Dio from Patagon

Dio Patagon Final


Young: Hello everyone. And welcome to another episode of The Merkle. Today, we have Dio, co founder at Patagon Management LLC, has been involved with many activists and special situations within crypto itself, being involved with projects such as Rook, Parrot, and Eragon. Dio, pleasure to have you. Tell us more about yourself, how you came into crypto and how you got to where you are today.

Dio: Sure. Thank you for having me, first of all. My family originally worked in crypto. So from a young age, I got exposed to it. At the time, it was only Bitcoin. So the only stuff I would do was, [00:01:00] occasionally, I would work in customer support, helping out a bunch of people who did not understand how crypto worked, and then also actually with helping The company my dad worked at track hackers, so I would call the hackers cell phones when they were able to find it and try and keep them on the line long enough for them to be Able to trace the call and be able to call law enforcement and the local countries as a result of that I bought Bitcoin very early on I bought it around 100, but not at all in size because I was a kid and I just held it for a while up until, to be honest, last cycle, when I started to see there was actually some interesting stuff going on in ETH with the DeFi and all this other stuff, and that made me get involved in some projects, and then I got Disillusioned from those projects because I felt like they weren’t actually providing value.

So I went from [00:02:00] someone who was like a developer helping projects developed a net short for a while. And one of our main shorts was. Tara, which obviously did very well. And after that, we were looking for similar trades and we was shorted waves. We shorted a couple of things on Shane, and then we found Faye protocol, which when we ran the math, we actually figured out instead of on a liquidity risk adjusted basis, only having 5 cents or something like that per dollar obligation.

They had 2 50. So there was an ARB, but it was the other way around. And that’s how I started to get involved in the special situations. investments. In the case of Faye, the team was very open to a change like this. They knew that the protocol wasn’t going to be able to continue in its current form and they wanted to be able to return money to investors and they actually did it.

In a super quick [00:03:00] time period, they closed it down in about a month, which is one of the fastest periods. And then from there, we’ve gotten involved in a lot of other projects. Very

Young: interesting. So crypto Twitter has a term for this strategy. They call it investing in risk free value kind of projects. And Faye was one of your earlier successes.

Could you tell us a bit more with certain examples, how exactly you go about talking and negotiating with these projects and ultimately achieving an outcome for both them and investors?

Dio: Sure. Most of the time, these projects that we find are DAOs, so there’s attributes that they have to have. They’re DAOs that have control over a treasury.

That have tokens with a decent amount of liquidity and the treasury isn’t holding their own token. For example, you would not do this kind of activist investing in general for something like Uniswap where 90 percent of the treasury is just their own tokens. But [00:04:00] you identify these, and then you identify if investors basically price them at negative equity value.

Which is basically saying that they believe the company, or DAO project, however you want to term it, is going to continue to destroy value. If that makes sense. So they price it basically below how much cash they actually have. Um, sometimes this is just because there’s not product market fit. Sometimes it’s because they’re burning more cash than what they’re generating.

Like in the case of Aragon, they had a pretty large treasury, but none of it was staked. I’m not entirely sure why it was, it could have been legal or other issues, but now they have it staked, and just by staking those assets, which was pushed a lot by Rfb investors, they can more or less cover their runway, basically forever, instead of having a runway of about [00:05:00] like 10, 15 years, it’s now basically an infinite runway.

So that’s what we try and do, is we find these projects that people assume are going to continually be burning cash, and we help them out. Basically either shut down, or, or approach book value via buybacks. Whenever a project decides to shut down, It’s because they want to shut down. It’s never because we come in and we’re like, hey, we’re going to shut you down.

Most of the time teams are over the project. At this point, they’re working on new projects and they just want to be able to leave.

Young: Yeah. I like that framing. And I do think having a activist investor scene does make the market a bit more efficient and definitely does. Keep projects on their toes as well in terms of actually creating value.

