Chain Venturer: Lex Sokolin of Generative Ventures

Decentralized AI, DePIN, and the machine economy.

Marco Manoppo & The Launchy Team
June 15, 2024

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Happy Weekend 🙋🏻‍♂️,

Welcome to Chain Venturer, a series of intriguing conversations with crypto investors. This week, we have Lex Solokin from Generative Ventures.

Generative Ventures is a fund focused on Seed and Series A companies within the emerging space we call the machine economy.

At a macro level, Generative Ventures targets this intersection of generative AI and Web3, investing in the foundational infrastructure and innovative applications to drive the machine economy forward.

If you would like to participate in a future episode, DM me here.

-Marco

In case you don’t know…

I’m an investor at Primitive Ventures. We back founders who believe that crypto represents the new socioeconomic primitive that will redefine individual sovereignty and financial paradigms.

If you’re building an interesting project → DM me here.

If your project is too early in the lifecycle, I also run a syndicate, you can check it out here.

Anyway, enjoy this week’s conversation.

kek CRV kek

It is a failure of RWA projects that Mich cannot borrow against his CRV to buy homes and then tokenize those homes onchain and permissionlessly borrow against them to pay off the loans against his CRV tokens, am I the only one that actually cares about capital efficiency now?
— Gwart (@GwartyGwart)
11:13 AM • Jun 14, 2024

Lex Sokolin of Generative Ventures

Lex Sokolin is a builder and investor working on the next generation of socio-economics and financial services. He is the Managing Partner and Co-Founder of Generative Ventures, an engaged venture capital fund investing in the Machine Economy powered by Fintech, accelerated by AI, and settled on Web3.

Previously, Lex was Chief Economist, Chief Marketing Officer, and Global Fintech Co-Head at Consensys, where he focused on protocol cryptoeconomics, digital assets, public and private blockchains, decentralized finance, and DAOs. Prior, he was the Global Director of Fintech Strategy at Autonomous Research, an equity research firm serving institutional investors, where he covered artificial intelligence, blockchain, neobanks, digital lenders, roboadvisors, payments, insurtech, and mixed reality. Before Autonomous, Lex was Chief Operating Officer at AdvisorEngine, a digital wealthtech platform, and CEO of NestEgg Wealth, a roboadvisor that partnered with financial advisors. Lex started his investment management and banking career at Barclays, Lehman Brothers, and Deutsche Bank.

Lex has contributed thought leadership to the Wall Street Journal, the Economist, Bloomberg, FT, Reuters, Coindesk, American Banker, ThinkAdvisor, and Investment News, among others. His industry newsletter, the Fintech Blueprint, reaches over 180,000 subscribers. Lex earned a JD/MBA from Columbia University and a B.A. in Economics and Law from Amherst College.

Here’s my conversation with Lex Sokolin.

Quick takeaways:

Lex Sokolin's defining crypto moment was the 2017 ICO boom, leading him to deeply explore Ethereum and blockchain.
Generative Ventures invests in Web3, AI, and FinTech startups, focusing on foundational infrastructure and innovative applications.
Sokolin advocates for decentralized AI to prevent large tech companies from concentrating power and to promote individual control over digital identities.
DePIN founders should deploy on existing networks for interoperability and prioritize user-friendly go-to-market strategies.
Founders should choose content channels that match their strengths and enjoyability, focusing on authenticity and audience resonance.

The following paragraphs are not verbatim quotes. These are paraphrases of our conversations optimized for written media formats. Some context and nuances might not have been conveyed properly in the process.

The author of this issue is not responsible for any misconstrued statements made in the issue.

All information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.

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What was the defining moment that drew you into the world of crypto?

Lex first interacted with Bitcoin at a Fintech conference in San Francisco. At the time, he was a founder of a digital investing startup, and it was around 2013, maybe 2012, when Bitcoin was priced at approximately $250. During the conference, the speaker asked how many attendees owned Bitcoin, and to Lex's surprise, about half of the fintech founders in the room raised their hands. Despite being deeply involved in the industry, Lex realized he had no exposure to Bitcoin and had yet to follow its development.

