Empire - Solana's Crypto Native Next-Gen CEX w/ Armani Ferrante

In this episode of Empire which took place on June 7, 2024, Yano and Santi hosted Armani Ferrante from Backpack to discuss the future of crypto exchanges, market dynamics, and innovations in the Solana ecosystem, and more! Read our notes below to learn more.

Background

Yano (Host) – Founder of Blockworks, Host at Empire

Santi (Host) – Host at Empire Podcast

Armani Ferrante (Guest) – Co-Founder and CEO at Backpack, and MadLads

Insights on Crypto Exchanges and Market Dynamics

Armani explains that Backpack acts as an entry point into crypto, functioning as a super app that simplifies crypto ownership across various chains and custody types, aiming to provide a comprehensive gateway to the crypto world.
Armani discusses the integral role of exchanges within the app ecosystem, highlighting that a successful exchange enhances the flourishing of the underlying L1 ecosystem and encourages innovative crypto products.
Armani highlights the unique challenges in launching an exchange, particularly the importance of engineering, compliance, and minimizing trust issues. He notes the critical need for robust legal and compliance frameworks, especially post-FTX collapse, to ensure sustainable operations.
Armani describes the position of exchanges as the first touchpoint transitioning people from traditional finance to decentralized finance, underscoring their potential to impact the transfer of value between these economies significantly.
Armani argues for the necessity of operating within a compliant framework to facilitate interactions with traditional financial systems, ensuring access to broad financial services and supporting the integration of crypto with mainstream financial infrastructure.
Armani says that building a reliable, robust web3 system that is up 24/7 and fast is necessary for executing the exchange opportunity and layering on cryptography and compliance adds unique challenges.
Armani mentions that the distribution piece in the market is unlocked in a couple of key ways, including unique products and the international nature of crypto exchanges. He highlights the challenges and benefits of setting up operations in Japan due to its high licensing barriers and crypto-native culture.
Yano asks if Coincheck and bitFlyer are the two major exchanges in Japan.
Armani says that Coincheck and bitFlyer are the large, successful exchanges in Japan. He praises Tokyo’s quality of life and the unexpectedly successful hiring of smart local talent.
Armani explains that listing tokens in Japan is unique because it requires approval and is heavily regulated, which limits the number of tokens on exchanges. He stresses the importance of respecting local licensing regulations to succeed in the Japanese market.

The Future of Centralized vs. Decentralized Exchanges: Challenges and Innovations

Santi asks about the decision to build a centralized exchange at a time when FTX was considered a good product, mentioning the high level of effort and regulation involved in building centralized exchanges.
He highlights the powerful brand of Coinbase and questions whether a decentralized exchange could ever match the customer relationship of a centralized exchange.
Armani says that decentralized exchanges are important and represent the future in many ways. He highlights the competition in the decentralized exchange space and the uniqueness of their product, which integrates a self-custodial wallet with a centralized exchange. He discusses the importance of progressive onboarding journeys for new users, starting with centralized platforms like Coinbase.
Armani notes the importance of integrating self-custody within the same app as the centralized exchange to educate users about self-custody alongside traditional exchange functions. He says that going toe-to-toe with large financial institutions is crucial for the crypto industry’s growth.
Armani discusses the challenges of competing with traditional financial applications in terms of design and user experience. He explains the significant barriers to building financial platforms, including the need for extensive capital, decades of experience, and trusted relationships.
Santi reflects on the innovations in the exchange space and the necessity of building a perfect product in a regulated environment. He highlights the importance of using top-tier service providers to gain credibility and discusses the financial and regulatory challenges of expanding to serve the next hundred million users.
Armani explains the extensive capital requirements for expanding an exchange, including the costs of setting up local teams and compliance infrastructure in different regions. He discusses the changed landscape of building exchanges compared to earlier times and highlights the significant barriers to entry in the current environment.

