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Posted Aug 29, 2022

Private Fund feature: Roshun Patel and Michael Jordan at DBA

Danny Bloomstine

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Take a journey into the world of digital assets and hear what these experts have to say about the opportunities for investing in the space today.

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Q: What led to your interest in digital assets as an alternative currency?

Roshun: I first became conscious of Bitcoin when I was in high school, but it was a post by Nick Szabo in 2015 talking about the Greek referendum crisis and Bitcoin’s potential that sparked my intellectual curiosity about digital assets as an alternative currency. The following year, Ethereum had a price crash following a hack on its decentralized autonomous organization (DAO). I was fascinated by this and went down an Ethereum rabbit hole. I began to fully understand the space, and as a computer science major, I was able to utilize my skills to experiment with Ethereum using early protocols and apps.

What interested me in those early days was the trading side of things – especially the arbitrage opportunities across assets and exchanges. This led me to explore building out the space around borrowing, credit, and lending. Ultimately, I’ve spent the past four years building out these ideas from scratch and have been part of the explosion of derivatives and financial products that has occurred in crypto since 2017.

Michael: Crypto has two worlds: the capital market side, and the technology side. I came at it from more of a developer’s approach. Like most people, I dismissed Bitcoin the first time I heard about it. This changed in 2016, when I tried to build a very simple fintech app based on the Chinese Red Envelope holiday, where people send small amounts of money to each other in a sign of friendship. I built the app using my Plaid API account hooked up to my Bank of America account. I quickly realized there was no way this would be the future of how we would build fintech and payment apps. There were no endpoints, no expressiveness, and it only connected my two accounts.

Next, I tried to build the app on Bitcoin. It was hard, but cool. Then I tried it on Ethereum and thought, this is so clearly the answer to how we will express things we can do in our head on the Internet. It felt like this was the big missing piece from things I had tried to do before.

Q: What are the biggest opportunities and challenges for limited partners (LPs) investing in digital assets?

Michael: For me, it’s the fact that you can do things on the blockchain that simply can’t be done using any other method. This has already resulted in uncontested, unprecedented use cases, and that will continue. If you want exposure to this, then you need to be invested in this asset class.

In terms of the challenges, the best thing investors can do is try to invest in crypto themselves for a few months before they reach out to us. By doing this, you’ll run into issues with email accounts you don’t have access to, investments with funds you don’t have the keys for, two-factor authentication issues, and many other nuances.

Our challenge in talking to LPs is that they want clear, simple use cases and applications – that’s how our brains work. We crave analogies and examples. However, we know most big value creation won’t be in precedent use cases. It will be in the net-new, blue ocean type of creation use cases.

Q: Are there any insights you’d like to share on the digital asset dip we experienced this year?

Michael: We think of the world in terms of price and progress. Progress is fundamental technology growth and usefulness of the technology. Price is what the consensus bid/ask is for. I’ll talk about the progress, and Ro can talk about the price since those are our respective backgrounds.

During this downturn, the things that broke were mostly things that existed 10 years ago – centralized lending platforms, retail brokerage, proprietary risk-taking without disclosures, loan stacking, etc. Those are all principal-agent problems of centralized finance. Those have existed for hundreds of years and will continue to exist as long as we’re holding money for other people.

The things that worked are all the non-custodial technologies. This is at the core thesis of crypto. The open, permissionless stuff all functioned correctly, and as far as I know there were no defaults or credit issues on chain. And so, when we think about the dip in terms of progress, the most important thing is that the technology worked throughout this crash.

Roshun: There is solace in knowing the crypto selloff is not completely exogenous of the broader finance world. We would definitely be more concerned if everything else was going swimmingly and for some reason, crypto had a terrible couple of months. There have been lots of issues stemming from risk-taking, geopolitical issues, interest rates increasing, etc., and these macro issues definitely affect an asset class like this.

For better or for worse, given how far down the spectrum crypto is relative to other asset classes, it tends to be sold off most when the world cares more about current reality than the potential of the future. As a result, you do see more drawdowns in crypto relative to more tangible asset classes like SaaS software.

Coupled with this were two black swan events. On the retail side, at Luna, a very large protocol failed. In many ways, it was designed to fail from day one, and some people could see that risk, but that doesn’t matter because there were billions of dollars of retail capital in the protocol. On the institution side, Three Arrows Capital, a large hedge fund, got over-levered and took down a lot of centralized players with it.

On the bright side, as Michael was saying, everything that was supposed to work did work as designed. Now everything is re-priced at a much lower point and moving forward, things look a lot more attractive. We’re excited about the opportunities for the rest of this year.

Michael: One thing I think is important for LPs to know is that there were a lot of things being marketed as appropriate for institutional LPs that were not. In our opinion, there was a lot of risk-taking with managers without the appropriate backgrounds, understanding, tooling, and systems in place.

