Transcript for #14: Interview with a Spartan

Today, I’m not only joined by a very special guest, but the format of this episode is highly unusual as well! I interviewed the man who goes by the name @DegenSpartan on Twitter and who is one of the biggest and most enigmatic Defi investors there is. I have wanted to have him on for a long time, but there was one problem: DegenSpartan, or DS in short, is fully pseudonymous and did not even want to have his voice known.
So we looked for a solution and ended up doing a text interview instead.

Then I got Patrick McCorry (@paddypisa on Twitter) to speak the part of DS in the final recording, while I spoke my own part. At this point, I want to give a huge thank you to everyone who reached out to us on Twitter and offered their help to make this episode a reality.

Discussed in this interview:

• DS: Degenerate or prudent investor?
• How he managed to recognize (and sell) the top in Defi
• His approach to investing
• Becoming Synthetix’ patient zero
• Why he dislikes Maker, YFI, and governance tokens in general
• and more!

Links:

• Subscribe to our mailing list for transcripts and other bonus content: uncommoncore.co/
• DegenSpartan twitter.com/DegenSpartan
• Hasu twitter.com/hasufl
• Patrick McCorry (as DS): twitter.com/paddypisa

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Hasu: First of all, thanks so much for coming on the show, DS. I always thought you are not just one of the most educational, but also one of the most entertaining people on crypto Twitter.

DS: Thanks for having me on! I’ve been listening to your podcast since it began and am a big fan, so it’s pretty surreal for me to be here.

Hasu: You have an incredible story – from starting out as a retail investor who bought the Ethereum top in 2017-18, to one of the biggest defi investors in the world. How did you manage to do that and what set you apart from so many others coming from the same place?

DS: I doubt I’m one of the biggest! But perhaps one of the more prolific participants that is actually retail, rather than professional. I have a finance background and I was an active investor in the traditional markets before I switched over to focus solely on crypto. I think that sort of background gave me a pretty decent edge when thinking about the various cryptocurrencies as investments or even working out what strategies to employ in the market to make good money.

Hasu: Without doxxing yourself too much, is there anything more that you can say about your skill-set and interests before finding this space? I think in particular what made you see the potential in crypto and defi, to begin with, and form the level of conviction necessary to become a full-time investor.

DS: Before coming in crypto, I was your typical retail investor – looking at stocks, bonds, REITs, all those typical things that you’d expect a regular joe to be dabbling in while they work out their long term investment strategy to retire. One of the concepts that were really popular at that time was the idea of “income investing”, which is looking for businesses that can pay out a steady dividend or interest income, and that would be a core part of helping you “FIRE”, which is the popular idea these days to be “financially free, retire early” by having income exceed expenses.

So one of the things I was particularly sensitive to was yield investing, and I’d search high and low to find investments that could give decent income/dividends without the capital being at risk. and I’d say that most things end up with roughly the kind of returns you’d expect, like 6% pa, or even lower for the “safer” stuff. And one of the things I first noticed when I joined the crypto space was the rampant mispricing between exchanges and the insane arbitrage opportunities

I kept comparing the numbers and doing the math because I couldn’t believe it. There were opportunities where you could use a few thousand dollars to make $50 in net arbitrage returns, and I saw this happening several times a day, on several pairs. Sure $50 net isn’t much, but if you can do it a few times a day and the markets are open 7 a day week… I did the math and it just blew my mind that you can arbitrage for such amazing returns. And keep in mind, all this is manual and by hand!

After engaging in arbitrage for a while, that was one of the things that really solidified my view that the crypto markets are extremely inefficient, and this inefficiency also meant profit opportunity, and I was really motivated to come into the space and hustle.

Hasu: To go back to the start of your answer, I love it that you started out as a fixed income/dividend investor because it sorta confirms my hunch that despite the “degen” brand that you have created for yourself, you’re actually a very prudent risk manager below the surface. We do have to touch on that for a moment – why did you decide to choose this as your alter ego?

DS: Haha, perhaps a PrudentSpartan rebranding in the future would be in order when no one actually believes I’m a degen anymore. 

Mmm, when I was deciding my alter ego, I didn’t want to restrict myself to being a permanent cheerleader of any specific coin or project, so I purposely avoided including something like “Bitcoin” in my name. – I wanted something more neutral, but I also wanted something that could remind me… myself, that crypto is a really crazy space and anything can happen.

