Challenges and strategies in crypto investment

From: thepipeline_xyz

Introduction to Logan’s Background and Investment Philosophy

Logan, managing partner at Frictionless Capital, began his podcast journey about a year and a half ago with the aim of conversing with interesting people [00:00:54]. He views podcasting as a “life hack” for extended discussions with inspiring individuals [00:01:02]. His career started in Silicon Valley, notably spearheading the supercharging network on the software side at Tesla [00:01:14]. He admired Tesla for its product building and its approach to the world, particularly its use of first principles thinking, exemplified by the Cybertruck [00:11:01].

Logan entered the crypto sphere in 2017 with Ethereum [00:01:37]. However, he grew disillusioned when gas fees reached $1,000 during the 2021 bull market, which led him to seek alternative ecosystems focused on scaling the industry [00:01:43]. He believes that new infrastructure, such as Monad, offering low transaction fees, high throughput, and unique applications, is essential to onboard the majority of the world [00:01:59]. This perspective informed his decision to start Frictionless Capital, concentrating on these new, high-throughput blockchains [00:02:19].

Frictionless Capital’s Investment Thesis: High-Throughput Blockchains

Logan’s investment thesis at Frictionless Capital centers on high-throughput blockchains. This stance was initially contrarian, especially when Solana was seen by many as “dead” or the “FTX chain” following its implosion [00:04:47]. Despite being “deeply unpopular for a long time,” Frictionless Capital believed Solana represented a unique bucket of high-throughput blockchains, which would become a requirement for scaling [00:05:02].

The fund’s core belief is in enabling self-sovereignty, private keys, and blockchain functionality for as many people as possible globally [00:05:43]. To achieve this, the industry must scale from millions of users to hundreds of millions, then billions [00:06:00]. This requires significant advancements in infrastructure to support more daily active users [00:02:53].

Analogy for Scaling

Logan draws a strong analogy between the evolution of internet connectivity and blockchain scaling:

• Going from 56k modems to broadband internet [00:11:54].
• The “block space” or transaction propagation limit in blockchains is analogous to slow internet connections [00:12:07].
• Faster, cheaper transactions enable the building of more interesting applications [00:12:29]. This focus on increasing bandwidth and hardware scaling, pioneered by Solana, leads to the conviction that these modern approaches will onboard the vast majority of users and engineers [00:13:03].

Frictionless Capital closed its fund recently and is now focused on full-time deployment, backing teams that leverage high throughput, including pioneers like Solana, as well as Monad, Aptos, and Sui [00:06:38]. These high-throughput blockchains enable unique applications that were previously impossible, such as replacing automated market makers (AMMs) with more efficient order books for trading [00:07:07].

Navigating Contrarian Views and Market Cycles

A significant challenge in crypto investment is maintaining conviction through multiple market cycles, especially when holding a contrarian view [00:09:25]. Logan notes that investors and engineers often need to see “a little bit of traction” to believe something will happen [00:04:31]. For Frictionless Capital, their thesis started to play out towards the end of 2023 with Solana’s run [00:06:30].

Logan’s strategy for retaining conviction involves:

• First Principles Thinking: Approaching the space from fundamental principles, which involves “ripping apart people’s arguments and trying to find flaws” in both others’ and one’s own thinking [00:10:13]. This method was learned and refined during his time at Tesla [00:10:56].
• Independent Research: After leaving Tesla, Logan spent a year and a half conducting independent research to understand blockchain architecture [00:11:36].
• Focus on Technology’s Potential: He realized that block space was the limiting factor, akin to dial-up internet [00:12:07]. His conviction stemmed from the understanding that building more interesting applications requires faster internet connections (higher throughput) [00:11:59].

Due Diligence and Identifying Promising Projects

Finding promising projects and being skeptical of others is one of the hardest things in crypto investment [00:14:49]. Many projects are strong in marketing but lack the underlying technology or execution capability [00:15:26].