Are there any legal aspects to this entire process and how do you go about dealing with that?

Dio: There are legal aspects. A lot of [00:06:00] these projects, and this is somewhat controversial, but would be considered, at least in the United States, illegal securities. We’ve gotten opinions on a lot of these, but at the same time, what’s interesting is that they’re not 100 percent considered illegal securities because the court has to decide that, obviously, that they have a lot of attributes.

But what’s interesting is that if you want to actually close these down, you can’t really sue on an illegal securities basis. You have to sue on a breach of contract basis because of what the illegal securities. Aspect will do in which case basically all the money that’s involved will be redistributed to every buyer who has ever been involved with it, which in the case of crypto would just Absolutely mean that everyone would get equally wrecked more or less so it’s interesting because there’s not really a the breach of contract is a good way to go after it in order to Treat it more as what [00:07:00] it is, which is Basically an unregistered partnership.

So that’s one thing that I found personally very interesting. That if you go actually the illegal securities route, which is what Gensler would probably want for a lot of these projects, it actually is hurtful to investors. So that’s not something we tend to pursue. We tend to say, especially if we have a majority of tokens and the team is not listening to us, we tend to say, look, you DAO governance.

You made that promise publicly to investors. You’re breaking that promise and that’s causing us damages. So we actually have taken Spartacus who the developer is known as way woo to court, and we are about to file for default and the court understood the arguments, which I was impressed by the court understood, which we basically came in, this guy had some experience with crypto, but no experience with defy.[00:08:00]

The DAO style of setting up these projects is actually intuitive if you explain it to them in tradfy terms. So there’s a lot of cases where if a team’s just no, because the team gets attached to the treasury and they feel it’s their treasury. They, when they go, no, we don’t want to do this because this violates X, Y, Z, or like technically it’s against this document that we have.

That we wrote 10 years before we, we decided that we were going to allow token holders to have total control over the project that that kind of stuff. In my opinion, most of the time we’ll not be able to hold up in court because of the breach of contract aspect. So I think that’s something that I found interesting is that the breach of contract is the best way to go after a lot of these projects.

Young: Very interesting. Very interesting. You mentioned Spartacus. I think it is still trading at a significant discount to their book value. Would you [00:09:00] say there are more opportunities for these sort of plays out there?

Dio: There’s not a lot. There’s a few and a lot of the ones that are left at this point are the more difficult ones.

Whatever your opinion is on Parrot and how much they gave holders, they were very open to a redemption style process. In the case of Spartacus, he has almost taken it up upon himself as a crusade against doing some kind of refund, and there’s a lot of projects that are similar to that. There are, and the multiples are still nice, but there’s a lot less than there used to be, and they’re a lot more hostile, and in some cases malicious.

For example, Hector Dow recently announced that they were going to do a redemption based on a snapshot, which, first of all, Doing it based on a snapshot retroactively is illegal because you’re treating investors differently, but we’ll ignore that part. But basically that team obliterated a hundred million [00:10:00] dollars in cash, just absolutely incinerated it.

And their identities, et cetera, are relatively well known in the community. And they’re still now saying it’s going to take them 12 months to liquidate all their assets, etc. So that’s the kind of stuff that can happen. The opportunity cost that you have there is ridiculous because now you have to wait 12 months in order to get your cash, which makes no sense, right?

What they should be doing is you should be able to cash out right now. And then whenever they’re done with the liquidation, you have a P Rook style token, where you then claim whatever they were able to liquidate. This method of waiting a year, to me, seems slightly malicious. And the snapshot method makes it seem like potentially what they’re trying to do is wait for people to move or sell their token.

So that then they have less obligations and they can basically keep more. So that’s the kind [00:11:00] of people that you’re dealing with. It definitely

Young: is. It’s not as clean as doing a trade or doing… No, it’s not. It’s

Dio: not at all.