I guess it also worked out well that my “degen” branding can serve as a very obvious warning to others to consider the stuff that I talk about. but I never expected I would be able to get such a following. Sometimes I do hope that the newer followers [who are] not aware of my inside jokes and humor do not take everything I say at face value.

It worries me sometimes that when I make jokes about me buying or selling something, others just copy that because I’m an “influenza”. [influencer] I think I’ve managed to prevent a lot of that kind of copy trading behavior to a minimum by constantly rolling out “psyop” campaigns so that followers can think a bit more before they ape into things based on what I say on Twitter.

The spartan part just came about because Spartans are pretty badass and cool, aren’t they? *laughs*

Hasu: You know, I love the way you use “psyops” on Twitter, because it always makes me think, and that’s something not a lot of accounts can do consistently. But what I found most impressive about your performance is that you are not a defi yes-man like so many others on Twitter. You were extremely early to defi, but you were also one of the first to say “I think the top is in, as an industry we are growing too fast.”

How did you manage to do that? What were the signs?

DS: Mmmm yes, that defi top in late august. That was a really really crazy time for me with all the farming going on. I would say the start of that defi hype was probably the launch of COMP, and basically since that day I was sleeping 3-4 hours a night, trying to stay on top of everything.

I’ve been in the space for a while, so I think I have pretty good stamina as a participant, but this was just going on for weeks and weeks. The thing was though, was that the quality of the things popping out was really deteriorating at a very quick pace: We had YAM, then a dozen YAM inspired food-based clones. We had YFI, then a dozen more YFI inspired “fair launch” clones…

The cycles of each subsequent new thing got shorter and shorter as people realized that the optimal strategy was to exit earlier than others, and then everyone was trying to front-run each other on the way out. Initially, the YAM game took – I think – 2 weeks to play out? The last of the food farms that I was looking at were collapsing within a day or two!

Of course, as a heavy defi user I was pretty much active this entire period, moving from farm to farm, and being on the frontlines and seeing how much worse each subsequent opportunity was playing out was a tell for me that this insanity would have to end soon!

Personally, I actually felt that Sushiswap was the top. It was by far the riskiest type of defi farming that had come on the scene. Previously, the only time you would be taking risks (other than malicious or otherwise smart contract risks) would be if you were brave or silly enough to participate in the “pool 2s” of the farming projects. 

Sushiswap pretty much forced all these farming participants, most of whom have never ever done liquidity provision before, to suddenly inject hundreds of millions of liquidity into Uniswap.

One of the problems with defi tokens until that point was that they were pretty illiquid. Now with Sushiswap incentivizing everyone to provide liquidity, it had created a huge opportunity for anyone looking to exit to finally swim out in the massive ocean of liquidity.

I was also printing a massive amount of money every day by participating in Sushiswap. it was so surreal, I kept saying to myself every day “this is retarded, this doesn’t make any sense, what could be more silly than this?”. I was pretty much scared of how ridiculously rich I was getting each passing day and that made me stop and think, I should probably get out. the last time I had these kinds of ridiculous thoughts was the 2017 peaks and that didn’t end too well for me, haha

Hasu: So are you saying, not only would the elevated prices of these tokens collapse once the subsidy ends, but it also provided exit liquidity for some of the largest holders?

DS: Well, I had guessed that just like YAM and YFI, there’d probably be more sushi-style clones to use Uniswap LP shares as farming assets in their pools 1, which we did see with things like sashimi and Moonswap… but just like how all those subsequent clones collapsed really fast, my thesis was that none of those would provide as much liquidity as Sushiswap during its initial rewards period. And that shrinking liquidity could cause larger holders to head for the exits while liquidity was still available to them. 

Basically, everyone was farming at hundreds of percent of annual yields for the past month or so… how many people would want to send those assets back to their native protocol to be used “as intended” and probably earn either massively reduced returns (relatively speaking), or some of them earn nothing at all!

I suppose it was the confluence of (1) the ever-increasing euphoric sentiments revolving around the defi farming situation and (2) the thesis that it is going to be pretty hard for anything to top Sushiswap as a defi farm, and that made me think that we’ll probably be heading lower once reality sets in that this can’t last forever. We didn’t invent some perpetual free money machine based on digital food farming, haha.

