Tekin Salimi on Managing $125M Through A DAO
Dao5 is an experimental cryptocurrency investment fund with plans to convert into a decentralized autonomous organization (DAO).
We dive into the biggest DAO drama from the last year, and why Tekin is so bullish and excited about DAOs.
We also discuss Tekin’s investment thesis while he was at Polychain, his switch to focus mostly on the Ethereum ecosystem at dao5, Web 3 infrastructure, NFTs, regulations, his thoughts on FTX, and much more.
Listen to the interview in this week’s podcast episode here:
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Intro to Crypto
I started my career in Toronto, Canada as a corporate lawyer, but realized it wasn’t for me. In 2016, a friend introduced me to Ethereum, and I initially dismissed it as a scam. My friend kept telling me about how much money he was making from it, I decided to invest a small amount of money and it started to appreciate. This sparked my interest and I began to learn more about the technology and the ICO landscape.
The concept of the DAO was a turning point for me as it opened my eyes to the idea of on-chain business entities and the potential of decentralized governance. I couldn’t last much longer as a corporate lawyer and quit my job in 2017. I began attending crypto conferences and offering my legal expertise to early-stage teams. By the end of 2017, I was approached by Poly Chain Capital and joined them as their first employee.
Polychain
I joined Polychain in 2017 and it was an amazing experience. I moved from Toronto to San Francisco and initially lived at the office, which was a residential apartment. In 2017, the crypto market had a different feel and Poly Chain had only five employees, I was the fifth person to join.
By the time I left in 2021, we had grown to 40 employees and had a large office in San Francisco, managing multiple different funds and operating companies in the billions. My first role at Polychain was as the portfolio support guy, where I helped founders with recruiting, legal, community management, and partnerships. I learned on the job and it was a phenomenal opportunity to learn about the anatomy of an early-stage crypto startup.
Over the following years, I moved upstream within Poly Chain and took on the role of leading the commercial negotiation and structuring of every investment we made from the fund. This gave me a lot of experience in structuring crypto investments and understanding market norms between founders and investors. I also started spending more time on the actual investment thesis of our organization and originating my own deals. Overall, it was a diverse learning experience.
What is the most commonly used method for structuring a fundraising campaign for startups?
I usually see the use of a safe plus token warrant structure at the seed stage in the western hemisphere. This structure is used for tax optimization and is typically used for companies that are building a decentralized network and may ultimately dissolve. The safe may not have any economic value and may not ever convert, but it serves as a mechanism for corporate governance for investors, providing recourse in case of legal issues with the founder.
Investing Path v/s Founder Path
I am passionate about investing and have always been interested in it, even when I was a corporate lawyer. I have been referred to as a scanner, someone who is interested in many different industries and not just one. This is what drew me to corporate law to begin with.
I find the portfolio theory approach as an investor very appealing because it allows me to focus on my strengths and spread them across multiple companies. I believe that the best projects are built by strong technical teams and, as someone with a non-technical background, my job is to support and serve technical founders.
Investment Thesis
I believe that the success of crypto funds is often due to identifying trends early and having a few successful investments in that category before it becomes mainstream. One example is Framework Ventures, which made a name for itself in the DeFi summer of 2020 by investing in Aave, Synthetix, Chain and other protocols that led the momentum.
I am also a big investor in Polychain, and I think we got two things right fundamentally. We invested in alternative layer ones like Cosmos, Polkadot, Avalanche, etc. in the era of 2017-2018 when Ethereum was the only game in town for developer ecosystem building smart contracts.
We were early investors in the first wave of DeFi protocols like dYdX, 0x, Compound, and Dharma. I was always excited about helping these alternative layer ones build ecosystems as it was one of the most emerging and exciting areas in 2017-2018. I also think it was interesting as there was no playbook for this at the time, but now crypto has evolved and different chains have their own unique ecosystems.
