Chia Jeng Yang and I carry on our chat, and if you haven’t yet, check out Part 1
In this part, we cover:
Do Physical NFT’s make sense?
Tokenisation of funds
Do Physical NFT’s make sense?
Zishuang: So we talked about art and gaming because those are the two proven use cases for NFTs. Do you see any other use cases?
Jeng Yang Chia: I definitely think it applies to any type of collectibles of which there are a lot of, and so obviously to the collectible market is huge sneakers is a great example of card games. So essentially anything that we collect, I think, counts as a market. I think that we've just mentioned a couple that we're more familiar with because those are the larger collectible markets.
Zishuang: I'm a bit more skeptical when it comes to a physical good NFT simply because I think whenever you see a new medium whatever exists on top of that, a new platform has to be sort native to it and for me, NFTs is a digitally native sort of technology and when it comes to digital goods. We're going to even put a QR code to the sneaker and I don't know. I don't know how that's gonna work. Yeah.
Jeng Yang Chia: Well, I'll push back right? Physical currency is something that can be turned into digital currency, you can build an overlapping digital layer on existing physical currency. And there’s value in that so, I can see your point. I think what is likely to happen is that existing IP owners with large distribution. For example, Marvel or DC will continue to be providing collectibles. But the use case for the virtual layer is to provide a very specific different type of experience on top of the collectible. I can see how there will be pure digital ecosystems within NFTs, but to a large extent, I think that it will also augment very specific types of non digital ecosystems, especially ones which are still incentivised to produce physical goods.
Zishuang: To use your example, how when Disney produces IP in the form of movies where they really monetise is selling merchandise, which is the physical good, and yeah, I guess now that when I think about it, if Marvel is pushing out collectible NFTs, the original comics which the NFT is based on would shoot up in value. Say, if a rare Spiderman NFT becomes the most expensive Marvel NFT, the value of Spiderman comic books in general will go up.
Jeng Yang Chia: Yeah, exactly. So I think maybe one analogy I would give would be action figures. For certain collectibles, there are certifications of all that authenticity issued by the manufacturer and people do appreciate the certificate even if they are sure that the product is authentic.
Zishuang: And while we're on the whole physical goods, NFT thing, Like to get your thoughts on this one. I was just talking about this with a friend a few days ago, right where I think the used car market can add some transparency. There's value, adding transparency to that market because if you're going to buy a used car, it can be a bit of a nightmare because you don't know what the transaction history is really. You don't know, who's owned it. What's the history of this person who owned it? Do you think that's value to, adding that certificate which is the NFT to a car? So for example I know that Jeng Yang treats his cards like s***, right? So whenever he turns up and I can view the transaction history the car, I’ll know to avoid it
Jeng Yang Chia: I think that's an interesting one. I'm probably a lot more bearish just because of how much data and infrastructure is required to set up for the marginal cost of the marginal value of verification. What that means is that just purely from an operational perspective, it's just far easier from a platform perspective to get it checked out by a mechanic than to trust the ledger, which would require extremely significant activity digitization for it to actually have value. So that's where my skepticism comes from. I think, in theory, it makes sense in practice. I think not, not as feasible due to the set-up cost and the incremental value-add.
Zishuang: Yeah, I guess you know, I thought the marginal utility really outstripped the marginal cost, but I guess after you pointed out the mechanic part, actually, the cost isn’t too expensive in most places in Asia, especially South-East Asia.
Jeng Yang Chia: Yeah, I think it's also just troublesome to capture every single transaction that exists. In Asia, this is certainly not possible with most transactions being offline in the West. It's probably exactly the type of cars that are dubious that has cash transactions. I can definitely see some value again with things which are less practical and more collectible, for example, luxury cars.
