Chain Venturer: Sid Venkateswaran of Electric Capital

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Happy Weekend 🙋🏻‍♂️,

Welcome to Chain Venturer, a series of intriguing conversations with crypto investors. This week, we have Sid Venkateswaran from Electric Capital.

Sid is a Protocol Specialist at Electric Capital, a VC firm that focuses on the cryptocurrency, blockchain, fintech, and marketplaces industries. Prior to Electric Capital, Sid was an early team member at FalconX, contributing across Trading, Product, and Partnerships.

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Sid Venkateswaran of Electric Capital

Sid Venkateswaran is a Protocol Specialist at Electric Capital, a venture capital firm that focuses on the cryptocurrency, blockchain, fintech, and marketplaces industries. Electric Capital’s portfolio companies include ConsenSys, dYdX, EigenLayer, Frax, Kraken, and Magic Eden. 

Before joining Electric Capital, Sid was a versatile early team member at FalconX, contributing across Trading, Product, and Partnerships.

During his Physics studies at the University of Illinois at Urbana-Champaign, Sid gained valuable experience as a Quantitative Analyst intern at IEX Trading, a company featured in Michael Lewis's best-selling book, "Flash Boys."

Here’s my conversation with Sid Venkateswaran.

Sid was speaking on his own behalf and not on behalf of Electric Capital. This content is for informational purposes only. Nothing that we discussed should be taken as financial advice and is not an offer or solicitation to invest with Electric Capital.

Quick takeaways:

• Sid, as a protocol specialist at Electric Capital, spends his time divided between investment activities—ranging from equity to liquid tokens—and supporting portfolio companies.

• The core issue of liquidity fragmentation, as Sid sees it, is less about the distribution of liquidity itself and more about the user interface (UI) challenges it presents.

• The key to overcoming the ease of forking and fee competition lies in building a robust ecosystem around the token, creating economic incentives that align the interests of all participants.

• Token swaps coupled with vesting agreements can be an interesting structure to complement crypto partnerships. This structure not only mandates accountability for both parties involved but also aligns their interests by making them stakeholders in each other's success.

• One of the pressing issues in DeFi governance is the low level of participation among token holders, compounded by the fragmentation of information across various platforms.

What was the defining moment that drew you into the world of crypto?

Sid became interested in crypto during the ICO craze of 2017-2018, a time when projects like EOS were raising billions before their launch. He initially thought about shorting these tokens to make a profit, but luckily, platforms for trading altcoin derivatives like FTX or Binance weren't available, which probably saved him from potential losses due to his limited understanding of the nature of crypto markets at that time.

While studying physics at the University of Illinois, Sid was also exploring financial markets in his free time, learning about market structure and investment strategies through books and online resources. This led him to intern at a stock exchange, where he started considering a future in finance, specifically in high-frequency or quantitative trading. However, he realized the challenge of competing in traditional markets, where large institutions dominate.

The defining moment: Sid recognized the formidable challenge of competing in traditional markets against institutions armed with resources and expertise. He saw crypto as an emerging field without established answers, offering a dynamic environment ripe for learning and impact. This realization propelled him to enter the crypto space, where rapid evolution and the chance to contribute to foundational projects offered a unique opportunity.

Joining FalconX, an institutional prime brokerage, as an intern when the team was just about 15 people, Sid quickly transitioned to a full-time role, thanks to the co-founders' encouragement. At FalconX, he focused on trading and lending for institutional clients, gaining invaluable insights into crypto market structure and growth from a small team to nearly 100.

After two and a half years of intense learning and navigating the 24/7 market demands, Sid yearned for more direct involvement in investment decision-making and on-chain capital deployment. This led him to Electric Capital, where he had been introduced while FalconX was a client. Joining Electric Capital marked a significant step in Sid's career, allowing him to work closely with pioneering teams and projects, shaping the future of the crypto landscape.

Can you explain what Electric Capital is and what your role as a protocol specialist entails?

Electric Capital is co-founded by Avichal Garg and Curtis Spencer six years ago. Both founders are highly accomplished, having built and sold several startups, including one to Facebook, where they continued their careers—Garg as the Director of Product Management at Meta, and Spencer as a Senior engineer. Their crypto journey began before the 2017/2018 cycle, following their tenure at Facebook and extensive involvement with Y Combinator startups.

Electric Capital's investment strategy is diverse, encompassing token deals, equity investments, and projects within NFTs, DeFi, and consumer infrastructure. The firm's portfolio includes notable investments in Bitnomial, a derivatives provider; Bitwise, known for one of the recent ETFs; Certora, which specializes in formal verification; and dYdX and EigenLayer, among others. This eclectic mix showcases Electric Capital's integrated approach to the crypto industry, led by Garg and Spencer's deep involvement and vision.

