Dialogue with DephiDigital Co-founder: Finding Trends Before Social Media Discussions, Staying Optimistic in Boring Markets

Original Title: Exclusive with Delphi Digital's Anil Lulla: Research, Crypto, AI, and the Future of Investing!

Podcast Source: Turtle Tree Crypto

Compilation: Deep Tide TechFlow

Guest: Anil Lulla, CEO of Delphi Digital

Host: Jagdish; Sushil Sanghvi, Crypto Researcher;

Release Date: September 6, 2024

Background Information

In this special episode, we had an in-depth conversation with Anil Lulla, co-founder of Delphi Digital. Delphi Digital is one of the most respected research and investment firms in the crypto space. Anil shared his extraordinary journey from Wall Street to building a $500 million crypto giant. We delved into Delphi's unique research process, the future of crypto AI, how to navigate complex market cycles, and why Anil is more optimistic about cryptocurrencies than ever. He also revealed the top projects he is watching and brought a huge giveaway for our listeners. Don't miss this exclusive conversation with one of the leading figures in the field!

From Wall Street to Crypto

• Anil Lulla shared his experience transitioning from traditional finance to the crypto space. He mentioned that he has been passionate about business and technology since childhood, and his father foresaw that he would not work for others.

• Anil developed a strong interest in using mathematics to predict business changes while studying finance.

Challenges and Opportunities in Entrepreneurship

• Anil recalled his experience with the team trying to raise $20 million to establish a venture capital fund in 2019. Despite facing rejections from investors, they persisted in their beliefs and started the fund using credit cards with a 0% annual interest rate. Ultimately, they successfully scaled the fund to $500 to $600 million, forming an internal family office model without interference from external investors.

Regrets of Investors

• When discussing relationships with investors, Anil mentioned that although he never met the investor who rejected them, they had communicated. That investor stated it was the biggest mistake of his life.

• Anil's experience emphasizes the importance of holding onto beliefs in the face of adversity and how to find opportunities in difficult situations.

The Secret: How Delphi Predicts Crypto Trends Early

Delphi's Research Advantages

• Anil stated that Delphi's research team is exceptional at identifying potential opportunities before crypto trends are widely discussed.

• Anil emphasized that when hiring team members, they prioritize those who are passionate and curious about the crypto space and create ideal roles for them to thrive.

Core Principles of Research

• Anil mentioned that Delphi's research team follows two main principles. First, the team always believes, "If it's on crypto Twitter, it's too late." This means they strive to find trends that have not yet been widely discussed to make investment decisions ahead of others. Second, they require every report to be in-depth and unique, ensuring that the content is not mentioned by other sources. This approach gives Delphi's reports an advantage in information density and uniqueness.

Personal Reading Habits

• Anil also mentioned that he does not know the specific content before the research is published; he downloads and reads the reports as soon as they are released, especially while flying. He believes that this continuous learning and research enable him to stay updated with the latest developments in the crypto space.

Crypto and AI: Why Delphi is Making Big Bets in This Area

Delphi's Investments in Crypto AI

• Anil Lulla discussed Delphi Digital's recent active investments in the crypto AI space during the podcast. He mentioned that Delphi has made about 17 investments related to crypto AI and released up to 15 podcast episodes on the topic. This indicates Delphi's focus and foresight in this area.

Initial Skepticism Towards AI and In-Depth Research

• Anil recalled his initial skepticism towards AI, thinking it was just a buzzword and might not lead to actual products. However, as team members delved deeper into the field, he gradually built confidence. Particularly, some members of the team, like Tommy, Kane, and Ross, helped him see the potential of combining crypto and AI.

Intersection of Crypto and AI

• Anil believes that building crypto infrastructure is not only to attract users but also to attract AI agents and bots. He pointed out that AI needs an open environment and various interfaces to interact with different protocols, and the decentralized nature of the crypto space meets this need. He believes that the combination of AI and crypto will provide significant opportunities for future innovations.

Team Collaboration and Diverse Perspectives

• Anil emphasized that Delphi's success lies in the collaboration and communication within the team. The close connection between their research, investment, and lab departments allows experts from different fields to share insights, leading to more comprehensive decision-making. This collaborative approach enables Delphi to maintain a leading position in a rapidly changing market.

Unexpected Events on Delphi Day

• Anil Lulla introduced the unique event of Delphi Day, which they hold internally once a quarter. On this day, team members are asked not to speak positively about Delphi but to freely express their views, pointing out shortcomings and areas for improvement.

• Anil believes this approach fosters open communication within the team, giving everyone a chance to voice their opinions.