Summary
Yes, but at most, it would augment the value of the physical item, and the value that the NFT will bring to the physical item will not be as high as a digital good
Tokenisation of Funds
Zishuang: What do you think of the tokenisation of funds? Using the example of a venture capital firm, let’s say you decide to tokenise this thing and open it up to your retail investors by splitting it into, I don't know, 10,000 different slices. And when I buy into it, I realise the value of this one's going up, maybe I can trade it out in the open market because a feature of an NFT is you make the good a lot more tradable and liquid in the secondary market.
Jeng Yang Chia: I think it's unlikely for unrelated reasons. I'll give one of them. If you are a repeat entrepreneur, you may be starting a company in the future. Would you be more willing to take money from me if I told you that my LPs included Sequoia and a bunch of other massive institutions or would you take money from me if I said I have 100 random people that I need to report to.
Zishuang: So, I've known you for a bit, would rather raise money from you than some random person from XYZ fund? I'd rather raise money from you and the next question to ask is would it be easier for you to raise your fund that way as maybe a solo capitalist?
Jeng Yang Chia: Let me turn around on the GP level. Let's say you’re a GP, considering an LP. Would you prefer me as an LP to invest in you and be helpful as an LP with introductions or would you want me, the LP, to have the option to liquidate my stake and anytime.
Zishuang: Yes, true. I actually think that the thing that NFT adds to the fund is that it doesn't lock up your money. But at the same time, it is worth locking up that money, right?
Because as a GP, I want you in for the long haul.
Jeng Yang Chia: Yeah. Liquidity is not a one-way street.
Zishuang: That's a very very good point actually. Do you have any more thoughts on that one? When it comes to where the value probably would be like in 10 years, a certain kind of fund that would make sense whereby tokenizing it would add value?
Jeng Yang Chia: Yeah. So I think there is one very specific example, where, for example, rolling funds make sense. And that is where you are an emerging manager with less of a track record. It's harder for you to raise institutional capital and you just need something to get the ball rolling to prove that you have the ability to execute. even if you might not have the CV to do institutional fundraising and I think that's what a lot of the rolling funds have ended up being, I think that's great. The one thing I would caution though is again, access is great. But no one likes to talk about whether retail investors fundamentally providing the capital do understand what they're getting themselves into. How do you assess a good GP? It took me a long while, and I've got more data than most people. So, I don't think I do know, fundamentally for the record. So, even giving people access to financial products without the company education used to be called a scam right? And now it's celebrated like the most democraticising certain asset classes are always great. But I think we've already seen that, at least for a portion of the population, it is very bad so I think we can balance the downside with the access and that's the new ones I want to really get across. Right, I think we've already seen the news for example, about quite a number of people who suffered from Robinhood. Now, does that mean Robinhood is a net bad? I don't know. I think it's certainly made access a lot easier for a lot of people, and gaining upside through the equity markets is a good thing that we need to balance with the implications of people losing money in things they don’t understand.
Zishuang: Yes, most people lose money at the same time those with access tend to be a certain class of people. Most people don't think your average person doesn't get access to invest in your Robinhoods or like your Google's or Facebooks of the world pre IPO, right? Is it really that bad for people to be able to invest in these things as opposed to let's say buying lottery or spending their money on gaming virtual goods or the casinos? I think people should be given a choice, but clearly, some people should be protected from themselves.
Jeng Yang Chia: I think marketing is another fancy way of saying, ‘empowering’. And to quote, a great philosopher, ‘With great power comes great responsibility.’
Zishuang: Uncle Ben.
Jeng Yang Chia: And when we have Robinhood, that means each and every one of us has the potential to follow stocks and affect the market in ways that people 50 years ago will never imagine and there are consequences for that. Sometimes, the consequence is being borne by the people who don’t understand otherwise because they were given access without education. Now again, I don't know if it's not good or bad. I just think that no one seems to care. I don't think that's not maybe the right way to go about it.
Zishuang: I don't think that one seems to care. I think right now the narrative out there is your hedge funds, your big guys are the ones gaming the system, and finally, a bunch of counter cultural financiers using Reddit to show the finger to the big guy and people actually like it.