Motivated by curiosity, Lex returned to New York and dedicated time to understanding Bitcoin, eventually acquiring his first Bitcoin around that period. However, he didn't immediately fall in love with it, as he saw Bitcoin more as an asset class than an application. While intriguing and powerful, it didn't resonate with his passion for the tech industry.

The defining moment: It wasn't until 2017 or 2018, as a researcher at an equity research firm focusing on innovation and major platform shifts, that Lex truly explored the crypto world. He began covering Ethereum, and around 2017, he noticed that the amount of money raised through Initial Coin Offerings (ICOs) had surpassed all previous equity crowdfunding combined. Despite significant efforts in the US to promote equity crowdfunding, it failed to capture public interest. In contrast, ICOs experienced explosive growth, captivating investors with their financial products.

Fascinated by the virality and excitement surrounding ICOs, Lex fell into the Ethereum rabbit hole. By 2017, he dedicated most of his time to covering blockchain technology. In 2019, he joined Consensys full-time, contributing to various aspects of the business, from FinTech and DeFi products to serving as Chief Marketing Officer and later Chief Economist. His involvement with Consensys profoundly transformed his perspective on technology.

Initially, Lex viewed blockchain as a means to rebuild the financial system on a more solid foundation. However, he soon realized that its true potential lay in becoming the economic architecture of the internet. While finance is a critical sector supported by DeFi, the more significant impact lies in digital ownership, property rights, and the non-custodial nature of the Web3 economy. This realization has shaped Lex's engagement with the crypto world ever since.

What is Generative Ventures?

Generative Ventures is a fund focused on Seed and Series A companies within the emerging space we call the machine economy. This concept goes beyond robot-to-robot payments; it's about anticipating the next significant leg of GDP growth, which Lex believes will be driven by generative AI.

When considering AI in practical terms—not the full science fiction, cyborg vision, but the grounded perspective—McKinsey predicts that AI could contribute between $4 trillion and $12 trillion in GDP growth. Lex sees this growth stemming from generative AI, which primarily produces digital content, objects, and assets.

Simultaneously, the Web3 ecosystem, with its digital rights management and economic systems, has proven capable of scaling effectively. However, Lex identifies a significant challenge: the lack of native GDP within the Web3 system. Currently, the space is highly financialized, with over 95% of its revenues derived from financial services, leaving little room for organic economic growth.

Generative Ventures aims to bridge this gap by leveraging the convergence of generative AI and blockchain technologies. The overlap between machine labour from AI and machine economic networks via blockchain protocols creates opportunities for ownership, provenance, and market formation around AI-generated artefacts. This includes payments, banking, and financial systems between AIs, AI agents, and decentralized network hosting models.

Generative Ventures is deeply invested in the intersection of Web3, AI, and FinTech, particularly in fostering economic growth within the Web3 ecosystem.
Lex argues that leveraging AI is crucial for driving this growth, as AI can produce digital content, objects, and assets that integrate seamlessly with the Web3 framework.
Generative Ventures has made several strategic investments that align with this vision, even though those investments are not “directly in that vein”.
For instance, the fund has invested in Taiko, a ZK-EVM project, and Delphinus Lab, which focuses on ZK-WASM technology to facilitate on-chain application development for developers.
These technical projects are essential for expanding the Web3 ecosystem's capabilities and promoting overall growth.

Conversely, Generative Ventures is less interested in pure financial plays. Lex emphasizes that while perpetual protocols on layer two solutions might generate profits, they often act as short-term fixes that could harm the ecosystem in the long run. These financial instruments might provide immediate gains, but they ultimately lead to issues akin to a sugar rush, followed by a crash.

Generative Ventures typically invests between $500,000 and $1.5M in seed or series A rounds. Despite the trend of increasingly large seed rounds, the focus remains on early-stage opportunities with the potential for substantial, long-term impact.

What are fluffs, and what is real at the intersection of crypto and AI?

