Dialogue with Dragonfly Capital partner Haseeb: Layer 1 will ultimately prevail, and the synthetic asset sector is undervalued

​Respondent: Haseeb Qureshi

Compiled by: Hu Tao, Chain Catcher

Recently, Cobie & Ledger, hosts of the crypto video podcast UpOnly, interviewed Haseeb Qureshi (hereinafter referred to as QH), a partner at Dragonfly Capital. QH was once a professional poker player, later learned coding and became a software engineer at Airbnb, and then entered the crypto space.

Due to frequently discovering bugs in crypto projects, QH worked full-time in security research at the stablecoin startup 21/Earn before moving into investment. In this episode, Cobie & Ledger discussed investment theories, the development prospects of L1 and L2, emerging trends, and more with QH. Below is a compilation of this podcast by Chain Catcher, with some edits. UpOnly: You were once a poker player and mentioned that many people like you later became crypto traders, as both involve a certain risk-taking related to mathematics. How do you think the phenomenon of poker players transitioning to the crypto space came about?

QH (Haseeb Qureshi, hereinafter QH): I think both crypto and poker are related to a certain aspect of human nature. Those who become professional poker players have a special DNA; they are willing to try strange things to make money, even if these are not understood by the masses or cannot gain traditional prestige. These people are naturally attracted to crypto, even if they initially lack the skills needed to engage in the crypto market.

Of course, the crypto market is different from poker; it requires strong expertise. I know many poker players who try to enter the crypto space, but most end up losing money. However, if you can dedicate almost all your time to learning and then enter these strange, cutting-edge communities, you will really have a significant advantage and find your footing.

Among the poker players I know, very few have become VCs; even professional poker players mostly end up becoming traders. VC is more like a team sport, while traders are in a solo competition, and playing poker is a one-on-one match where no one can give you ideas. It's like a war where everyone is against everyone, and that's how it is in the crypto space.

UpOnly: I know that after 2011, poker games gradually started using cryptocurrencies for transactions, at a time when the crypto market was still very early.

QH: Yes, at that time, poker players were unbanked, so people had to use Bitcoin or other mechanisms to solve this problem and ensure they could continue participating in the games. But later, the poker economy has become increasingly worse.

I believe poker is definitely a "zero-sum game"; when some people win, others lose. Technically, it is a "negative-sum game" because, in reality, everyone is slowly losing money.

I started playing poker in 2006 when online poker was very popular, with many amateur enthusiasts. But poker has become more and more professionalized and marginalized.

This means that less skilled poker players are losing money faster and in greater amounts. This has led to the phenomenon of "overgrazing" in poker, making the game worse, and those professionals can no longer rely on it for a living, so they have to find another way.

UpOnly: In your description, people are just slowly losing money over time. The current situation may not be as easy as it was in 2013.

QH: I think every generation has its own "scam." If you enter an industry early that your parents don't understand or even find infuriating, you can leverage this "marginality" to make money.

UpOnly: This perspective is interesting. I would describe it as each generation building its own Ponzi scheme and choosing to exit the Ponzi schemes of the previous generation. The most obvious example is gold; the new generation may see it as just a rock, while Crypto Punks are more valuable to them than gold. So this topic, "exiting the old Ponzi scheme and creating this new Ponzi scheme." Do you think this is history repeating itself, or are there differences in the cryptocurrency revolution?

QH: I believe that over time, the new generation creates new valuable things, and this is beyond question. John Pfeffer once said something I really like: I can believe that through Crypto, we have found a way to create new valuable things; but I do not believe we have found a new way to make things valuable.

I basically agree with this view. Most of the time, when you can't articulate why something is valuable, it may be due to your lack of understanding of it. But I think for most things in crypto, we can actually explain why they are valuable. People are generally not good at this, but this is what I pursue.

As a VC, sometimes I also don't understand why someone would want this thing. If you can't answer that question, it usually indicates that you don't understand it, and you probably shouldn't invest. Just like the super valuable Crypto Punks, if you try to make some arguments, even if there are a thousand answers, the most important reason is that there is a community that values them. Just like the value of a Rolex far exceeds the value of its metal cost because there is a group of people who regard it as a treasure.

The value of Crypto Punks lies in the fact that those at the forefront of the new generation of crypto elites and wealth value this form. For example, if you want to showcase your wealth status, you can post a photo with your Tesla on Instagram, but that feels vulgar.

Why don't we have a digital-native way to showcase our wealth and social status? This is a fundamental part of human nature, to show off wealth to your friends. Humans have a tendency to flaunt wealth, but this tendency has not been well expressed on the internet until the emergence of these digital artworks.

UpOnly: Yes, but are their prices a bit absurdly high? How do we distinguish whether they truly have this value? In contrast, Rolex prices are relatively static.

QH: I think the reason is that Rolex can always be produced, and the quantity is not fixed. If there is a very old and limited edition Rolex, it would only be owned by a Saudi oil tycoon. Such a Rolex is similar to Crypto Punks.

Crypto Kitties and Crypto Punks illustrate the real difference; Crypto Kitties are more like Rolexes, with no limit on quantity. If you want to enter the NFT world, you can hold a Crypto Kitty, and the price is not very high now. But if you want a Crypto Punk, it's like you're competing with a Saudi oil tycoon.

UpOnly: As a crypto VC, can you talk about some of your biggest mistakes?