Hasu: How do you manage to keep enough distance to these investments that you can actually sell them after they made you a lot of money?

DS: One of the things I do rather differently than other traders or even investors is that I actually never have a specific price target. For me, the decision to buy or to sell should be based on sentiment regarding the project. If the price has gone up, but there are still plenty of disbelievers, or you hear comments that people have only just dipped their toes in, I’d assume that there’s more sidelined firepower to keep the party going. I think it is pretty much a question of who is going to buy these coins next, and is there anyone after that? But it’s definitely more art than science.

You can always just sell a bit and then another bit. Just see if things are still going well before you start selling again. Every peak has a leg on both sides, but some people seem to forget that you can also sell on the right side post-peak as it is going down as well! Just as long as you don’t have the mental stigma of “oh no, but I’m not selling at the all-time highs”, that holds you back from selling.

Hasu: How do you measure sentiment?

DS: I think that’s really hard, but that is also one of the reasons why I use Twitter so much. you get to sneak peeks at things happening in the nooks and crannies of our universe. people having conversations on what they did, how they felt, what they plan to do next, all in public view. I use all the different social media to spy on and to chat with other investors on how they feel and then just try to figure out what I think the different players want to do next.

It’s probably a pretty trash way of doing things. I’m sure some statisticians would cringe at what I just said and roll their eyes that I consider this method even useful by any measure. but I don’t know of any other better way, haha!

Hasu: Idk, I always trust the practitioner in matters like this 🙂 How would you describe your approach to investing in general? You mentioned sentiment, but you have always struck me as someone who pays a lot of attention to fundamentals as well. How long do you usually hold a position, and do you trade long as well as short?

DS: I think my crypto so far approach has been to play the contrarian – finding a pretty unpopular thesis and investment and sussing out if it actually has the fundamentals to shake things up. It basically means I try to work in niches that the pros aren’t looking at, and the attention isn’t on. That means I’m not competing with smarter and more talented people that would beat me in a fair fight. I’m winning by playing a game that they didn’t even know was going. This makes my job as a capital allocator easier since I don’t need to compete with others when accumulating positions and they don’t bid up my average investment price as well.

Of course, I’m not just looking at unloved segments. The idea has to make some sense as well. combine a rather unloved project with improving fundamentals to back it up, and I think that’s the recipe to get high-profit multiples.

I’ll hold a position for as long as I think there’s still upside, though I might pare down its size as it becomes too large relative to the rest of my portfolio. I almost never short because I’m really terrible at it, and given just how irrational the crypto markets are, I think playing the short side of things is massively more difficult and riskier. I don’t think it is worth it unless it some really obvious play and I have the collateral and liquidity to open a short!

I think it is definitely a lot easier to be a bull than to be a bear in crypto. During the recent defi drop, I felt really uneasy being bearish the whole time and I kept thinking to myself, when can I get back in and just post bullish nonsense? haha!

Hasu: Next, I’d love to learn how you think about a few different projects. 

More than any other project you have become associated with Synthetix. You’re known as their “patient zero” who brought many other big investors in. Can you describe for our listeners, what is Synthetix, when did you find it, and how did you recognize its potential?

DS: Patient zero, ahaha, that’s hilarious!

Hasu: Can’t believe you hadn’t heard that before 😁

DS: I suppose Synthetix is best thought of as a derivatives or synthetics protocol, which allows you to go long or short on supported synthetic assets. Since the positions are synthetic, the assets are not restricted to just ERC20 tokens but cover a wide range of non-Ethereum based crypto assets like Bitcoin and Ripple, and also non-crypto assets, like precious metals and equity indices. pretty much the sky’s the limit – as long as there’s a price feed somewhere, it could become a synthetic asset on the platform.

I think it was mostly dumb luck, to be honest. Synthetix was originally Havven, and that was a decentralized stablecoin project that had the idea of tagging on protocol fees every time a transaction was made. but centralized stablecoins like GUSD, USDC, and of course USDT, pretty much killed that idea of a stablecoin that charged fees every time you move it.

I viewed the pivot to synthetic assets as a hail mary that actually was successful. But as I understand it, it was actually more of a mindset change for the community regarding the path of the project rather than a technical change, because it still leveraged the pooled debt model that the original Havven was based on – they just figured out that the pooled debt could be used for so much more things. And I guess I got sold on that pivot as well, haha. I think it was easier for me to accept and digest the pivot because I understood technically why it was possible to pivot and what they were trying to do with their new direction.

