the bear market continues, we’re seeing web2 crossover funds such as Sequoia lowering their AUM and shedding crypto investors. Regan Bozeman from Lattice Fund has also written his investor update stating how bad the funding environment is.

Amidst all this, we still have capital allocators that are still actively investing in the space.

For this week’s issue, we have a great guest: 0xSmac from Compound VC.

Enjoy this conversation.

If you would like to participate in a future episode, DM me here.

-Marco

Enjoy your weekend

0xSmac, Compound VC Investor

0xSmac is a deep thinker and exceptionally brilliant at envisioning future possibilities. A few months back, he wrote one of the most incredible pieces in crypto, imagining future possibilities for the next 5 years.

Today, let’s learn a bit about him and his investment thesis.

Having worked a lucrative career as a structured credit trader at an investment bank, he fell down the crypto rabbit hole. In 2017, he attempted to quit his banking job to focus on crypto but only managed to do so between 2018-2019. Around 2019-2020, he planned to pursue an MBA but instead spent most of his time engaging in the crypto space.

Eventually, his obsession led him to leave business school and engage in conversations with crypto professionals. After doing his own thing for a while and consulting some projects on the side, 0xSmac decided to fully jump into crypto.

Now, 0xSmac is an investor at Compound VC, an investment firm that’s uniquely focusing on crypto and biotech/healthcare.

Here’s my conversation with 0xSmac.

Quick takeaways:

• Decentralization for the sake of it is not practical — whatever the products are, there should be a good reason to utilize distributed or decentralized networks.

• Value capture in crypto networks or distributed systems is key — a crypto project can be successful in reaching its goals, but without capturing any value

• Crypto gaming is a black hole of money getting lit on fire.

• Crypto’s biggest risk is spinning our wheels for another couple of years without applications that people actually want to use.

• Solana is an amazing chain that shouldn’t be underestimated.

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What was the defining moment that made you decide to work in crypto?

Prior to his crypto days, 0xSmac worked in structured credit trading at one of the major investment banks. In 2015, one of his friends introduced him to Bitcoin, which prompted his fall into the crypto rabbit hole — spending every free time reading every white paper and researching the space.

When Covid hit, he began sharing his thoughts on Twitter. Via his public writings, he started to get in contact with investors in the space, including Michael Dempsey, the Managing Partner of Compound VC. The conversation developed and eventually led 0xSmac to join the firm.

He had done angel investing and some consulting in crypto, but had never been fully involved in other projects/companies prior to Compound VC.

You’ve been in the space in 2015, what’s the biggest difference between now and then?

Coinbase was pretty much the only significant player, at least post the Mt. Gox days. 0xSmac bought his first crypto via Coinbase and didn’t do much with it until 2017. Frankly, 0xSmac didn’t even keep up with much crypto news or developments. He didn’t even touch it as he was still busy with his trading job. Looking back, simply not touching his BTC was an incredible trade in itself.

What is Compound VC?

Compound VC is a thesis-driven, research-centric investment firm focusing on healthcare/biotech and crypto. The firm makes its ideas available to the public by periodically updating its theses via public research.

0xSmac focuses almost only on the crypto investing side, while there are other professionals at the firm that devotes more time to Healthcare/Biotech investing. Lately, the firm is seeing overlap or perhaps what can be classified as Decentralized Science (DeSci).

Alas, these three frontier tech verticals seem to be increasingly overlapping over time. As a firm, Compound VC is uniquely positioned to have nuanced views on these verticals compared to a traditional crypto fund.

What is Compound VC's current crypto thesis?

On the crypto side, Compound is interested in distributed systems and distributed networks that solve actual problems and are value add.

Whatever the products are, there should be a good reason to utilize distributed or decentralized networks — there need to be additive benefits whether it’s through reducing cost or getting access to latent resources such as distribution.

Focusing on decentralization for the sake of just decentralizing things is not a realistic goal and people are oftentimes not practical with this approach.

Blockchain is great and a lot of things should probably be done on top of it — but what are those use cases whereby having distributed networks actually benefit the products or services? These are the questions that Compound VC asks.

There are many things these days that benefit more from being centralized rather than decentralized. Decentralization for its own sake doesn’t make much sense, one also needs to be pragmatic.

Which areas are Compound VC most interested in?

One area that’s very interesting is ideas such as distributed compute, storage, and energy. Compound VC’s fundamental idea is that self-sovereignty is an important thesis that applies to various systems, such as the financial system, healthcare, education, energy, and more.

Thanks to Bitcoin, it’s natural that the financial system was the first one to be touched by crypto. However, there are a lot of other systems that the technology can be applied to.

For instance, energy: In the US the electricity grid is becoming more volatile.

• In the future, is it better to stuff energy to centralized providers to reach economies of scale, or would it make more sense to smooth the volatility of the grid?

• In the US, there are data that show that smoothing the volatility and increasing grid resilience to prevent blackouts is arguably more important. In this case, the value of decentralized networks or distributed systems makes a ton of sense.

• Cryptosystems can be utilized to build grid resiliency by creating a network of assets (such as batteries, solar panels, and wind turbines) that can be turned on and off automatically, as well as automatically sell back into the grid.

Simply put:

• Are solutions based on decentralized networks a better alternative to the problems being addressed?

• Is the market big enough to be venture scale?

• What are the inflection points that would lead to these systems being adopted?

What do you think about DePIN projects like Helium and Hivemapper?

The key for DePIN projects is to figure out the value capture. Founders should be able to answer how valuable is the data that they’re capturing. The worst outcome is a well-executed operation whereby large datasets are able to be collected but captures no value — which might just turn the project into a public good.

In your “Crypto Future” piece, you said that “on-chain gaming will not be the sector that drives adoption” — can you expand a bit more on that?

The piece: https://www.acryptofuture.xyz/

0xSmac gets a lot of questions about the crypto gaming thesis from other investors. Gaming is a massive industry and every successive generation of games surpassed the older generation.

Having said that, there are two ways crypto gaming manifest itself:

• Off-chain gaming with on-chain assets: It’s just a regular off-chain game where users have gaming assets that live on-chain. This isn’t too compelling as it doesn’t enable a unique new behavior.

• Fully on-chain games: While this is the ideal scenario, blockchain technology today does not yet have the capability to constantly change state to support “good” fully on-chain games. Maybe we can do so with simple board games such as chess, but not AAA-rated games yet.

That said, I’m sure there’ll be a massive crypto game, but Compound VC and myself are not the right people to have a view on how to pick the winner. It’s unrealistic for us to pick amongst 1,000+ games and know which one will blow up.

Rapid Fire Questions

1. What’s a web3 game that you are most interested in right now?

   • Oh Baby Games.

2. What’s your biggest investment mistake?

   • Heading for an MBA degree.

3. What’s your most contrarian view in crypto right now?

   • Crypto gaming is a black hole of money getting lit on fire and Solana is an amazing chain that shouldn’t be underestimated.

4. What’s the biggest risk that the crypto space is facing?

   • Spinning our wheels for another couple of years without applications that people actually wanna use.

5. What’s the most underrated use case of crypto?

   • Stablecoin — western people don’t appreciate how useful stablecoin is.

6. What’s one book that an aspiring investment professional should read?

   • Zen and the Art of Motorcycle Maintenance by Robert M. Pirsig

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.