Format and Purpose of the Event

• On Delphi Day, the team discusses the performance of various departments, including research, investment, and incubation. Anil explained that typically, everyone reflects on their own department and suggests improvements. This open discussion atmosphere helps team members recognize their shortcomings and seek opportunities for enhancement.

Specific Case Study

• Anil shared a specific case regarding their gaming portfolio. During last year's Delphi Day event, the team discussed their investments in the gaming sector. Although they remained optimistic about the gaming industry, they realized they had made many investments and needed to reassess whether to continue increasing their stakes. During the discussion, the team invited some project leaders from their gaming portfolio to showcase their ongoing work and the problems they were addressing. This interaction shifted Anil's initial pessimism to optimism, reinforcing his confidence in gaming investments.

Self-Criticism and Culture

• Anil emphasized that Delphi values a culture of self-criticism, and the team aims to improve continuously through this method. They are open to external criticism but prefer to identify and address issues themselves. This attitude of self-reflection has become an essential part of Delphi's culture, allowing it to maintain a leading edge in the competitive crypto market.

Launching Projects: How Legion Addresses These Issues

Current Market Challenges

• Sushil mentioned that in the past six months, many new projects have struggled to maintain their listing prices, even some reputable projects face challenges. New projects often find it confusing to effectively conduct initial coin offerings (ICOs), initial decentralized offerings (IDOs), and other strategies, without finding an ideal solution.

• Anil believes that Delphi is working hard to address these issues, particularly through their new project, Legion.

Legion's Innovative Solutions

• Anil introduced Legion, a newly unveiled project aimed at addressing the difficulties faced by new projects during their launch. The core idea of Legion is to build a scoring and track record system for investors from the ground up, allowing non-accredited investors to participate. Although facing more legal challenges in the U.S., this model has the potential to succeed in Europe.

Reintroducing the ICO Model

• One of Legion's highlights is its ability to allow projects to distribute more broadly and attract a diverse investor base, not just large venture capital firms. Anil believes this approach can help projects launch more effectively and avoid potential value mismatches in traditional financing methods.

Synergy with Metallex

• Anil also mentioned that Legion's sister company, Metallex, focuses on blockchain legal services. Metallex's founder, Gabriel Shapiro, was formerly Delphi's legal advisor and now leads this project. Metallex will provide legal support for many projects, including on-chain governance, data partnerships, protocols, and more. By collaborating with Delphi's lab team, Metallex will automate these legal services and integrate them into Legion, enhancing its functionality.

Future Outlook

• Anil is confident about Legion's future, believing that over time, Legion will become the premier project launch platform. Although it can currently be seen as a launch platform, its functionalities will continue to expand, ultimately providing more comprehensive support for projects. The launch of Legion is viewed as a significant step in addressing current market challenges, with expectations for its development and impact in the coming months.

Evolving Crypto Cycles: Meme Coins, Solana, and Real-World Use Cases

Evolution of Market Cycles

• Sushil mentioned that with the launch of Ethereum, the cryptocurrency market has undergone several cycles of evolution. In the first cycle, all tokens were rising, while the second cycle saw tokens with stories and visions performing well. In the current cycle, investors are beginning to differentiate between well-performing and poorly-performing projects, focusing more on actual performance rather than hollow dreams.

• Anil believes this reflects market maturity but also raises questions about how to navigate such an environment and Delphi's role within it.

Anil's View on the Market

• Anil reframed the concept of market cycles, stating that the second cycle was primarily driven by the rise of DeFi, which brought real revenue models and business models. Subsequently, the frenzy around gaming, the metaverse, and NFTs also invigorated the market. He pointed out that the importance of NFTs lies in their introduction of culture into the crypto world, even though current market enthusiasm for NFTs has waned.

Current Market Dynamics

• In the current cycle, Anil observed two main trends: the rise of Solana and the popularity of meme coins. Solana, as a highly liquid project, has attracted significant investor attention, even showing considerable upside potential when below $10. On the other hand, meme coins are seen as a leveraged tool with no liquidation risk, with many investors purchasing meme coins for higher risk-reward.

Impact of Meme Coins

• Despite the significant attention meme coins have received in the market, Anil pointed out that the proportion of investments in meme coins among Delphi's internal investors is usually low, averaging between 10% and 15%. This indicates that even amidst the meme coin craze, investors' confidence in their long-term potential is not as strong as for projects like Solana.

• Anil believes this phenomenon reflects the complexity and diversity of the market.

