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Hello everyone and welcome to the Liquid Podcast. This show is a weekly series where we talk to some of

the best and brightest Web3 and crypto investors about their stories, ideas, and strategies. I'm your host, Cosmo Jiang. Today, I'm excited to present our guest, Sonia Kim, founder of Programmed Capital. Programmed Capital is an actively managed, long-term focused liquid token fund. Prior to launching Programmed, Sonia worked at Aberfrith Partners and Kiltern Partners, privately owned investment firms in Edinburgh, where she helped manage several billion dollars of institutional client capital in undervalued public equities.

Sonja began her career as an investment risk analyst at Bailey Gifford, a global growth investor notable for its successful implementation of the long-term investment philosophy. Sonja holds a Master of Finance from MIT, as well as a Bachelor's in Mathematics and a minor in CS from NYU. Before we get in, for those who are new listeners, GCR, or Global Coin Research, is a community-first research and investment DAO. We are a tokenized, decentralized community of builders, researchers, and investors in Web3. You can find more information about us and how to join at globalcoinresearch.com.

Please note that All opinions expressed by myself, Cosmo Jiang, and our guests are solely our own opinions and do not reflect the opinions of GCR, Nova River, or any other of their affiliated institutions. This podcast is for informational, educational, and entertainment purposes only, and should not be relied upon as a basis for investment decisions or any other type of advice. Sonia, hello. Thank you so much for coming on today. How are you?

Yeah, I'm good. Thanks.

Thanks for having me.

Yeah, I feel it's very rare that I get to talk to someone from the other side of the pond. Why don't you let everyone know where you're located?

Yeah. So I'm sitting here in my little office in Edinburgh, Scotland. I've been here for 10 years. I'm originally from Seoul, though I grew up in Canada, was educated in the US and then decided to move to Edinburgh after graduating from MIT. So yeah, I'm the quintessential web3 native in a sense that I'm not from anywhere from 1 place in the world.

It's funny You say that and maybe we should dive into your background, but I almost feel like it's a good thing. It's considered a good thing in some ways in the trad far world to have be able to remove yourself from the hype mind of crowd think in the major cities and be outside the US and especially in Scotland. But maybe I'm giving it too much away. I'd love to, why don't you tell us a little bit about your background and what are the different steps along the way that have brought you to crypto investing?

Absolutely. So I studied math, CS and finance. And so you'd think that I would have been drawn to crypto from early on, but I actually spent most of my career in very conservative investment roles, initially in risk management and then in value investing. So As I mentioned, after grad school in 2013, I moved to Edinburgh, Scotland, which is a story for another time. But I started as an investment risk analyst at a company called Bailey Gifford.

And for those who may not know who Bailey Gifford is, They're a prolific growth equity manager managing around 250 billion of global kind of retail and institutional money. And I would just summarize their investment style as basically pick great companies that will benefit from structural growth and just huddle. So for example, they've held Amazon from 2004 and Tesla from 2013 and they still are shareholders in both today. Uh, so that's really where I learned the power of patient investing, which I carry with me when I'm investing for program capital, just to continue my role at Bailey Gifford, it was risk management where I thought about portfolio construction and concentration risk, things like behavioral biases and decision-making and so on. But I knew that I wanted to eventually get into investments and value investing really appealed to me because for personal reasons.

I saw many kind of investment failures in my formative years, starting with my dad who had early success in business, but was basically wrecked in the tech bubble of like late nineties and early 2 thousands. Also when I moved to New York for college in the fall of 2008, the GFC was just starting. And yeah, fast forward 5 years, I was being actually taught by a professor, Robert Martin at MIT. Of course he's notable for winning the Nobel Prize for his derivatives pricing model, but he was involved in LTCM, long-term capital management, which went bust with the Russian default. Yeah, that's when I realized I wanted to work in more kind of a risk-managed part of investment, which is obviously value investing.