Unlike traditional venture funds, Electric Capital boasts a team primarily composed of engineers rather than analysts or associates. This technical prowess enhances the firm's due diligence capabilities, enabling a comprehensive understanding of the underlying technologies in their investments. Sid, as a protocol specialist at Electric Capital, spends his time divided between investment activities—ranging from equity to liquid tokens—and supporting portfolio companies. His role involves sharing data with companies about incentive systems, governance systems, liquidity attraction strategies, and revenue distribution mechanisms. Companies use Sid's insights to help steer away from pitfalls, leveraging patterns observed across the industry to guide them toward success.

Electric Capital does not engage in short-term trading strategies or high-frequency trading, instead adopting a venture strategy that focuses on long-term value across multiple cycles. The firm actively stakes and engages with projects on-chain, demonstrating a commitment to the sustained growth of its investments. Sid's choice to join Electric Capital was driven by the opportunity to engage deeply in the crypto space beyond just trading, attracted by the firm's comprehensive and engaged approach to investment. This perspective underscores Electric Capital's unique position in the market and its contribution to the evolving landscape of cryptocurrency investment.

How has the liquid crypto market, especially in terms of decentralized exchanges (DEXs) and prime brokering, evolved from 2020 to 2024?

The evolution of the liquid crypto market from 2020 to 2024 has been profoundly influenced by the rise of Automated Market Makers (AMMs) and decentralized exchanges (DEXs), marking a significant shift in the trading landscape. Reflecting on Sid's experience at FalconX, during the nascent stages of platforms like Uniswap and Balancer, trading predominantly occurred on centralized exchanges such as Coinbase, Kraken, Binance, OKX, Bitfinex, and BitMEX. These platforms dominated the market, particularly for BTC transactions, with BitMEX and Bitfinex leading in volume around 2019.

However, the current scenario presents a stark contrast. Binance has expanded considerably, and Coinbase has successfully risen, altering the dynamics of token listings and liquidity provision. Previously, protocols had to invest heavily and navigate numerous challenges to get listed on centralized exchanges. Now, the option to launch permissionless pools on AMMs has simplified liquidity introduction for new protocols, offering dual advantages.

Firstly, this evolution democratizes access for crypto investors, enabling users to participate in these ecosystems. Launching early on a DEX enables broader adoption for these protocols. And users do not have to give up custody of their assets. 

Secondly, and perhaps more intriguingly, is the impact on the type of token holder a protocol attracts. DeFi protocols, in particular, benefit when their users are also their token holders, fostering a community of participants aligned with the protocol's success. This alignment is less likely with tokens purchased on centralized exchanges, where they may be subject to speculative trading. In contrast, buyers on DEXs are more likely to be users of the protocol. 

Sid's insights highlight a pivotal change in how liquidity is approached in the crypto market, underscoring a broader trend towards decentralization and community engagement.

How do you see the issue of liquidity fragmentation on-chain, especially with the launch of many Layer 2 solutions and the ability to easily run your own roll-ups?

Sid believes that the transition to a multi-chain world is inevitable. A few years ago, the mention of a multi-chain ecosystem hinted at developments within networks like Cosmos and various Layer 2 solutions. Today, the landscape is evolving even further, with protocols like Frax launching their own chain, Fraxtal, and dYdX transitioning to a Cosmos chain. This trend suggests an upcoming surge in the creation of Layer 2s and independent chains, likely leading to an even more pronounced fragmentation of liquidity than observed in recent years.

The core issue of liquidity fragmentation, as Sid sees it, is less about the distribution of liquidity itself and more about the user interface (UI) challenges it presents. Currently, liquidity is spread across different chains, protocols, and pools, restricting operations to the available liquidity within each. As one ventures into less popular chains, building and moving significant amounts of liquidity becomes increasingly difficult.

However, Sid is optimistic about the future. Technologies like Inter-Blockchain Communication (IBC) and cross-chain bridges (e.g., Axelar or LayerZero) promise a seamless interaction across multiple chains, potentially obscuring the complexity of these operations from users. Projects like NEAR, with their chain abstraction efforts, are pioneering this seamless experience, allowing users to transact across various chains through a single wallet interface, without needing to understand the underlying processes.

Furthermore, Sid anticipates the development of smart order routing systems capable of scanning multiple venues to secure the best liquidity options. Think, CoW Swap or solvers on steroids. This system would not only simplify transactions for users but also mirror practices in traditional financial markets, where a vast array of public equities and dark pools necessitates sophisticated solutions for efficient order execution across fragmented liquidity sources.

Drawing parallels with the traditional market's approach to handling liquidity fragmentation, Sid suggests that the crypto market can adopt similar strategies to address these challenges. Just as market participants in traditional finance have developed mechanisms to navigate and utilize fragmented liquidity, he envisions a future where technological advancements and improved UI/UX design enable effective management of liquidity across the burgeoning landscape of chains and Layer 2 solutions.