As an example, we created ecosystem funds for Polkadot, Celo, and Definity in early 2018, which was not a concept at the time and it was more about how we could compete with Ethereum’s built developer community and bootstrap that from day one. So what I feel like was the most exciting were those conversations with founders about coming up with strategies to really drive an organic developer community around these new platforms.
I would love to hear your favorite story from helping a founder secure an investment from Polychain, if you have one.
I attempted to set up a large airdrop for Dfinity for ICP before its launch, as securities laws in the US made it difficult to do public crowd sales. We aimed to get more community alignment with the project and had a list of around 60,000 to 65,000 people. However, we realized that the airdrop had been attacked by members of the Chinese community using multiple fake IDs bought on the black market. We learned about the importance of civil protection and attack vectors in the crypto world and that it’s important to always have a security mindset when working on large deals in crypto.
Dao5 Fund Thesis
dao5 is a seed-stage venture fund that aims to convert a portion of the fund into a DAO at the end of the fund lifecycle. From the perspective of LPs, it is similar to any other venture fund, with the capital being called on over a course of several years and distributions being received as positions are sold and liquidated. However, at the end of the fund, the plan is to turn the general partner entity of the fund into a token table and dilute the equity of the investment team and myself to give some ownership to the founders in the portfolio. This is an experiment and the goal is to create a collective of founders that co-manage a pool of capital, making it more fun and crypto-native.
Motivation
I believe that launching a fund or business that is going to be relevant in the future is important. I recognized that simply recreating what worked in the past will not guarantee success and wanted to be more innovative and experimental. Being outside of the US allows for more flexibility in terms of regulation, but there is still a need for more clarity in terms of governance and DAO regulation in the industry. I hope that in five years, there will be enough clarity to operate in a secure and compliant way.
Projects backed and incentives
I am focused on infrastructure in the Ethereum space and am interested in projects that improve core tenants of Ethereum. An example of such a project is Eigen Labs and its main product, Eigen Layer. I was involved in the seed round of Eigen Layer and Sreeram Kannan, the founder, is an advisor to my fund.
Eigen Layer allows ETH validators to restate their ETH to provide security to other chains and earn rewards from other app chains or other blockchains for providing that security. This fits well into my thesis of modularity and making things more interoperable within the space.
I see many instances where projects want to launch their own VMs, apps, or competing L1s, but it doesn’t always make sense to bootstrap their own set of validators as they will never have the same security as Ethereum. It is beneficial for the whole space to bootstrap this decentralized base of validators that Ethereum already has.
Eigen Layer’s Incentive model
- They will have their own native token, the Eigen token.
- The core value is retaking ETH, and it’s possible that the Eigen token will also be subject to slashing risk.
- They are working on other products like their own data availability layer.
- They believe that Ethereum is rapidly growing and will be the winner of the future in terms of world compute
- They are experimenting with scalability and cost efficiency for Ethereum.
- They have a project called AltLayer.
- AltLayer is more aligned with optimistic rollups, but for apps with limited windows of high transaction throughput, like ICOs or NFT minting events.
- AltLayer alleviates the overhead for narrow periods of time and allows projects to spin up disposable optimistic rollups, then discard them after the fact.
Can you explain your reasoning for primarily focusing on the Ethereum ecosystem, despite exploring another layer one blockchain ecosystems in the past? Additionally, how do you believe the tooling and development around Ethereum have contributed to your decision to return to it?
I find myself in a state of cognitive dissonance when it comes to choosing a blockchain ecosystem. On one hand, I believe it’s logical to be ecosystem agnostic and that a great application or technology is a great application or technology, regardless of which platform it’s implemented on. However, the other part of me recognizes the strength of Ethereum’s community and my deep belief in it. With each passing year and cycle, I believe Ethereum becomes stronger relative to other layer one communities.
Despite the hype and funding of other projects, I believe the quality and resolve of the Ethereum community and projects cannot be dissolved or displaced. I also believe that Ethereum’s decentralized movement truly benefits the world and its leader, Vitalik, is a missionary in the space who is not a mercenary.