I did that for 7 years. The best way to describe the role there is basically you're a contrarian and a calculator. This is how Seth Klorman describes the role of a value investor. And so given my background, I was really skeptical of crypto, even during the 2017 bull cycle. And it really wasn't until the pandemic when I came across A16Z's crypto startup school videos that I got interested in digging deeper.

And yeah, eventually what really clicked for me was when I realized that protocols can be thought of as internet native businesses, in a sense, they can generate earnings, they can increase their book value, and ultimately even return those earnings to token holders in the form of a yield or token burn. And I think skeptics, including my former self, have this misconception that crypto or tokens don't have any value curl. So realizing that and then also having in the back of my mind how successful Bailey Gifford had been in long-term investing in Web2 companies with network effects, it just became clear to me that crypto could be the next market that produces many multi-decade winners. So yeah, I didn't really have a plan initially for how I would get into crypto investing, but I followed my intuition And I've worked at boutiques where I was just around a lot of investors who had taken the risk to start their own funds. And yeah, fortunately with the gracious support of 1 of my mentors, I was able to launch Programmed Capital in September,

2022.

Tell us a little about programmed capital. I love the, maybe spell it out for our listeners. It's P-R-O-G-R-M-D, dropping the vowels. Where does the name come from?

Yeah, so I really liked the word programmed in crypto and people are high conviction about their ideas. You would have heard phrases like 10k ETH is programmed. And the word obviously refers to programming. So I had double meaning of it. And yeah, as to the spelling, it was tough to decide whether to go for American or British.

So I don't know if you but American spell programmed with 1 M, but Brits with 2 M's. So to avoid confusion, I just went for an even more confusing version where I removed almost all the vowels.

I love it. It's very memorable. And I guess as they say, or linguists will often say, you really don't even need most of the middle letters in any word. If you see the first couple characters and the last couple characters of word, you're going to

get that right.

So it works out well. Yeah. Yeah. Although maybe that's also a very Anglo central view and it's not true, obviously for Asian languages. But yeah.

How would you describe the investment strategy of Programmed?

Sure. So Programmed tagline is patient investors in the secular growth of blockchain economies. As I mentioned, I'm really influenced by the long term investment mindset that's common in the Edinburgh investment scene. And if you look at the various industry metrics, say like the number of builders and users in crypto, there's no denying that the industry is in a healthy long-term growth trend. But these things play out over like an extended period of time.

So to my mind, patient investing in fundamentally strong crypto protocols is probably the single most reliable way to deliver sustainable alpha for investors. I'll go 1 level deeper. So where program capital plays is in the subset of 3 different conditions. So first is, is the project building in a large market with the structural demand drivers. And typically riding the positive beta effects in an industry is such a powerful force.

So that's number 1. Number 2 is, does the internal execution of the big idea give any competitive advantage of that protocol over its rivals, including, I would say, Web2 solutions? Because ultimately how Web3 gains traction is if it has some sort of edge over how people are using technology today. So this question really pertains to due diligence on the team and the tech. And finally, number 3, what is the sustainable value transmission to token holders?

So this question really asks the path to value accrual and what that looks like for a token. So yeah, these 3 things are fundamental to program capital's investment process And how we think about delivering capital growth for investors in the liquid token market.

I love that framework. And I think you lay it out very well. I guess, like, how do you think this Is this very, I mean, and all that sounds actually very familiar to me. And I think it'll sound very familiar to people from tradfi and typical investing roles, that sort of framework of market size, growth, competitive advantages, and ultimately, uni economics or how does that come back to me? How is your how would you say your background in long term fundamental investing has really informed your process for crypto?

What's similar versus what's different?

Yeah, that's a really good question. Maybe I'll break it down into 2 parts like research and then implementation. So on the research side, I think understanding what makes a great business or a great protocol seems mostly translatable from TradFi to crypto. I guess the big difference here though is now we have a concept of a community rather than just a single management team for a company. So understanding the nuances of that is definitely important.