I’d still credit my dumb luck, but mostly the Synthetix team’s big brain realization that they could pivot to something larger as the main reasons why SNX turned out to be a good investment for me, haha!

Hasu: I do remember reading about Havven back in the day, and thinking that their model of charging transaction fees on transfers would probably not be sustainable, but unlike you, that was the moment I stopped following them.

How has your view on Synthetix changed since then, are you happy with the current direction, and what do you think is the endgame for them? 

I guess the biggest question would be, when do they feel comfortable issuing shares on individual US securities? Would that be the watershed moment for the synthetics space in general?

DS: Perhaps not many of the current community share this aspiration of mine, but I really really want to see synthetic stablecoins outside of the USD being used outside of trading purposes and as an alternative to “official” digital fiat currencies.

Synthetix is unique in its design in that it could actually bootstrap crypto versions of various fiat and overcomes the liquidity problems that any custodial stablecoin would have when interacting with the rest of the market. Perhaps one day far in the future that could happen!

I think the general endgame – that most of the community shares – is to become a multi-asset version of BitMEX, allowing traders to trade on a variety of assets, long or short, with the option of using leverage.

About individual US securities, perhaps that could come after the project can further decentralize itself from regulatory actions? I think we are fast approaching the point where the team does not have control over everything and is thus “sufficiently decentralized” that you can’t round up everyone into a room and say ” ok can you guys stop trading”.

I actually feel the watershed moment would be perpetual swaps on layer 2 with leverage, not individual US securities

Hasu: The way trading works on BitMEX is they only match external market participants with each other, so for every customer’s long position, there must be another customer who is short. As a result, BitMEX doesn’t incur any balance sheet risk, no matter what trading occurs on its platform.

Synthetix is different from that in that the SNX stakers take the other side of every synthetic that is outstanding. so for every sUSD, they are short USD-SNX, for every sBTC they are short BTC-SNX, etc.

Do you see any material risks from that approach, and what do stakers do to hedge them?

DS: Yes, that’s why the perpetual model to me is the watershed moment. That will be when the protocol will be aware of the imbalance of positions and the funding rate would exist to get people to balance out the positions. 

It has always been a concern that I’ve raised up early on, so I am really eager to see that upgrade when it finally goes live. I’d expect that it would make the risk exposure of Synthetix minters to be squeezed into a narrower band, reducing the risk of them being caught severely offside by large winning traders on the platform.

Hedging is pretty clunky right now. In fact, I thought people don’t worry about it enough! But, Synthetix has rolled out stop-gap measures of paying for shorters through staking inverse synthetic positions in BTC or ETH, and since that program launched, the skew of positions and the risk that minters take on reduced drastically, at least from my perspective. I’d consider it a small success for now, but I really think it is not very elegant at all, haha

Hasu: Right, I saw that you can now get rewarded for minting and staking iBTC and iETH, because that helps derisk the exposure of stakers somewhat, and I also think that’s a step in the right direction.

Speaking of Havven, sUSD, etc. another project that you (and me, both) have been vocal critics of in the past is Maker. Can you say more about why you don’t like it?

DS: Oh boy, Maker. haha. I’d say I think my main critique is their design which I feel is inadequate because it lacks the ability to go negative and to charge DAI holders for stability, or from another perspective, it is unable to incentivize DAI supply creation.

Another design issue that I have with the maker protocol is their 3-party system of 

1) DAI holder/user

2) DAI supplier / CDP owner

3) and the MKR holders

I think their 3 stakeholder system creates a weird tension in every situation and decision making because it always seems that 1 of the 3 parties is made a “loser” at the benefit of the other 2 parties.

My last bit is less about the protocol and more about their token’s value accrual design.  don’t really like buy-and-burn models because you need to assume going concern and a secondary market bid. I prefer fee collecting and distributing models because it is straightforward and self-serving, but I suppose this could be a security avoidance/tax decision to have things done that way.

Hasu: What do you mean by “going concern”?

DS: That it continues indefinitely to be able to realize eventual gains when you eventually want to sell. As opposed to a fee distribution model, that if it ceases operations, at least you’ve “recouped” some of your investments from the fees distributed until that point in time.