Future Outlook

• Anil holds an optimistic view of the future, especially regarding important projects like Celestia and Athena. He believes these projects hold significance in the market and may surprise at the right time. He emphasized that as a fundamental investor, he always believes in the importance of fundamentals and that market maturity will continue to improve over time.

The Dilemma of Low Liquidity and High FDV

• Jagdish raised an important topic in the current crypto market, namely the issue of low liquidity and high FDV (Fully Diluted Valuation). He observed that large institutions are investing in ETFs for Bitcoin and Ethereum, while venture capital (VC) tends to focus on infrastructure and fundamental projects. However, ordinary investors seem to be losing interest in VC tokens, turning towards meme coins.

Views on VC

• Anil pointed out that many people hold a critical view of VCs, but he believes the market's performance reflects investor behavior. He emphasized that many VCs are not guiding the market on how to launch tokens but are looking to gain returns through investments. He believes that the control of prices by market makers and exchanges may be the root cause of the problems.

The Issue of Low Liquidity and High FDV

• Anil acknowledged that the phenomenon of low liquidity and high FDV is indeed a hot topic. He believes that the ideal situation is high liquidity and high FDV, but currently, many projects create excessive hype upon launch, leading to unreasonable valuations and ultimately causing price declines, which harms both the community and team morale. Therefore, he suggests that projects need to experiment with different issuance methods.

Effective Issuance Strategies

• Anil mentioned that he jokingly tells some clients that the best token issuance might be a "bad" issuance. He believes that launching tokens without hype and allowing the community to build from the ground up would be more beneficial for long-term development. He cited Synthetix and Chainlink as examples, explaining that early community members who entered at low prices would remain loyal to the project because their investments have yielded substantial returns.

Changes in the Community

• He also noted that the current community is often "mercenary," with investors showing low loyalty to projects and quickly shifting to others when issues arise. Anil believes that projects need to attract more users willing to hold long-term to reduce such short-term behavior.

Future Direction

• Finally, Anil stated that the market will gradually self-correct, especially as investors express dissatisfaction with low liquidity and high FDV projects, prompting projects to try new issuance models, such as Legion and Echo. Overall, despite current challenges, as the market matures, the relationship between projects and investors will improve.

Are VCs Exiting Too Early? The Pros and Cons of Crypto Investment

• Jagdish raised a question about VCs exiting early in the crypto space. He believes this phenomenon has its benefits, as VCs can exit before products find product-market fit (PMF), attracting more investors into the market. However, this early exit also leads to situations of high liquidity and low FDV. He expressed confusion about whether this is a feature or a flaw.

Anil's Perspective

• Anil responded that this is a great question. He believes that everything has its pros and cons. In the crypto market, early exits are seen as a feature, which is one reason many people flock to the crypto market. Investors like the ability to achieve liquidity quickly and can find ideas that other investors might not fund.

Incentives for Teams and Investors

• However, Anil also pointed out that when investors and teams receive substantial returns before the product has found PMF, they may lack the motivation to drive the product's success. Therefore, he suggests incentivizing teams by extending investment lock-up periods or setting milestones. This is crucial for maintaining team motivation, as investors want projects to adhere to their investment thesis. If the investment thesis changes, early liquidity may become an issue.

Bull Market or Bear Market? Why There's More Optimism Than Before

• Sushil raised a hot topic regarding the current market: are we in a bull market or a bear market? He mentioned that many people are confused about the current "boring range" and asked Anil for his views and when the bull market might begin.

Anil's Perspective

• Anil stated that he is personally very optimistic about the current market, considering it the most favorable period since he entered the crypto space. He believes that not only are there changes in the market and macro structure, but also positive changes in the regulatory framework of the crypto industry. He mentioned that the long-awaited ETFs (exchange-traded funds) are on the horizon, and interest rates may soon decline, providing positive signals for the market.

Impact of Political Factors

• Anil also mentioned the upcoming elections and candidates' attitudes towards cryptocurrencies. He believes that changes in the political environment could significantly impact the crypto market. For instance, the friendly attitude of Trump and other candidates towards cryptocurrencies may attract more supporters. He noted that Trump even mentioned incorporating Bitcoin into the treasury reserves, a topic rarely discussed in the past.

The Power of the Community

• Anil believes that the number of cryptocurrency holders among voters is increasing, making it impossible for politicians to ignore this group. He pointed out that cryptocurrency holders often become single-issue voters, which means politicians need to consider this factor when formulating policies.

Future Outlook

• Overall, Anil holds an optimistic view of the future. He believes that if favorable regulatory policies are introduced, it will bring new growth opportunities for the crypto market. He hopes to see politicians fulfill their promises rather than neglect cryptocurrency-related issues after being elected. Although he admits to having low trust in politics, he believes the current political environment provides a favorable backdrop for the crypto market.