Strategic Insights on Entering and Expanding in the US Market

Santi asks if the recent political climate, especially with the election cycle in the US, has made it easier to engage with regulators for business expansion.
Armani says that their strategy for entering the US market hasn’t changed significantly. He highlights the immense resources required to compete in the US, especially against established players like Coinbase. Instead, they are focusing on building their presence internationally where they can gain a headstart.
Santi asks about the factors contributing to their success and how Armani views their competitive position, particularly in comparison to Coinbase’s strategy.
Armani says that they haven’t “won” yet but are progressing well. He highlights their unique approach starting with their core community around Solana and Mandala, which has enabled a symbiotic relationship between their products and the community.
Yano asks Armani about the future of their exchange and how he plans to expand the product offerings, including whether they will add NFTs or traditional equities.
Armani explains their product expansion strategy, focusing first on Solana users and gradually catering to a broader market interested in diverse crypto products.
He discusses building on capital efficiency and security, essential for their trading platform. Armani highlights the potential of stablecoins and their role in creating efficient, safe financial hubs similar to traditional banks for newer generations.
Armani acknowledges that building crypto products isn’t as complex as rocket science, highlighting that skilled Web2 professionals can adapt to the crypto environment.
He highlights the importance of developing secure, reliable cryptosystems at scale and suggests that successful platforms will grow with the underlying blockchain ecosystems, becoming integral to the financial services landscape.
Santi questions the necessity of having a stablecoin to attract mainstream users.
Armani says by differentiating the need for creating a stablecoin from having robust stablecoin products. He discusses the challenges of distributing new stablecoins and the strategic advantage exchanges have in achieving this.
Armani talks about the strategic importance of partnerships with exchanges for launching stablecoins but indicates that creating their own stablecoin is not currently in their plans.

Solana Ecosystem, Launchpad Significance, and Lessons from FTX Collapse

Santi asks Armani to discuss the significance of their launchpad in solidifying their position within the Solana ecosystem and its potential to give them an advantage over other exchanges.
Armani highlights the critical role of exchanges in owning customer relationships and the importance of their launchpad in facilitating significant exposure and storytelling for new projects. He reflects on the success of their launchpad initiatives and their impact on both the projects involved and the broader exchange ecosystem.
Santi compares token listing strategies among exchanges, noting some prioritize speed while others appear inconsistent. He asks how closely working with teams within the Solana community has informed their listing strategy.
Armani credits their close relationships with key developers in the Solana ecosystem for guiding their thoughtful and informed listing process. He stresses the importance of supporting high-quality projects and being actively involved in the ecosystem.
Armani says that the simplicity and effectiveness of parallel processing in Solana make it a standout platform for developers. He highlights Solana’s ability to execute at scale and the strategic decision to continue building on it despite broader industry challenges, underscoring the inherent advantages of Solana’s technology and its community.
Santi mentions that before the FTX collapse, he was actively involved with Solana projects like Orca and Raydium. After the collapse, he observed a significant improvement in the quality of projects and DeFi ecosystems on Solana, leading him to recommend certain apps like Backpack, Jupiter, Tensor, and DRiP to newcomers interested in crypto.
Santi expresses uncertainty about the exact catalyst behind the qualitative shift in Solana projects post-FTX but suspects factors like the introduction of $BONK may have played a role. He acknowledges that as a non-developer, he might be missing nuanced developments within these ecosystems.
Armani says that Solana’s unique, product-first approach, resembling Silicon Valley, attracts pragmatic builders focused on user needs, making it a favorable environment for developing fast blockchain solutions. He doesn’t see this practical focus as a disadvantage.
Armani adds that Solana has been a hub for long-term project development, with teams like those behind DRiP and Jupiter having invested years into their startups before launching. He says the FTX collapse filtered out less committed individuals, leaving behind dedicated builders which contributed to a focus on quality during the bear market.
Armani reflects on the benefits of anonymity in crypto, citing personal experiences where open actions, like open-sourcing a wallet, led to undue criticism and misunderstanding. He contemplates the disproportionate backlash and judgment faced by public figures in the crypto community, especially in light of high-profile cases like FTX.
Yano asks Armani about positive lessons from the FTX collapse, noting that despite its issues, FTX was an impressive platform managed by a small team.
Armani says that despite the negative publicity around FTX, it’s important to recognize the real growth and significant business achievements in crypto, exemplified by both FTX and Binance. He highlights learning from their focus on customer-centric products rather than peripheral activities like celebrity endorsements.

Lessons from Coinbase, Leadership Approaches, and Long-term Success

Yano comments on similar missteps made by Coinbase regarding their NFT platform, which was largely reduced during the bear market.
Santi adds that Coinbase’s acquisition and subsequent product launch failed to deliver significant results.
Armani explains that Backpack is divided into specialized teams, such as the wallet and exchange compliance teams, and he oversees them, blending marketing, engineering, and product development.
Yano questions how Armani’s approach to building his company differs from other founders.
Armani says his method isn’t unique but emphasizes empowering senior engineers with significant responsibility and autonomy, which he feels is central to their success.
Armani identifies the categories of pure effort, consistency, and focus as his keys to success, stating that these elements combined ideally position one for opportunities.
Armani shares a profound insight from a friend, likening a successful founder’s mindset to that of a redwood tree—aiming for longevity and resilience across multiple cycles rather than short-term gains, contrasting sharply with those who faltered by focusing too narrowly on immediate successes.

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Show Information

Medium: YouTube (Video)

Show: Empire

Show Title: Solana’s Crypto Native Next-Gen CEX | Armani Ferrante

Show Date: June 7, 2024