Ep. 60: NFTs, quantitative finance, and liquidity cascades with Corey Hoffstein

Watch our interview with Corey on Youtube.

Corey Hoffstein is the co-founder and Chief Investment Officer of Newfound Research as well as an enthusiast of cryptocurrencies and various crypto projects. Newfound is a quantitative asset management firm seeking to help investors proactively navigate the risks of investing through better diversification.

Related

• "Ep. 56: Joel Comm on blockchain, NFTs, and cryptoassets"
• "Ep. 55: Seth Levine on cryptocurrencies and the future of finance." 
• "Ep. 41: Complexity science and its applications with Geoffrey West." 

Show Notes

• Corey started off studying computer science and finance before entering the world of entrepreneurship by starting Newfound Research.
• Like many others, Corey's entry into the world of cryptocurrencies was halting and intermittent. He got a BTC wallet early on and promptly lost the laptop it was on, but in recent months he decided to take another, more serious look at the ecosystem. 
• Ultimately the conclusion he reached about crypto is "I don't know where it's going, but I don't think it's going away."
• Being a professional in quantitative finance, he naturally gravitated towards trading opportunities. Interestingly, this led him to spend time trying to flip NFTs.
• A common criticism of NFTs is that there's no intrinsic value to them, you can almost always Google the same image or bit of media. 
• Corey addresses this by making a perceptive comparison to the market for original artwork. There's nothing stopping a person from Googling every panting ever done by Money or Van Gogh, and yet an enormous market exists for high-priced originals. 
• He further notes that people are doing many things with NFTs besides selling images or playing cards. Gary Vaynerchuk offers image-based NFTs which also come with exclusive access to him and his conferences.  
• We also spend some time on a few of the more mundane potential uses of NFTs, such as issuing driver's licenses or important documents, or serving to validate online identity.
• Thomas asks Corey what he thinks the future of banking will be in a blockchain world.
• Corey isn't sure, but he does note that it's become very obvious that there are tremendous barriers to entry in traditional finance and that many of the functions those institutions performed can be replicated, and sometimes improved, on the blockchain. 
• As an example, he cites borrowing and lending, which can now be done on the blockchain through the Aave protocol. 
• I make a point that's come up a few times in recent interviews, which comes from Chris Dixon: right now, many people are using NFTs to digitally replicate existing functionality, like the creation of scarce trading cards. But the real excitement comes when you realize that these are really new digital primitives upon which new structures can be built. 
• Corey likes the idea of new digital primitives, and references the popular 'Loot for Adventure' NFTs.
• These are just white text on a black background, describing some weapon, armor, or item. What's interesting is how people are now remixing these items into new games.
• Put another way, these NFTs are *composable*, they allow for a near endless amount of mixing and matching to create new environments, new ecosystems, and new digital worlds. 
• Or as Corey puts it: "...when you give people red, blue, and green, you can get a whole rainbow and a spectrum out of it..."
• At this point we switched to talking about liquidity cascades, a subject of study for Corey's organization Newfound Research. 
• I specifically wanted to know why Corey made this claim in "Liquidity Cascades: The Coordinated Risk of Uncoordinated Market Participants": "Large and sudden drawdowns are a known risk feature for market historians. One would hope that as markets mature, volatility occurring from endogenous events would diminish."
• His answer is pretty detailed, but it boils down to the idea that mature markets should be ones in which everyone is pretty familiar with the fundamentals of the major companies and in which there should be relatively few surprises.
• Part of the reason we don't see this is leverage. Market participants are often highly levered, which means that when one position is liquidated it drives the price down, triggering another liquidation, and so on. 
• Thomas asked Corey about another topic in quantitative finance, about which he'd recently written in the Wall Street Journal: return stacking. 
• Interestingly, return stacking ends up looking like another way of utilizing leverage. An example might be investing in a 1.5 times leveraged vehicle with 60% exposure to stocks and 40% exposure to bonds. 
• $100 dollars invested in such a vehicle would actually buy you $90 of equity and $60 of bonds. This means that you could get 100% exposure with only 66% of your money, leaving another third to invest somewhere else. 
• The rest of the conversation covered cryptocurrencies in financial institutions, inflation, consumption as an important mechanism for digital ecosystems, and much more!