QH: As long-term investors, we are looking for those who are genuinely trying to build for long-term development, not just those who want to get rich quickly. One characteristic of the crypto industry's big cycles is that it attracts both those trying to get rich quickly and those who truly see the fundamental issues, believe in the field, and want to participate long-term. A large part of our work as VCs is to find those with real ambition who want to build for the long term.

There are many cases of failure, some of which can be described as painful lessons. Uniswap was one of the most painful things for us last year. At that time, we investigated some data on Uniswap and found that 8 out of the top 10 pools had not been profitable since their inception, and we felt it could not achieve sustainability, so we completely missed out. We also missed the seed rounds of Solana and Terra.

UpOnly: I conducted a poll on Twitter about "the reasons behind your biggest gains and losses," and the results showed that the biggest gains came from simple spot trading, while significant losses were caused by over 50% leveraged trading, etc.

I think people are very shortsighted when they first enter the market, holding the mindset of "I came late, I need to catch up with them; many people have already made billions, so I need to borrow money and leverage, etc., I can't miss this opportunity." In fact, you only need to hit it right once; you don't need to participate in everything.

QH: Not as investment advice, but one thing I want to say is that diversifying your portfolio is really important; it's the core of risk diversification. If your returns follow a power law distribution, then the best strategy is to diversify as much as possible. This is easy to do in liquid markets. So, aim to trade less and increase investment diversity.

I'm not saying that diversification can reduce losses because everything is correlated during large market fluctuations, but I believe that investment diversification can enhance returns. In traditional markets, investment diversification is actually to mitigate risk; in the crypto market, it can only mitigate risk to a certain extent, and its effect is not significant, but it can actually amplify returns.

UpOnly: What do you think about the view that "the future is multi-chain," and the long-term development potential of current projects and Ethereum?

QH: The common goal of various chains now may be how to improve scalability. They are roughly divided into EVM-compatible chains and non-EVM-compatible chains. Some investors believed from the beginning that performance and tool development were important, ultimately applicable to all programmers.

What needs to be improved now is the blockchain programming language EVM. The EVM was written by Gavin Wood in 2017, and clearly, he did not understand programming language design or virtual machine design because the Ethereum yellow paper is a nightmare; the EVM is poorly designed. But that doesn't matter; more than five years have passed, and everyone is using it to do various important constructive work, learning to use it effectively.

So I think the current situation is like the JavaScript or English we are using; EVM will become the way to write smart contracts, it will always exist, and it may iteratively get better. People will find ways to make it more efficient and secure, but it will iterate slowly like JavaScript. Solana and Avalanche are both researching their own EVM-compatible networks.

I always believe that Layer 1 will ultimately prevail among existing solutions, including those architectures bridging Ethereum. They are all trying to do the same thing, such as scalability, etc. But broadly speaking, especially in the early stages, we do not clearly understand the real needs; many interoperability and composability architectures may win in the short term.

UpOnly: What are the impacts of scalability?

QH: When we talk about blockchain, we treat it as a network, and I think that's not a very good metaphor because it easily brings to mind Facebook or Google. These networks can scale infinitely, but blockchain cannot.

Imagine blockchain as a city; Ethereum is like the capital of the crypto world, a huge financial center, and as a result, this space becomes crowded, prices soar, and it can only accommodate the wealthy. Where do most people go?

Layer 1, Layer 2, and interoperability solutions are different answers to this question. For interoperability solutions, different projects are like different small cities, each with its own community and banks, interconnected by highways and bridges.

Different Layer 1s are trying to build a large city outside of the capital; it will be completely independent, with its own financial center, and everything will be recreated in an independent city. Doing this now is feasible, for example, Polygon and Avalanche, which have their own AMMs, their own DeFi; all these things are recreated and separated, with the advantage of being cheaper and more scalable.

UpOnly: What tracks do you think have not yet exploded? What is your favorite category of crypto assets?

QH: Synthetic assets, in my view, have not been well developed; the current trading volume is small and not really utilized. For example, Mirror and UMA, neither is truly scalable. We know that the world's demand for dollars is huge, but many people cannot access them, which is why stablecoins have exploded in the past few years.

Moreover, I believe that as long as there are oracles, any asset can be synthesized, such as buying Tesla stocks or any financial asset that anyone in the world wants. This will definitely have a big explosion, but right now it is still very small. Most people in the crypto industry are speculators; one day you will be able to buy any asset you want with your phone, and for me, this is bound to happen, but it hasn't happened yet.

UpOnly: That will be interesting to see how it evolves.

QH: Cryptocurrency has always been a global narrative, much like Amazon's impact on retail. DeFi has done the same thing; I believe the fundamental story behind DeFi is to provide opportunities for those who cannot access equivalent financial services.

UpOnly: How do you understand DeFi and NFTs?

QH: NFTs are more consumer-focused than DeFi; they are a great way for consumers to enter the crypto space. DeFi is experiencing significant scalability issues and did not really develop last year.

I think the reason is that many people want to earn returns on crypto assets, but not many have enough technical skills to use DeFi. So there needs to be another layer of front-end, whether it's wallets, games, or other things.

Just like Coin98 led many people into the crypto space, they are consumer-facing and easier to connect with regulators; their development speed is slower than that of DeFi protocols themselves. DeFi protocols can continuously innovate, even if not many people are using them, so that is the ultimate advantage.

Most of what we see in DeFi was built between 2017 and 2019 when no one cared about it. But innovation develops this way; people build a bunch of things that no one cares about for a while until there is a breakthrough, and then a new layer of users opens up.