Now LPs can go into the market and look for what’s real. Who was marketing nonsense to me last time? Who is Monday morning quarterbacking and saying they were doing things that they weren’t? And if those are the people I was invested in, how do I get exposed to the real investors in the space now? I think that’s the exercise LPs need to undertake. Do you believe the asset class is real? And if so, how do you get exposure to the best managers with the right amount of risk?

Q: What’s your outlook for the crypto space for the second half of 2022 and beyond, and why should LPs be excited about investing in digital assets in 2022?

Roshun: We view the opportunities we invest in like a tree. There is the trunk, then the limbs, and then further out are the leaves. When you talk about an application layer, you’re definitely branching out into the limbs and the leaves. In the old market conditions, when everything was getting funded, the limbs and the leaves became more interesting. But with the broader selloff in the market, the technology at the trunk is very cheap, so we’re focused there currently.

We will eventually get out to the branches and the leaves with specific protocol applications, but currently, the technology of the trunk is the most interesting part to be involved with.

Q: This is Fund 1 for DBA. What excites you most about the journey you are about to embark on?

Roshun: What excites me is the way we’re launching this platform. We are launching our first fund with great timing, but for the future there are so many ways we can scale, different strategies we can run through different vehicles, and synergies we can provide to founders.

Founders in crypto like to hear about opportunities where they can get access to credit, like borrowing or lending their treasury, or where they can trade certain things in a non-custodial way. Engaging with companies in these different ways is super valuable to these founders, and we can provide them a lot in one place.

We are a value-add in that we’re working and operating on chain rather than just taking an equity or token investment, signing a term sheet, and disappearing off the face of the earth – which many investors right now have a reputation of doing. We are starting with a blank slate, and we can emphasize the operational capacity we have.

Michael: I think it’s helpful to explain the DBA story, where the name comes from, and what it means. DBA comes from the term “doing business as”. As crypto investors, when you invest, you’re literally running the protocol. You’re either providing security, validation, storage, computation, or whatever it is that the protocol needs. As a token holder or a market participant, you’re actually doing business with that protocol.

What’s really cool is that we’re experimenting with how it all starts, and where our operation stops. Normally a venture capital firm that gives a company money doesn’t sit at the company and actually do business with them. They may provide insight and guidance, but they aren’t acting as 10 percent of an operating part of the company.

It’s very realistic that in the future of crypto protocols, because of the scalability and uniformity of the technology, we will potentially run and operate a bunch of these protocols as our core day-to-day operations of the business. That’s a very modern, digital-first way of building out an investment platform.

There’s a lot of uncertainty in that, and we can’t foresee exactly where our operations will start and stop across our portfolio, but it will be a very exciting space to work on and has attracted a lot of really smart people to do it with us.

Q: How do you rank the importance of your relationship with your LPs in the current environment?

Michael: In an emerging asset class, as much as we think the total return is important, LPs are looking for long-term compounding guidance. We’re focused on having a small LP base for that reason. We believe that’s the right way to do it for the first few funds when people need river guides for what to deploy into the space.

Roshun: Some of the most rewarding calls and times I had at Genesis were moments of very crazy volatility in crypto, or broadly in markets, and getting on the phone with people that had deposits with Genesis to talk about what happened.

I think with the breakneck speed that crypto moves at, the reality of the situation is there are people very close to it and there are investors and LPs that are a little bit further away. We are the ones on the frontlines, and part of our satisfaction and the rewarding aspect of working with LPs is bridging the gap and helping people understand the frontlines. We think that’s going to be very important for crypto and for us in general.

Q: What was important to you when selecting your service providers?

Michael: We think crypto has a “Goldilocks problem” for service providers. The crypto-native people are too small and too retail, and for the big providers, crypto isn’t big enough for them to service properly yet. So, the industry is in the messy middle.

What we look for is not the firm so much as the person at the firm who is willing to get on a call and do the work with us. We know it’s going to be more work for them to work with us than a typical client, but we find that it’s a relationship thing and it’s a human thing. The technology is not that complicated on any of this stuff, but the integrations can be insanely complicated. It’s very rare but very important if a service provider comes highly recommended to us by a trusted source.

Roshun: It ultimately comes down to, are they willing to work with us, and what stage of growth are they at? How open to feedback are they? How open to growing with us are they?

Part of the reason that FireBlocks is where it is today is because Michael at Galaxy and myself at Genesis helped drive the direction of that business early. We look for businesses that are malleable enough to meet our needs and we can help put a good product together that serves us very well and serves the service provider in the broader market too.

About DBA

The founders of DBA have spent the last five years in front-row seats of the crypto industry. Now, they are building a crypto firm based on their beliefs on where the technology is and what it needs to fulfill its potential. DBA loves crypto and its ethos of open innovation.

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