Young: Yeah, that’s what I realized as well. I’m aware that even though RFV is in theme now and in vogue and it’s popular and people talk about it and Patagon has been relatively successful in that space, it’s only one investment strategy that you have under your belt.

What other sorts of… What investment themes do you see going forward, or opportunities to generate alpha?

Dio: Sure. I still think that there’s geographical mispricing with some stuff. There is an absurd amount of capital that is focused on Europe, the United States, and parts of Asia. And there’s not a lot of capital that is focused on other regions, such as Latin America, such as Africa.

And there’s not a lot of people that study those kinds of situations. And I think there’s still a decent amount of alpha there. For example, [00:12:00] right now, we don’t have a lot of trad5 positions, but if we did, we would be putting on a uranium short right now, because it ran up a decent amount. before the potential war in Nigeria.

And first of all, Nigeria only produces 5 percent of the world’s uranium. It ran up like 50%, which makes no sense. And also, it looks like that war’s just not gonna happen. It’s a situation like what happened with Russia with oil, where people were like, let’s embargo Russia. The oil prices are gonna go crazy.

But what actually happened is that Russia just sold their oil to India and China. And then China didn’t buy more oil from the U. S., it just got shifted. Our belief is the same kind of situation will happen with uranium, since there’s some African countries that are saying they won’t sell to France. Then France can buy from Kazakhstan, from Canada, and other countries will buy, probably Russia, from these countries.[00:13:00]

So there’s stuff like that. There’s also the Argentine elections, which I believed that, first of all, that a right wing candidate would win. I did not expect… the libertarian candidate to have such a insane lead, where it looks like it’s going to be a runoff potentially between two right wing candidates for the first time in ever, I think, in Argentine history, or at least in recent pre dictatorship Argentine history.

And I think that could have a massive impact. And already we’ve seen since The election, the stock market’s up something like 50 percent. Which, when it’s measured in Argentine pesos, doesn’t really mean too much. But, it is an absurd return right now when most equities are going down. And with the data coming out of China, in my opinion, macro, it doesn’t look like the world’s gonna be better in two years.

But it also doesn’t necessarily look [00:14:00] like we’re gonna go into a heavy recession. It’s gonna be… More like stagflation for a few years.

Young: Interesting. Where do you see crypto fitting in with all of these?

Dio: Yeah, like I mentioned on my medium, I do feel the world is becoming much more multipolar. Like we were about to have a war in Africa and the United States more or less didn’t get involved.

There’s some military reasons for that. The US has a massive military and drone base in Niger, which it uses for anti terrorism and keeping a check on Russia. But France and ECOVAS took a much larger role there than what a lot of people expected. And that’s become the norm. Turkey now has outsized influence in places like Libya and other countries.

Russia, which although it is a very large country and has a very large military, isn’t a massive economy compared to even some countries in Europe or [00:15:00] even like Texas. They have a lot of power now in Syria and Libya and Sudan and throughout Africa through Wagner. China’s getting more involved. There’s a lot of rise in regional powers.

And local power blocks like the European Union and ECOWAS are doing a lot more. I think with that kind of macro environment, it doesn’t make sense for you to measure the value of European, Chinese, Libyan goods in American dollars anymore. And it doesn’t necessarily eventually make sense. to use basically nationally controlled payment processors for transactions either.

I think we’re a long way away from crypto taking those positions, but I think it’s one of the better options for obvious reasons. And end of the day if Lazarus Because Lazarus is the only part of North Korea that has crypto at the moment. Wanted to buy something from another country and [00:16:00] off ramps weren’t an issue.

They could do that and the United States couldn’t really do anything about it. And while that’s like a kind of negative example, we don’t necessarily want to allow Lazarus to fund military operations in North Korea or nuclear missiles testing. That is also a good quality to have, that it’s uncensorable.