How do you get tokens from one chain to the next chain safely? What are your thoughts on that? Thoughts on bridges, if you have any?
I believe that the need for interoperability among blockchains has been a prevalent issue for a long time. The original vision for Cosmos and Polkadot was to create a common development framework for all blockchains to follow, making it easier to move across different networks. There are some differences between the two projects in terms of security models. In recent years, we have seen a number of projects that aim to create open standards for cross-chain messaging or token transfers. Axelar, LayerZero, Nomad is one example.
I believe that the first wave of bridges we saw last year had the biggest issue with security. The amount of money stolen from DeFi and Bridge hacks over the last year is over a billion and a half dollars, which is not sustainable. There are hopefully various technologies and companies that will help address this problem. I don’t think there is a single solution for security for bridges, but we need better and more scalable code auditing firms.
Additionally, development languages and frameworks like move, which is supposed to be more secure than Solidity, will play a factor. We also need to encourage more hackers to be whitehat and not blackhat. The recent arrest of Avi Eisenberg is an interesting case in terms of legal precedent for whitehat and blackhat hacking in the space.
Code is Law
Where do you stand on the code is law statement?
Code is law is more of a principle than a final rule. I believe the intent is a huge factor as well.
I agree that there needs to be solutions to the bad acting in the crypto space, but I also question if regulation has created more harm than benefit for consumers. I believe that the SEC’s exclusion of US recipients from certain airdrops may not be protecting people and that the balance of regulation and access for retail investors is off.
I also observe that projects that have held sustainable value as tokens over multiple years, such as Polkadot and Cosmos, were often ICOs that had a lot of participants and didn’t have lock-ins, and these have performed better than some VC-backed coins. Due to regulatory uncertainty and fear, retail investors are being hurt more than benefited.
Regulations
I believe that regulators need to be careful when distinguishing between regulating a private company that holds retail users’ coins or manages their private keys, and regulating a piece of software on a blockchain. These are very different things and should not be conflated.
What is the next big hurdle in your opinion? Obviously kind of interoperability and getting tokens across chains. Anything else that we should be thinking about solving?
I discussed security and the need to prevent another year of preventable bugs resulting in over a billion dollars being stolen. I am interested in the language and virtual machine of Aptos and implementing it within other ecosystems. Another area of interest for me is real-world assets, such as wrapping them and putting them on the blockchain. I was not interested in this in the past, but with a higher interest rate environment and the need for returns, I find it appealing. I believe that crypto offers the opportunity for these assets to trade 24/7 and be accessible to all investors, not just accredited ones.
How you navigated the hard year of 2022 with the fund and how you’re thinking about it in hindsight?
I found 2022 to be manageable as I launched at the beginning of the year and was able to be conservative and focused on early-stage, defensible companies. I knew there was still excess from 2021 that needed to be cleared out, and the credit bubble and high levels of debt and leverage made for risky investments. I took a conservative approach and waited for the right opportunities to deploy my funds. I am still mostly undeployed.
Some fund managers are having difficulty deploying funds even though they have raised a large amount of money. What is your opinion on this situation?
I have heard mixed things about venture funds and their ability to default during economic conditions. I believe that larger funds with institutional LPs tend to not default, but smaller scrappier funds that raised from family offices or entrepreneurs may not have the capital they thought they had a year ago and may not be able to make commitments.
Bullish on DAOs
I would love to understand why you’re so excited about DAOs and what other people should be thinking about when it comes to DAOs.
I believe we are currently in the early stages of the journey with DAOs. We are in the proof of concept stage and have not had anything meaningfully successful yet.
Constitution DAO and Assange DAO successfully raised large amounts of capital, but they ultimately failed due to issues with execution and decision-making. The biggest issue with DAOs currently is that governance is not engaged, and incentives are not there. This leads to a tragedy of the commons where no one takes the lead, and there is no incentive for innovation.