Further, What's different is the way that we can gather information. I think that in crypto, gathering information is so much more free form than in equities where you have a standard way of accessing your 10-Ks to 10-Qs. You speak to management directly, sometimes the board members, and then you also to supplement your research, speak to sell side analysts. So it's very straightforward and standardized. But in crypto, I find it very chaotic.

So you have to go through to Discord, Twitter, protocol documentation, word of mouth, conferences, you can go to on-chain data to validate some of the factual things to substantiate your thesis. Yeah, I think that's the main difference. And the result of that means that I think information edge encrypted is much more significant than in the stock market, which I think is actually good for active managers and active management in this space. Yeah. And then on the implementation side, obviously the kind of buy low, sell high concept is universal, but I think the volatility hits super different, especially for a long biased liquid token investor.

I think I'm learning to be even more patient investing in crypto because Just when you think you bought the bottom, there could be another 50% like down. And that's literally what happened, say, in November 2022, when the fund added more to Solana after the FTX incident. And then December 2022, saw another halving of the price. So yeah, the crypto market definitely tests your mental fortitude and conviction in a more extreme way.

Yeah, I think that's right. I often tell my investors that my risk management is largely the same framework, just that because the vol is 34X equities, you need to have much looser risk management procedures. And it's certainly much, much more relaxed mindset. Otherwise you're going to be convincing yourself to get out of every position. And I really appreciate your piece about the research piece.

I often debate whether it's a good thing or not that there are a lot of services now being stood up to provide on-chain data in a more consumable way. In some ways, this is like investing in equities prior to the rise of all these syndicated data providers over the last 2 decades, when it was much more about gumshoe sort of research, which is exciting.

Yeah, I'm not going to lie, being used to the services that, for example, Bloomberg or Faxet provide, I think I would welcome a similar service provided to crypto investors. And we are seeing new service providers emerge like Token Terminal and Artemis. I'm a big fan of both of those platforms. So yeah, I think it's generally a good thing to make information more democratized and efficient, but we're certainly nowhere near the, where we were in the stock market.

Yeah. Look, let's maybe use your framework and do a deep dive into a couple of these names to help people contextualize why maybe they're not just interesting ideas. Because I think in any early stage thing, there are a ton of ideas, but people really don't do the next step of contextualizing why they're not just good ideas, but also good investments, especially from a value investors perspective. So maybe I think the biggest, easiest asset, perhaps, or not easiest, sorry, but the biggest asset is ETH. Certainly the most important asset to educate TradFi investors with.

I know, I'm sure you've spent a ton of time thinking about it. How do you think about ETH?

Yeah, that's a great question. I'm sure everybody has run their own models and come out with 5 different numbers that they feel could be reasonable. But before maybe digging into ETH specifically, maybe I can talk about how I view the 3 dimensions of token value, and then I'll jump into ETH thereafter. So I like to segment the sources of value for tokens to 3 aspects. First is economic value.

So this is the estimate of intrinsic value that tradfi investors will be very used to deriving. So this would be your future cash flows discounted at cost of capital. Second is utility value. So what is the token used for? Is it used for governance, collateral, payment?

Is it used to say receive discounts in the case of exchange tokens. So there's got to be a value attributed to the utility that the token provides. And finally, the third element is what I call speculative or store of value. Perhaps it's a little harsh to put speculative value with store of value in 1 bucket, but the commonality between the 2 is that they both rely on some sort of social consensus around what the token is worth. Of course, speculative value is shorter term than store value.

I think for a value investor in crypto, which I understand is a very rare breed as of now. It's important to understand that 1, you can anchor on the economic value, but you understand utility value to also have an influence over the token's price. And 3, you acknowledge that the speculator value or store of value of a token could also create or have a massive impact on the eventual value of the token. That's the overall framework under which I view how to think about token value. When it comes to Ethereum, it has a very clear kind of economic value proposition because there's already user fees and a sustainable economic value that has arisen from the merge and the transition to proof of stake.