And so I think that’s something that increasingly people are going to use as the U. S. steps up continuing to use kind of financial sanctions and people start to look for a different solution. And although China’s trying to do its own thing, a lot of neutral countries, which are increasingly representing more of the world’s GDP, Are going to want something that’s also neutral and doesn’t mean they’re going from one country controlling it to another country controlling it.

Young: Which countries would you be watching in that case? What do you see as the initial starting point for a neutral currency like crypto to be adopted? Yeah. [00:17:00]

Dio: I think Latin America is probably one of the better places. Already, we saw El Salvador, which they did for political reasons and to get foreign support.

But Latin America is probably one of the regions in the world that has the longest ongoing history with inflation and distrust of banks and governments in general. Just to mention my family’s case. My grandparents lost their savings three times as a result of banking failures in the country. Argentina actually, Argentines have about 400 billion dollars, almost the equivalent of the entire country’s GDP, in dollars either hidden outside of the financial system in Argentina, like under mattresses, etc.,

or outside of the country in offshore accounts. And if you look at a lot of crypto events and crypto people, there’s a lot of links that go back to Latin America and especially Argentina. Like Brian, uh, at [00:18:00] Coinbase went to Argentina and that was where he started to understand the need. For something like this in a country like Argentina, Vitalik went to Argentina, the guys that made The Central End are from there, team members at Yearn, team members at Aave, every single project, it’s hard to find one that doesn’t have Argentines.

So I, I think that honestly Argentina and Latin America in general is a good place to start to see that because the other thing is they’re also big commodities traders, but also as big commodities traders and big importers, it could be hard for them because if they’re accepting payment in coin, ETH, whatever, it could be harder for them to then import other products from the US, China, whatever.

But I still do think that already in those countries, we’re starting to see it semi normalized as a way of paying people. And so I would probably look at that region a lot [00:19:00] more than parts of Asia and other areas where the kind of fintech apps are more government supported, more stable, and there’s no real reason to use it.

I remember in Singapore using Grab for absolutely everything, and I was fine.

Young: Yeah, yeah, same for China. You could literally install your identity card on WeChat. Um, you have social media there, Snapchat functions, um,

Dio: pay for stuff. Yeah, it has like everything. I’ve been trying to get a WeChat for a minute, and I just have not been able to set one up.


Young: in terms of investing within crypto itself, I’ve seen some of your pieces regarding value investing where you talked about LIDO a lot. Where are you, putting your money going forward?

Dio: I would say it is, it is very fluid at the moment. We’re currently very exposed mostly to RFP, mainly because we believe a few plays are going to be ending relatively soon.

And so we want to be able to capture that, and our opinion is that [00:20:00] the markets will be relatively flat besides three days ago, when they were definitely not very flat. So we want to be earning in dollar terms, but long term, what we want to do… Is we actually want to treat this as earning and basically in terms of ETH.

So we want to have STETH or ETH borrow against it at rates, first of all, that are way better than the rates that we can get right now from other people that we work with. Right now we’re paying around 10 percent because it’s crypto and people are worried we just run away. On chain we’ll pay like 2. 5%, um, ranging, but still.

And then we can use that to invest into RFV plays or arbitrage plays. Increasingly something that we found is interesting is arbitrage plays. Which has made us somewhat not liked in general. We got a very tiny position in Alchemex ETH after the [00:21:00] hack. And then we sold it. It was literally five, 10 K, which compared to the company is nothing.

It was more or less us testing it out. But what we found interesting recently is with the curve hack, a lot of people that actually bought into these debt based tokens were more or less punished. As a result, in the case of. Al ETH, they couldn’t freeze ETH chain transactions or movements, but with JPEG, they actually froze.

All tokens after the hack, but also after people had started buying tokens and they basically put up a vote that said they could force people to take a loss on those tokens, which from a legal perspective does not seem like it would work out very well if it went to court. And from an accountability perspective, it’s weird that when you provide liquidity on an LP, [00:22:00] that is a risk that will happen.