Logan’s due diligence process involves:

• Technical Focus: Unlike many funds, Frictionless Capital is highly technical [00:17:17]. Logan prefers to talk with technical co-founders rather than marketing personnel [00:17:40].
• Honesty about Tradeoffs: He values engineers who are honest about the engineering tradeoffs they are making, as no solution is maximally efficient at every possible outcome [00:17:51]. This includes understanding different scaling approaches like Layer 2s [00:18:14].
• User and Product Impact: While technical details are crucial, Logan emphasizes that “Tech is not the end game; Tech is the starting point that allows you to build really unique products” that grow the industry [00:18:41].
• Welcoming Criticism: He appreciates when people highlight flaws in his logic or thinking, as it helps him learn and improve [00:19:09].
• Unique Crypto-Only Applications: Frictionless Capital looks for applications that are only possible within the crypto ecosystem, often enabled by high throughput [00:19:59].

Monad

Logan was an early believer in Monad, recognizing its legitimacy due to the team’s caliber and its potential to parallelize the EVM for high throughput [00:22:40]. He believes if he could rewrite Ethereum’s history, he would design it with parallel processing and high throughput like Monad’s architecture [00:32:43]. Monad’s goal is to usher in a new paradigm of applications that can reach mass adoption by providing the necessary “rails” [00:31:46]. It’s described as “Solana-like performance but fully EVM compatible” [00:32:15].

Key Investment Areas and Future Trends

Logan and Frictionless Capital are particularly excited about:

• DeFi 2.0: Leveraging high-throughput chains to enable native order books and more efficient decentralized finance applications [00:35:51]. If blockchain is to move the majority of money globally, it must integrate traditional finance (TradFi) technology stacks [00:37:01].
• MEV and Payment for Order Flow (PFOF): Understanding Maximal Extractable Value (MEV) is becoming increasingly important [00:20:16]. They backed Dlow, a company focused on PFOF, which Logan sees as complementary to Jito’s work on the taker side of liquidity and the “next iteration of kind of this MEV structure” [00:20:33].
• Decentralized Physical Infrastructure Networks (DePINs): This category represents a new way for capital formation and has the potential to enable the first applications with 10 million monthly active on-chain wallets [00:21:57]. Examples like Helium, expanding into personal cell phone plans, demonstrate how crypto rails can coordinate physical world products [00:37:34].

Logan believes the industry is at the “very early precipice” of a transition to high-throughput blockchains and will enter the “Golden Era of crypto products” [00:28:27]. This shift will allow application engineers to focus on product development rather than infrastructure, which is currently a significant drain on their time [00:35:08].

Advice for Aspiring Crypto Investors

Navigating the abundance of information and distinguishing what’s “real” from what isn’t is a significant challenge in crypto [00:23:34]. Logan offers several pieces of advice:

• Embrace Being Wrong: “Everybody’s wrong and your goal is to be less wrong” [00:24:24]. Even industry leaders make mistakes, and accepting this helps one grow [00:24:30].
• Talk to Smart People: Engage with many smart individuals and actively seek out flaws in your own thinking, as this makes you better [00:24:43].
• Do Your Own Homework: There is no “perfect design” or “perfect alpha.” Investors must “do your homework and come to your own conclusions” [00:24:57].
• Synthesize Information: Learn from different points of view from engineers and leaders, and synthesize this information to form your own sophisticated understanding [00:25:48].
• Beware of Bias: No single individual or entity holds all the information without some degree of bias [00:26:19]. The goal is to be less biased and less wrong over time [00:26:27].

Holistic Well-being

Logan advises prioritizing physical and mental health, especially during bull markets [00:41:48]. He suggests going outside, getting sun, and working out, as one “cannot trade or make money if your mental health or physical health is not there” [00:41:31].

Personal Conviction and Learning

A key lesson Logan has learned in crypto investment relates to the dichotomy of being right versus being popular [00:42:00]. The things that generate financial returns “will not always make you popular” [00:42:11]. While growing up, he always wanted to be liked, but in investing, being early and right often means holding a differentiated point of view [00:42:17].

Be Right, Not Popular

If you’ve done your homework and truly believe in something, even if it’s unpopular, you may be right [00:42:47]. It’s crucial to “stay the course” while continuously questioning yourself and seeking information that might invalidate your thesis [00:42:56]. Don’t be contrarian for the sake of it, but trust differentiated information [00:43:24].

Logan shares an anecdote about being rejected by popular venture capital funds before starting Frictionless Capital; many of those same funds are now investors in his firm, reinforcing the importance of self-belief and doing the work [00:43:30].