So you can try and define economic value in a similar way that an investor of companies would try and define it. I like to decompose economic value into 3 categories, which you can find from John Huber of Sabre Capital, who has a very good presentation on this online called 3 engines of stock value and it's this notion that you can break down the expected stock return of a company by earnings growth, multiple expansion, so PE, and share count reduction. And if you multiply all 3 together, it gives you the expected return of the stock price. And you can analogize this to blockchains. So you know, the main drivers of say Ethereum would be 1, transaction fee growth.

This would be in dollar terms. 2 would be network value to transaction multiple. So essentially like the PE multiple. And 3 would be token supply reduction. To go through each of the 3, so Ethereum had $1.8 billion in transaction fees in the last 12 months, and it's tracking to earn around $4.1 billion of transaction fees based on the last 30 day run rate.

You can think about like, where could this get to in the long run? The global public cloud services spend is expected to be around

$500

billion in the next couple of years. Similarly, the global payments market is around 2 to 3000000000000. And if you think that public blockchains play in the intersection of compute and payments, you could take a view on what you think could be the transaction fee of L1s and more specifically Ethereum based on the relevant market size. So that's how I would tackle the transaction fee growth aspect.

And how big could that be? It's 4 billion annualized run rate today. And you said tackling a 2 to 3000000000000 dollar market, including payments of public cloud services.

Yeah. So it totally depends on your, your kind of investment horizon, but I like to model out 10 years just so that I can align my projections with the long-term holding period of the fund. I've modeled consumer spend on blockchain compute to be around $40 billion market size over a 10 year period. And the way I've come to that is by relating how much governments and corporates spend currently on cloud services. Of course, with the mainstream adoption of blockchains, Now that cost burden will shift from governments and corporations to consumers.

In terms of the role that blockchains could play in global payments, I've modeled as the single low digit figure of the total in the next 10 years. So that comes out to around 90 billion, adding the 2 elements together, I'm guessing, you know, around the 100 plus billion mark. And then you can take a view on what kind of market share Ethereum could could occupy in that larger space of blockchain transaction fees.

So that's obviously huge market. And so that's a transaction fee growth. When you think about going back to your analogy of the 3 engines value, what are the next pieces?

The second piece is the transaction multiple. We don't have much sensible data on this yet for crypto, but we do benefit from having a lot of data on public companies. To give you some context, the 75th percentile on PE ratio of global equity is around 30 times. And last time I checked, to give you further context, Amazon is trading closer to 100 times, Tesla 50 times and Google 25 times. So you can take a view on the growth trajectory of Ethereum relative to some of these Web2 growth companies.

And then yeah, to round it off, Number 3 is token supply. We know that Ethereum's token supply changes based on the net impact of base feeds burn and staking issuance. And we don't obviously know the exact number it's going to be in the future, but it feels like low single digit deflationary to low single digit inflationary assumption doesn't seem like a crazy action.

Yeah, and what's really cool is that obviously the staking issuance piece is calculable. You have to make some assumptions around how many people end up staking, but the staking issuance is calculable. And then the base fees burn is maybe a bit more finger in the air, but it is it accelerates with transaction fee growth. And so it's all related.

Yeah, it's crazy what's happened in the last week with meme coin craze. Right now we're seeing token supply be deflationary at an expected rate of 2 to 3% per annum.

Which implies call it on a multiple basis, I guess that probably 2 to 3% implies 33 to 50 times, right, which is not so bad compared to a lot of tech companies on an LTM basis.

But I'm not sure if that's sustainable on a go forward basis.

Yeah, that makes sense. That's really cool. Yeah, ETH is just, I think, a very approachable asset for a lot of tradfi investors dipping their toe in and first figuring it out. And also a fundamental asset for anyone in crypto to really dive in and have a model and have a framework for thinking about. So thank you for sharing that with us.