Jeng Yang Chia: The narrative is really untrue, right? Like for GME, the narrative of hedge funds being screwed by the retail investors wasn’t really true. They were ahead of everyone and they made way more money out than the retail investors. So you've just introduced more volatility, which is how hedge funds make money. So, there are plenty of things I dislike about the financial markets. I think a lot of the regulations don't make sense, but the idea that retail and that access alone, grants retail investors some kind of ability to profit from the market. That's a bit iffy to me. There's certain things. I like to love ETFs more. A lot of my money is in ETFs. I think ETFs are an amazing construct for retail investors, but non-contextual complete unfiltered access. I'm not that convinced.
Zishuang: Hmm, for me. My concern is really that. I don't think manipulation of the market at any point is good and I would say, a lot of public companies right now, their true value is not being reflected in the stock price already and the mild concern of the GameStop like event is that it's gonna get even worse, right? And how is the average person going to invest his or her money properly. That's a big challenge down there, I think.
Zishuang: So, moving away from venture capitalist asset class, I was wondering what do you think of other asset classes when it comes to tokenising and asset class? I was thinking about commercial real estate.
Jeng Yang Chia: Again, I think it's great. No, we're standing under the performance of REITs, of course, but, That's the type just like ETFs. I think that's the type of passive benchmarking that makes sense. I think the danger is this narrative that active investing should be widely available to the retail investor and it's a narrative that never really made sense to me because you have professional active managers who know how to front run everyone. So, you also empower retail investors to front-run each other. So, with that level of competition out there, why would you want to introduce retail investors to that game? It's a little bit like saying we should set up a poker table, invite all the best players in the world into this poker table. And just to be fair, we should invite the retail player, a novice to this game just to make things fair. I don't think that democratises anything. I think that screws over the retail investor.
Zishuang: Yes, that's probably true. At the same time, though. If you have a retail investor, who wants to get in the poker table with a World Series champion, the guy's just asking for it, right?
Jeng Yang Chia: But the stock market isn’t a shot at being at the table, you're not competing for a chance to make it. You’re simultaneously making moves against every investor in the world. On the other hand, there's one difference, which is positive, that poker tables are zero sum game whereas the equity markets is not necessarily a zero-sum game. so, I can see some of the carrot, but the ease of which markets can be manipulated means that it's far easier to make money in the zero sum situation than it is to make a traditional win-win situation. which means that I have some suspicion that retail investors are going to be on the losing side of a zero sum situation.
Zishuang: Maybe, at the same time, right? Like I think the idea is pretty cool that you can provide access to the traditional retail investor. So let's put it another way. If you talk about commercial real estate, most people do not have enough funds to be able to access some of this asset class in general. I think the idea that, you can get young people on to the property ladder, whether it be commercial real estate or, residential real estate. I think that's pretty cool. Yeah. And it's an asset class that generally rises over the long term, It would actually like, you know, get a whole new generation of the property ladder, which is desperately needed.
Jeng Yang Chia: So I I like REITs, right?
Zishuang: Yeah.
Jeng Yang Chia: As mentioned, it's a form of passive investing, which I think makes sense, just like ETFs, and I have money in ETFs. I think what my point was about active investing and how much access to active investing is necessarily good. Like other Financial Innovations, like, Zerodown, that gives people an ability to own houses at a younger age, rather than waiting until your 30 or 40? I think that's great but that these and so I see value in financial engineering, I think I have a very specific point. I have a question about which is the limit to access to active investing.
Summary
Might not make a lot of sense for VC as it potentially misaligns the incentive structure
Could make sense for an emerging VC with no prior track record
Access isn’t always a good thing
I have an interest in all things tech but with a particular interest in Social, The Creator Economy, and the Metaverse. If you’re working in the space or starting something new, I’d love to chat, my email is zishuang.cheng@gmail.com
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