I also believe that Dunbar’s Number, which states that social groups break down above a certain number, is a significant issue in the space.
For those listening who might not know what we mean when we say governance, can you break it down for them?
The magic of DAOs is that for every key decision, every token holder can vote. I can participate in key decisions for a DAO by voting, with my vote being proportionate to the number of tokens I hold. This allows my voice to be heard transparently, like being a retail shareholder in a company like Apple. This is one of the unique features of DAO governance.
What are some of the issues that you hope DAOs are helping to solve?
I am bullish on the future of DAOs in the next 5-10 years. I believe that the number of DAOs and the sophistication of how they operate will greatly increase, as well as the development of necessary tooling and software in the space. On the investment side, there will be some DAOs that rival the size and assets under the management of the largest capital allocators in the world. These DAOs will have a decentralized structure, with sub-DAOs making autonomous decisions, but with a system of liquid democracy to prevent abuse of power. I also see the potential for DAOs to be used for community-based investment strategies, similar to the Wall Street Bets forum, and for raising money for specific causes.
What have you learned about DAOs that you find surprising in hindsight or maybe a new insight that you can share?
I believe that the reason for the dysfunction in some DAO fundraises is the lack of ability to keep people engaged over a long period of time. I have looked at some fundraises in 2021 and noticed that some have been successful with high valuations, such as the friends with benefits and the pleaser DAOs. These are great examples of community building by starting off with tight groups of like-minded friends and gradually decentralizing. To avoid a tragedy of commons, it is important to be relevant, engaging, and do unique things like buying the Wutang album from Martinelli’s auction. The biggest learning is to take a slow and deliberate approach, which is what we plan to do with the future dao5.
For those that don’t know Friends with Benefits or Pleasr DAO, can you give us the TLDR on each of those?
- Pleasr DAOs and friends with benefits are examples of successful community building in Dow fundraises.
- Pleasr DAOs focused on buying unique assets, such as the Doge NFT and Martinelli’s exclusive Wutang Clan album, to gain mainstream media attention and build brand equity.
- Friends with Benefits focused on hosting physical events in the real world and built culture momentum, leading to a high valuation and interest from Andreesen.
Highlights From 2022: The Best DAO
- To be a good DAO in 2022, relevance and engagement are key.
- Nouns DAO has been effective in achieving this through their generative low resolution art auction system, where the winner earns an NFT that also serves as a voting right over the pool of capital.
- Nouns DAO has been innovative in building a community and exploring sub DAO governance to avoid common issues faced by most DAOs.
What biggest opportunities do you see right now in crypto? What do you have your eye on for 2023?
I am excited about the return of sobriety in the industry and the focus on important building blocks for the space. I am a big fan and believer in the ZK rollup ecosystem and believe it will become more robust. I think real-world assets are an interesting use and whoever manages to tackle a way to get high-interest-rate assets on chain will be interesting.
I think there will be big opportunities in DeFi, but it needs to be used for something other than margin gambling. The era of 1000% API is over.
What are your thoughts on the NFT space?
- Play-to-Earn (PFPs) will sustain as a user behavior, but may not be as valuable as they were in the last cycle.
- Many NFTs are just “crap” and will go to zero, similar to how most art doesn’t have any value.
- Small innovations, such as overlaying utility and governance rights on NFTs, will be interesting phenomena.
How Are You Defiant?
I think that the question of whether or not crypto is a good thing is a complex one. On one hand, I believe that people who are deeply involved in crypto are often those who are dissatisfied with the status quo and want to change it. On the other hand, I also think that crypto is a harsh and brutal world, where wealth can be gained and lost very quickly. I also believe that crypto is not necessarily a force for good, but that it does significantly increase the velocity of wealth and that this is, in the end, a net positive for society. I also think that the pursuit of crypto is very defiant and amazing.