What else is interesting to you? What else do you find interesting?

I want to talk about render. I know that JCR did a piece on it recently. I just came across it last week. So the listeners might already be familiar with it. But essentially, Render is a decentralized GPU computing platform.

I think it can become the key infrastructure for building the open metaverse by lowering basically the compute barriers for 3D rendering. Rendering is the process of creating photorealistic 3D graphics, which is actually a very computationally intensive and expensive process. For example, Toy Story 4 apparently has taken 13 million hours to render. And the current issue with the market is that to rent GPUs from cloud providers, say AWS or Google, costs can be really expensive. And it can also be difficult to secure GPU capacity in large quantities.

And the real reason behind that is that chip manufacturers only sell enterprise-grade hardware to cloud providers. And enterprise-grade hardware can be anywhere from 10x the cost of the consumer equivalent, but they only provide 10 to 25% higher performance. So the Render Network is a decentralized network that is connecting idle consumer-grade GPU that people might have in their house with artists that require rendering jobs. And it's often dubbed Airbnb of GPU compute for rendering. And the value proposition here is that artists and studios get to render their jobs for cheaper and faster.

What's interesting about Render Network is that it benefits from the established distribution channel and partnerships of its founding company, Otoi. Otoi is a software company founded by an industry veteran called Jules Urbach in 2008. Its main product is a rendering software called Octane Render, and Octane Render subscribers get complimentary access to the Render Network nodes. So it's already got this amazing distribution platform. Also, Otoe has heavy hitters on its advisory board, like Eric Schmidt of the ex-Google CEO and Chair, and Brendan Eich, who you may know is the creator of JavaScript, as well as the co-founder of Mozilla and now Brave.

And so the render network is already very established in the tech and media sector, and it can support also the rendering of other software, not just Octane Render. You may have actually seen recently, they expanded to facilitate running stable diffusion prompts, which means that it now has involvement in AI as well. So that's the business side of things. On the valuation and token side of things. Render is really interesting.

Right before we dive into that, cause I think there are 2 things you touched on there that are super interesting and insightful and we're focusing in on 1 is essentially you're saying Render is a GPU computing platform and people could use this instead of the large cloud compute providers like a Google Cloud or Azure or AWS. Why might someone choose to do that? Just to help us really understand why that demand exists.

Yeah, it's, I would say access and price are the 2 dimensions that render improves upon the existing existing solution price, obviously, when you decentralize something, and the suppliers of this additional GPU compute, they're, this is using idle GPU capacity, they're kind of marginal demand for additional income is much less than say AWS or other cloud service providers who've laid out this huge CapEx to try and gain incremental return from it. So price gets much cheaper. And yeah, as mentioned before, access is also really difficult because there's just not enough capacity and potentially underinvestment from the cloud service providers in GPU compute.

That makes sense. That makes sense. And then I think the last thing you said, which is what really excites me about this idea is that Render as a concept and as an idea really crosses, sits at the intersection of crypto or crypto incentivized networks of cloud compute and then potentially extending to AI compute today. So yeah, let's talk about the token. In all this, like why does R&DR matter?

Yeah, sure. So they have recently had a community vote to transition from just a normal utility token to burn and mint equilibrium. You may be familiar with BME, which is the acronym for Burn and Mint Equilibrium. And basically how it works is the artist would pay for credit in dollars, and the same amount of render token is burned with that amount of dollar. So it has the deflationary impact on the total supply of render.

On the flip side, there's some incentives paid out to the suppliers of the network. So the people who commit their GPU capacity, and the net impact on the token supply, you could almost model it out as a net burn yield, which in TradFi terms would be the net share buyback yield. So even though Render is a utility token, you could almost model it like some sort of a dividend yield or total shareholder returns yield methodology.