That is something that you have to accept, that kind of situation could happen. We found it very weird that in the case of some of these projects, Alchemax with bridged products, because they have control over the bridged tokens and JPEG decided that they were going to try and protect LPs. At the expense of people who had bought into the token, by the way, they got most of their money back from the hacker, but if they hadn’t gotten the money back from the hacker, their users would not have been able to exit their token positions that are debt based unless it were for these buyers.

Right. That’s something that kind of worries me to an extent. One of our guys had with them on the Alchemax discord and then they saw that he had a thread about them and they assumed that we had a massive position but we find that kind of weird because Sure, you got the hacked [00:23:00] money back, but your users would not be able to get their tokens back if it weren’t for buyers who are basically willing to take on the risk of holding this token.

I found that a bit weird, but it’s still a very good opportunity. Some friends that I know made. Multiples on the Al ETH at 1. 1 person that I know bought for one ETH I think 100 Al ETH and they were able to sell at 80 cents on the dollar, which is absurd, but that was very quick. That was a five minute range when you could do that.

So we look at stuff like that, like the DPEG. A while back that happened in May of last year with ST ETH. That’s also an opportunity that we looked at. Coinbase ETH’s kind of variation from the peg is something that we were looking at. We got involved in the USDC play. We made some mistakes when it came to how we sized into that play.

We had a part of our position that was in perps and then funding went to 30, 000 percent a year and we’re like, okay, this was dumb closing out that [00:24:00] position. We discovered at the same time that going along on chain or going along via Bybit and other margin, actual margin, not perpetual systems worked a lot better.

So that’s what we tend to do. We don’t tend to take too many directional bets. We are long ETH and we are long Bitcoin and Solana. We don’t have Bitcoin, but we believe it will continue to go up. We just think ETH and Solana will outperform.

Young: I like that philosophy, not taking directional bets. That’s the very definition of alpha, actually.

This has been amazing so far. I like the global macro overly as well. Not something you see a lot in crypto.

Dio: That’s something to me that makes this whole argument that the ETF. Not really, because ETFs solve a problem, right? The problem they solve is institutions can buy crypto. But if risk assets are not popular…

Those institutions don’t want to buy crypto. You’re solving a problem that right now doesn’t exist. There’s [00:25:00] no banks or big companies that are like, I want to put my pension fund in Bitcoin. They will be able to next cycle and it’ll be great, but short to medium term. It’s not gonna be bullish besides people buying the news.

Young: Yeah, I think the market’s a bit dry of narratives right now. One of the most notable RFV plays that Pentagon is currently involved in is Aragon. And it’s an issue that has been going on for a while. Could you talk a bit more about your involvement with Aragon and what are you campaigning for going forward?

Dio: We actually got involved in Aragon initially. We had no position. And we reached out to a VC who introduced us to the former co founder at Eragon who still plays. A decent role there as part of the AA, which is the Aragon association. And we basically told them, look, we know some friends of ours, a major fund and a crypto personality that I think you will understand who it is.[00:26:00]

Are buying a lot of ants. They want to do buybacks. They see you’ve done buybacks in the past. They just want to do it up to book value. There was one buyback that took ants priced at 13, which is not logical. So they were like, we just want to do that. And they’re like, cool, that’s fine. That sounds good.

We’ve done buybacks in the past. And they actually mentioned potentially using up to half of the treasury to do buybacks. Which would push the price way past book value. But we were like, okay, if you want to do that, and then we’re like, okay, now the team knows it’s not going to be hostile after Rook, we were pushing the Aragon association, they said that they were going to transition to a Dow and a Dow treasury, and they were half a year late.

absurdly late and so we got annoyed and we’re like, hey, can you do this? Can you do this? It’s been this long. You guys should be doing this faster. And then a member of the community there who was upset about how Rook [00:27:00] turned out even though it was the team’s decision to shut down. claimed that what we wanted to do was shut down the entire project, which was never our goal.