Lex said announcing Generative's launch last August was somewhat embarrassing, especially since it meant collecting all these hype-driven hashtags. It felt like Generative was playing into the hype. Lex has been methodical in articulating Generative's thesis, particularly in terms of why Generative cares about the AI component. If there's no path for it to grow the GDP of Web3, then it's not a fit for Generative.

When looking at the sector now, what happened unexpectedly is how quickly the markets turned. The shift was from the depths of a bear market, where everything seemed bleak and uninvestable, to a phase of absolute euphoria. This has resulted in a frenzy not only about crypto but also about companies like Nvidia and Microsoft. Nvidia, for instance, has almost single-handedly buoyed the US stock market by pulling up the S&P 500.

This euphoria has spilt over into the crypto industry, which is rife with people wanting to capitalize on current narratives. Unfortunately, many use buzzwords without any substance behind them. Generative must be particularly careful to distinguish genuine innovations from mere narrative plays.

As a venture investor, Generative doesn’t operate on a quick time horizon. Unlike a liquid crypto fund that can trade in and out of assets like BitTensor without concern for fundamentals, Generative cuts a check and commits for the long term. There are constraints on the ability to exit, making it dangerous to invest in market-timed narratives.

Generative takes time to discern between fluff and real value. Competition for deals has increased, even in the Web3xAI and DePIN spaces, making it tougher for Generative as an investor. There is now less time for due diligence, but avoiding mistaking mere signals for substantive value is crucial. Misjudging this can be detrimental.

Generative maintains discipline by thoroughly investigating and doing due diligence. Overly complicated pitches are often red flags, masking a lack of substance. Conversely, genuine novelty and distinctiveness in founders and their backgrounds tend to stand out. Over time, an intuition for distinguishing true potential from mere hype develops.

What's the argument for decentralizing AI, and is there a benefit to running GPUs in a decentralized way beyond the idealistic notion of preventing one company from controlling all the compute power?

The argument for decentralizing AI centres around several key points, starting with the differentiation between centralized and decentralized models. Large tech companies control the AI infrastructure, data, and algorithms in a centralised model, creating significant risks and potential drawbacks. By decentralizing AI, we can address these issues by equitably distributing control and ownership.

To frame this, let's consider the analogy of a robot. The robot's hardware body is akin to the physical infrastructure, like GPUs, that powers AI. The robot's senses represent the data inputs—images, text, videos—used to train AI models. The models, whether large language models (LLMs) or image generation models form the robot's brain. Finally, AI agents act as the frameworks for action, determining how the robot interacts with the world to achieve specific goals.

In a centralized setup, all these components are managed by big tech companies, similar to how people entrust their money to banks like JP Morgan. While this is convenient, it comes with significant risks. If a bank's system fails or gets hacked, customers suffer. Similarly, centralized control of AI can lead to misuse or theft of sensitive data and loss of individual autonomy over personal digital representations.

Just as Bitcoin offers an alternative to traditional banking by allowing self-custody of financial assets, decentralizing AI offers a way to maintain individual control over digital identities and intellectual contributions. This can help prevent scenarios where digital avatars or personal data are stolen and misused, leading to severe identity theft and fraud.

Generative believes that it is crucial for non-custodial AI, where individuals own their AI agents and the underlying data. This ownership extends to the models and the training data, ensuring individuals retain control over their digital artefacts. This decentralized approach mitigates the risks associated with centralization while promoting innovation and personal autonomy.

To decentralize AI effectively, we need to consider each component—hardware, data, models, and action frameworks. Projects in the Web3 AI space are already exploring these aspects. For example, Decentralized Physical Infrastructure Networks (DePIN) leverage tokenomics to bootstrap hardware networks, avoiding the need for significant capital outlay. This creates a supply of decentralized GPUs, which can be used by AI developers.

The challenge lies in generating demand for these decentralized resources. While Web3 entrepreneurs might prefer decentralized GPU providers due to shared philosophies, convincing Web2 companies to adopt these solutions is more challenging. The broader Web3 AI ecosystem must focus on demonstrating the tangible benefits of decentralization to attract both Web3 and Web2 users.