Given the open-source nature of DEXs that can lead to a race to the bottom in terms of fees, and the ease of aggregating liquidity in crypto compared to the lengthy process in the equities world, how can one effectively assess and choose among the multitude of DEXs and AMMs available?

Addressing the concern of a race to the bottom in DEX fees and the challenge of forkability, Sid emphasizes the importance of unique offerings and the strategic role of tokenomics. He highlights Curve's approach, where token holders, including significant protocols, lock their tokens for governance purposes. This engagement creates a barrier for new entrants, as they must not only match but exceed the product and fee advantages of existing DEXs. They also need to persuade a committed community of liquidity providers, traders, and integrated protocols to switch allegiance.

Sid points out that the key to overcoming the ease of forking and fee competition lies in building a robust ecosystem around the token, creating economic incentives that align the interests of all participants. This strategy not only fosters loyalty but also makes it challenging for competitors to replicate success merely by forking. He acknowledges that while some protocols have successfully adopted models similar to Curve's, simply copying these models without a clear strategic fit can be ineffective.

In conclusion, Sid advocates for thoughtful economic design and community engagement to build a defensible position in the crypto market. By incentivizing participation and engagement in the ecosystem, DEXs can create a competitive advantage that is difficult to undercut simply through lower fees or forked technology. This approach not only addresses the challenges posed by the open-source nature of DEXs but also leverages it to build a committed and engaged user base, ensuring long-term success and resilience in the face of potential competition.

Sid’s take on enhancing on-chain collaboration through token swaps and vesting agreements

Sid observes that the crypto ecosystems beyond Ethereum are still in their infancy, lacking the depth of experimentation seen on the Ethereum network. However, he anticipates significant advancements in these newer environments as they enter more mature stages. Developers in these ecosystems are expected to introduce innovative token models and foster on-chain partnerships, evolving beyond the preliminary attempts witnessed in the last cycle.

A recurring theme Sid notices is the announcement of partnerships between two protocols on social media platforms like Twitter, which often result in little to no tangible outcomes. These collaborations frequently amount to mere discussions without delivering real benefits to the protocols involved or their user bases. Sid proposes a more substantial approach to ensure these partnerships yield actual results: token swaps coupled with vesting agreements. This structure not only mandates accountability for both parties involved but also aligns their interests by making them stakeholders in each other's success.

By integrating token swaps into partnership agreements, protocols become contractually obligated to honour their commitments, fostering a genuine collaboration that benefits both entities and their respective ecosystems. This method of aligning incentives could pave the way for more meaningful and productive partnerships within the crypto space. Sid also highlights the potential for innovation in how these incentives are structured, not just between users and protocols but also across different protocols, suggesting a landscape ripe for exploration and experimentation in aligning incentives more effectively.

What are your thoughts on the recent Uniswap fee switch and the overall changes in DeFi governance over the past couple of years?

Sid emphasizes that governance in the decentralized finance (DeFi) sector lacks a one-size-fits-all solution, stressing the importance of a hierarchy that champions decentralization. This concept isn't about reaching a definitive state of decentralization but rather engaging in a journey towards progressively more decentralized governance structures. Sid advises emerging projects to consider this evolutionary approach, starting from simpler mechanisms like multi-sig wallets, advancing through intermediary stages like snapshot voting, and eventually adopting comprehensive governance contracts.

One of the pressing issues Sid identifies in DeFi governance is the low level of participation among token holders, compounded by the fragmentation of information across various platforms. To enhance engagement, Sid suggests centralizing discussion and decision-making information in specific, well-communicated channels. Furthermore, Sid sees significant value in the delegation of voting power to knowledgeable and active community members, which could streamline decision-making and leverage the insights of those deeply invested in the project's success.

Despite these challenges, Sid views the recent developments around Uniswap's fee switch as a pivotal moment in DeFi governance, highlighting its potential to set new precedents in how value accrual mechanisms are integrated and managed within leading DeFi protocols. Uniswap's initiative could encourage other projects to explore similar mechanisms, even though many are still in the early stages of generating revenue or value to distribute. Sid's perspective underscores the dynamic nature of DeFi governance, acknowledging both its current complexities and its potential for fostering more engaged, informed, and decentralized communities.

Rapid Fire Questions

1. What's one piece of content every aspiring investment professional should read/watch?

   • Reminiscences of a Stock Operator by Edwin Lefèvre

2. What’s your biggest investment mistake?

   • Too skeptical about a lot of things and end up missing opportunities.

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

   • Stablecoins.

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

   • In the long term, most AMMs aren't going to be around.

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

   • Lack of a broader attitude towards security.

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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.