Our goal was to get the token to reflect how much cash they had on hand. As a result of that, the knee jerk reaction from these guys was like, oh shit. These guys are trying to shut us down. They kicked all of us from the discord, they kicked some of us from the forum, which is something, uh, I think Anthony Lutenegger later denied, but is true.

And then that led to the Twitter and news spat that everyone saw, where RFV traders and members of the community were trading barbs with the team. Eventually the team and some members of the community were able to get into a room. And we were able to calm things down. The tensions were very high, but I think…

That this was not a case, in my opinion, of a malicious team. It was a case of a major misunderstanding and [00:28:00] miscommunication because no one was talking directly to each other. So they were talking through Coindesk articles and tweets. Everyone was blocking each other. I think we did try to make sure that something like that wouldn’t happen because we reached out, but it’s also something that, it happens.

And the team has since then opened up a communication about how this would be done. And they… Asks for different kinds of models, which ranged from buybacks to a wrapped token model to yield on WAN, which is the voting derivative. They’ve started staking their assets, so they earn money that can pay for their runway.

So they’ve been very proactive, and we believe they’re gonna announce the start of discussions on a resolution to the issue of token holder value. And that’s the best kind of end scenario that you want, which is that you can actually work with the team to get this kind of stuff done. It’s been rough at times.

We had a report that we gave to a bunch of people on [00:29:00] this discord that are RFV guys that then got leaked and was sent on chain and that kind of sucked. Because it was a report written right after they announced that they were going to be a Gitcoin kind of program and only do grants and totally ignore the previous governance.

So it was very hostile. That old report had some things that were blatantly false. For example, that they weren’t incorporated. They showed proof that they were incorporated, just not registered. And it was very hostile. I think the most likely scenario is either a journalist leaked it or a former member of the team because there’s been so much turnover at Aragon leaked it.

So that was not fun to have to deal with and do damage control. But the team has been very understanding throughout the entire process. And although it has taken a long time, to the point where some people have assumed that, you know, [00:30:00] um, the RFE people involved have just given up, if you look at the price, you can see that’s definitely not the case.

So, we expect, eventually, in the next month, 5.

But at the same time, obviously, our RV can be very up in the air. I assume that these guys are dealing with us in good faith, but they could turn around again and be like, Oh, we can’t do this for X, Y, Z reason. Kind of poison pill. I would put that chance at the 10 percent chance. I don’t think it’s statistically significant.

Young: It’s interesting. I hope there is a good resolution on the Aragon matter. And for my last closing question, I ask this to everyone on the show, if you had a crystal ball and you could ask about it, anything about the future, doesn’t have to be crypto, it could be, but it doesn’t have to be, what would you want to know?

Dio: That’s [00:31:00] crazy. Very good ending question. I feel like I would be curious. If I would be married in 10 years, question, but there’s a part of me that’s worried that I won’t marry in 10 years and I’ll just be the lonely finance guy. I feel like I’d want to know that so I could rest easy.

Young: You have control over that in theory, in theory.

Yeah, maybe that’s a question that everyone’s mine,

Dio: especially in crypto, especially in crypto. There’s a distinctive lack of. Men being able to have a game.

Young: Yeah, that’s an amazing round off. Thank you so much for sharing It was we touched on a lot of things and I’m sure our listeners will learn a lot Tell our listeners how they can find you or find out more about Pentagon

We have a Pentagon Twitter, which isn’t crazy active, but we tend to Explain when or how we got into certain plays Me personally, I have a Twitter and I have a Medium, and those are probably the best places to either keep up with whatever random stuff I’m [00:32:00] thinking about.

The Medium ranges from the Niger War, to why Bitcoin’s good, to Terra Luna shorts, to RFV.

Super. I’ll link those in the show notes below so our listeners can find you as well. And thank you so much once again.

Dio: Thank you for having me. Have a good day, man.