How Delphi's Three-Armed Strategy Creates Alpha

Uniqueness of Delphi's Research

• Jagdish mentioned that the uniqueness of Delphi's research lies in the fact that they not only provide research reports but also have "skin in the game" in investments—meaning that members of the research team also participate in investments, making their research more practical and actionable.

• Anil believes this approach makes the research more reliable, as researchers are not just writing reports; they are also looking for opportunities that can bring Alpha to their portfolios.

Collaboration Between Research and Investment

• Anil explained the collaborative approach between Delphi's research team and investment team. The investment team receives numerous investment opportunities, while the research team continuously seeks projects worth writing reports on. If the research team identifies potential Alpha, they will write a report and send it to the investment team, recommending further investigation.

Investment Decision-Making Process

• At Delphi, the investment decision-making process is relatively slow, typically taking two weeks. In the first week, the investment team submits investment opportunities to the investment committee (IC) and answers questions from committee members. In the second week, experts from the research team participate in discussions, conducting in-depth analysis and debate on the investment opportunities. This interaction generates high-quality discussions, helping the team make more informed investment decisions.

Advantages and Challenges

• Anil emphasized that while Delphi's investment process is relatively slow, this thoughtful approach helps avoid hasty decisions made during bull markets due to market hype. He believes this method not only increases the success rate of investments but also promotes knowledge sharing and improves research quality among the team.

• Delphi's three-armed strategy combines research, investment, and team collaboration to create an effective process that helps them seek Alpha in the competitive crypto market. This model not only enhances the practicality of research but also improves the quality of investment decisions, ensuring the team can maintain a leading position in a complex market environment.

Projects to Watch

Current Projects of Interest

• When discussing current projects, Anil expressed excitement about some emerging projects in Delphi Labs and Ventures. He noted that although he spends less time in the Labs department, he is very optimistic about two of its incubation projects—Legion and MetalX.

Operations of the Labs Department

• Anil explained how the Labs operate: they propose ideas, find teams to incubate them, and then launch them into the market. Recently, they decided to temporarily halt new incubation projects to focus on advancing existing ones and plan to evaluate them in the next nine to twelve months.

Investment Direction of the Ventures Department

• In the Ventures department, Anil mentioned they are focusing on several areas, especially the intersection of AI and cryptocurrencies. He cited specific projects like MyShell (a role AI-like project) and Inference Labs, which have generated significant interest within the team. Additionally, they have invested in Haitopia, a decentralized Minecraft project, and are developing a large-scale Internet Game on Solana.

Infrastructure Projects

• Regarding infrastructure, Anil highlighted some noteworthy projects, such as Nisha, which is a more interconnected Rollup ecosystem with a very strong team.

Research and Consulting

• In terms of research and consulting, Anil mentioned their collaborations with several protocols (like Anoma) and that they will make most of their work publicly available for learning and reference. He particularly noted a recent in-depth report they did for Optimism, sharing their views on Optimism's superchain vision.

Work-Life Balance in the Crypto Space

Maintaining Work-Life Balance

• When asked how to maintain a balance between family life and work in the crypto industry, Anil shared his perspective. He believes that although the crypto market is a 24/7 environment, maintaining balance in life is still very important. He mentioned that he has made many friends in the industry and is currently attending a friend's engagement party in Spain, where discussions with friends rarely involve crypto topics, allowing him to relax.

Importance of Enjoying Life

• Anil emphasized that life is short and should be enjoyed. He and his wife travel together and try to carve out time for family and friends. He noted that the market will always be there, so people should actively seize opportunities to enjoy life. He recalled the first three years of founding Delphi, where he hardly took a break; although that time was very productive, it was not healthy. After some reflection, he realized that taking appropriate breaks could enhance work efficiency.

Fun Stories from the Crypto Industry

• Discussing fun stories from the crypto industry, Anil shared his experience of resigning to start a business with a former colleague. He and his partner Yan decided to leave their executive positions on Wall Street to start their own crypto research company. When they explained this decision to their boss, she initially thought they were joking and expressed confusion about their choice.

• Anil recalled that at that time, Bitcoin's price had dropped from $20,000 to $6,000, and they believed they were resigning at the market's low point.

Motivation and Determination

• As they left the office, their boss told them, "If this doesn't work out, feel free to call me; Deutsche Bank will always welcome you back." This statement motivated Anil and Yan, and they resolved to work hard and not give themselves a chance to return. Anil believes this encouragement strengthened their determination to start their own business.