Hasu: After the march events and and compound yield farming has catapulted Dai to trade consistently above $1.05, I thought they would reach a boiling point and finally be forced to integrate negative interest rates. but what they did instead was to flood the system with centralized stablecoins that they can’t even charge stability fees from. What do you think about that, and their focus on implementing real-world collateral compared to issuing more synthetics (than just dai) from the same trustless collateral?

DS: Yup, I think accepting centralized stablecoins as collateral really hurt the “DAI as a pure decentralized stablecoin” narrative that it had largely enjoyed. A lot of its strongest supporters had to do a lot of soul-searching to decide if this direction is really something that they can support. I felt their community fractured quite a bit since March.

I’m tempted to put on my tinfoil hat and say that everything they have been doing was planned all along, but that’d be too easy for their supporters to tear apart. To be honest, I’m really not sure what their endgame is. Their holders seem so out of touch from reality, where it took them months to accept LINK as collateral while… MANA was collateral all along? I don’t get it. I don’t know what they are doing. I pretty much view Maker as entertainment at this point. What’s their endgame? I have no idea.

Hasu: The last project I want to talk about is Yearn finance. I believe you have been pretty skeptical of them in the past and did not buy into the hype. Why were you skeptical? And when YFI did its initial runup to 40k, did that make you question yourself at all?

DS: My skepticism was from day one. I was familiar with yCRV and the iEarn products for a while since I’ve always kept close to my yield-seeking roots. I almost didn’t even want to farm the YFI tokens because I was thinking, “What would they govern, and why would they govern? What product streams are they governing? Where are the fees being generated that they can vote to redirect to token holders?”. But of course, the price of the tokens was going nuts, so of course, I farmed them hard.

I could not understand why people were buying into the tokens. Did Andre pinky-promise that he would do pro-bono work for all the YFI holders exclusively until he retires? To be honest, I was perplexed that Andre kept releasing things under the YFI umbrella and banner at all.

For example, do yVaults need to be yVaults? To me, they could’ve just as easily been AndreVaults, and Andre himself collects the fee for maintaining and managing the vaults. But I suppose he wanted a body to be able to organize themselves and do that instead. I did not expect Andre to keep building things and injecting them under the YFI umbrella.

It was excellent timing of the universe that Curve launched CRV shortly after yVaults and directing the vaults to farm it was ridiculously profitable for everyone involved. Everyone was euphoric about the “cash flows” coming in from the vaults. But were these cash flows sustainable? In my opinion, not by a long shot. Yields above 20% is an anomaly in this world that would be corrected sooner or later.

of course, seeing the token price run up, there was always the thought of “damn, if I had held until now, I could have made X much more profit!” But fundamentally, I couldn’t do it – I couldn’t buy back in. The math didn’t make sense to me. It still doesn’t. I can appreciate it as a fun trading pair, but when I start thinking about the fundamentals, it just falls back to narratives of a magical future and the numbers don’t make sense to me. Maybe I’m really offside on this. I guess I’ll just live with it. You can’t catch every single run on every crypto. even if I was in YFI, I’d never have the conviction to hold it, which is why I sold it when I did have it, haha.

Hasu: I think your arguments make a lot of sense. I’d be really surprised if the yield farming opportunities don’t compress a lot in the future, especially for large pools of capital running completely transparent strategies that the rest of the market can copy for free.

Since you mentioned the governing capabilities of Yearn, that brings us to the final topic I have planned for today. You have been one of the more vocal skeptics of governance tokens in general. Are you a governance minimalist?

DS: Mmm, I never really thought about my own classification, but yeah, I guess I would say I’m a governance minimalist. Just look at the real world, governments can be a mess and do more harm than good! The whole idea of governance tokens being valuable because they can vote in fees later doesn’t sit well with me.

Could Maker be an example of a governance token that is having a hard time voting in fees for token holders, and is not seeing strong value accrue to its token?

I feel that governance token holders that extract rent are free-riding quite heavily in proportion to the value that they create. Does holding YFI and rubber stamping governance proposals create value? Or are the builders that operate under the YFI umbrella the ones that create the value? The flow of who is creating value and who is earning that value seems strange to me.

Perhaps tying governance tokens to more quantifiable work than just voting for proposals might be a better way to get holders to be value creators as well instead of, in my opinion, free-riders.

Hasu: This was fantastic, thanks for taking the time 🙂