I love that. My favorite stocks when I was a public equities investors were those that I like to call tontiners, which is this comes from this basically the insurance plans in the past years we called tontines where, where shares just get bought back. And that is how, you know, you as a token holder or a shareholder accrue value is because if the enterprise is worth the same and there are fewer shares, then obviously your share is worth more. And so I love the idea of a, of renders and burn mechanism because it's just so classically, it's been around for millennia. That is exactly how many economic organizations work.

Cool. I guess like, how would you think about the speed of the burn or what fundamental metrics does this all link back to as we try to evaluate?

Yeah. So The lever here is demand. The more demand and more artists that are rendering the frames, the more burn pressure there will be. So in modeling out what the net deflationary pressure could be, would be directly related to your view on the eventual adoption of this network by artists and studios that do 3D rendering.

Makes a lot of sense. And it sounds like it's something that's actually very, not easy, but something that's very clear to track and there's a very clear KPI here, which is also exciting. Cool. And maybe taking a step back,

2022

was clearly a year of many blow ups, which tends to create good investment opportunities. We talked about a couple of them, Ethereum, Render. How do you think about opportunity selection generally at this point in the cycle? Or just more broadly, how do you think about portfolio construction?

Yeah, sure. Having still 1 foot in the tradfi world through friends and former colleagues, I can tell you that investors really don't want to engage with crypto right now. Sorry, tradfi investors really don't want to engage with crypto right now, with the possible exception of Bitcoin and Ethereum. And you can really see this from the way altcoins have just moved sideways since FTX blew up in November 2022. This is a long-winded way of saying, I don't even think you need to go that far to find good opportunities right now.

You know, projects have been building for 7 months continuously in a head down way since November

2022.

And that kind of progress, I don't think has been necessarily recognized by the market. So in this context, Solana and Cosmos are top of mind. This year alone, Solana Labs has just shipped the Saga phone, which is such an awesome and exciting experiment. Cosmos is seeing its shared security vision really come to life with the first instance of replicator security with the launch of Neutron, I think this week. You're seeing real progress with 2 L1s.

And yeah, for whatever reason, the market just is not reflecting this positive progress that we've seen since November 2022 last year.

Yeah, yeah, that makes sense. Look, I really always really enjoy talking to you because I feel like we can dive deep into name and certainly speak a very similar language, having both trying to translate a lot of the traditional financial valuation techniques and and create analogies in crypto. And in reality, the more and more it sounds like the way that you see it and the way I see it is almost all the value, the valuation frameworks and valuation techniques are the same. They just have slightly different names, which is which makes it more approachable, perhaps, and it should make the asset class less scary.

Great.

Yeah. So look, just as we're closing out here, I always ask my guests the same question, which is that crypto trades 24-7 during your 65 days a year, and the information flow is constant, voluminous and noisy. How do you prioritize your time and stay balanced?

Yeah, that's a really good question. I think having the long-term focus naturally helps navigate the 24-7 nature of crypto a little better. I like Twitter. I've been trying to post more stuff on say crypto fundamental analysis. But obviously spending too much time on it can definitely be unhealthy.

Thankfully, I have 3 English bulldogs that need to be walked. So I'm constantly going on walks. We're blessed in Scotland with so many hills within a driving distance. So yeah, I just try to spend as much of my free time outdoors, hill walking and yeah, playing golf, et cetera.

Nice. Nice. That does sound relaxing. It's I imagine having to handle 3 bulldogs. It's quite a lot of work.

But that's that sounds fun. Look, thank you so much for the time. This has been a lot of fun and I think really educational for our listeners. So appreciate you coming on today, Sonia.

Yeah, of course. Thanks for having me. Pleasure.

If people want to reach out to you, how can they find you?

So I am reachable on Twitter at Soniasunkim, S-O-N-Y-A-S-U-N-K-I-M. And also, Telegram handle is Soniasunkim, S-O-N-Y-A-S-K-I-M.

Awesome. Thanks so much. And yeah, thanks everyone for tuning in. See you next time.

Have a good weekend!