As we move further up the AI stack, the contextual relevance of decentralization varies. For instance, questions that need careful consideration are whether training data should be scraped using decentralized networks or if models should be trained centrally and then open-sourced. Projects like Autonolas, which offer AI agent frameworks with financial capabilities, align closely with the vision of decentralized AI, highlighting the potential for AI agents to manage and spend capital autonomously.

What are one or two tips or lessons that you would give to aspiring DePIN founders to help them manage their supply and demand side effectively?

One key observation about the DePIN space is the recent trend exemplified by Helium's move from operating its own network to leveraging Solana. This shift indicates a broader trend where DePIN projects are moving away from the traditional model of running their own coin networks, akin to Litecoin or Ripple, and evolving more towards token-powered apps or protocols.

The first tip for aspiring DePIN founders is to consider deploying on an existing network rather than trying to establish a standalone coin network. Similar to how DeFi protocols benefit from interoperability on shared networks, DePIN projects can also gain from being part of a larger ecosystem. By deploying on a common network, DePIN projects can maintain their own tokens for bootstrapping the supply side while leveraging the interoperability and shared resources of the broader network.

The second tip is to prioritize a clear go-to-market strategy and understand the importance of being part of a larger ecosystem. Driving actual adoption in the DePIN space requires reducing the friction of adoption. This can be achieved by bundling multiple DePIN projects into a single application, utilizing one chain, and integrating with a unified wallet. It is crucial to simplify the user experience and make it easier for users to engage with multiple DePIN projects.

Generative emphasizes that reducing complexity and enhancing interoperability are key to effectively managing the supply and demand sides. By focusing on these strategies, DePIN founders can create more compelling and user-friendly solutions, ultimately driving broader adoption in the industry.

What writing tips would you recommend for founders who want to improve their branding and marketing strategy, become more approachable, and rally their community?

In Lex's entrepreneurial journey, putting himself out there has been crucial. Over a decade ago, Lex began with a content strategy, initially focusing on conferences and traditional media. By 2017, he launched a newsletter, which evolved into the Fintech Blueprint in 2019. Over time, this strategy grew and compounded, expanding across various channels.

For founders looking to enhance their branding and marketing strategies, here are some key writing tips from Lex:

Select Channels Aligned with Your Strengths.

It's essential to choose channels that suit your natural abilities. For example, Lex's academic background made long-form writing a good fit. Each piece he writes for the newsletter is a form of strategic thinking for himself. Today's landscape offers numerous channels—Twitter, Farcaster, newsletters, TikTok, podcasts—each requiring different skills. Experiment with various formats to gauge traction and audience response.

Experiment and Find Your Fit: Different platforms demand unique approaches.

The skills needed to excel on Farcaster differ significantly from those for a newsletter, TikTok, or a podcast. Try out each platform, see where you get the most engagement, and practice within those spaces. Understanding the nuances of each channel will help you refine your strategy.

Focus on Enjoyment and Resonance

Ultimately, choose a format that you enjoy and find internally motivating. Creating content will reflect in your work and resonate more with your audience if you derive pleasure. Consistency and authenticity in your preferred medium can significantly boost your approachability and community engagement.

Rapid Fire Questions

What's one piece of content every aspiring investment professional should read/watch?
- Accelerando by Charles Stross.
What’s your biggest investment mistake?
- It was 2008. I was working at Lehman Brothers. The senior people in the business said to buy more stock; pretty much everyone else in the firm did. So, we all bought more Lehman stock on the way down.
What’s the most underrated use case of crypto?
- Money movement.
What’s your most contrarian view in crypto right now?
- We're over levered into liquid restaking and I have concerns about the amount of money that's being locked up in that ecosystem without fully understanding the risks.
What’s the biggest risk that the crypto space is facing?
- Missing the plot again and not reading the room, which is to focus so much on the casino that it becomes culturally cool to be financial nihilists and to denigrate people who care about companies and fundamental value and building things that are sustainable.

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.