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By March 11, 2023May 10th, 2023No Comments
vVv AMA | CapX

CapX: Layer-2 Infrastructure For Token Distribution and Decentralization

March 2, 2023

CapX is a specialized Layer 2 blockchain focusing on private and community token distributions, a liquid secondary market for unvested tokens, and project infrastructure from ground zero to TGE, all built on Polygon Supernets.

Hitesh Bhardwaj, CEO and Founder of CapX, joined us for an AMA on February 21st.

vVv: Welcome everybody to another episode of our vVv AMA sessions. Today we’re streaming live from a very special location, Marbella in Spain, where we’re having our second real-life vVv event, and I have the pleasure to sit next to our audience of vVv members. II’d like to introduce our today’s guest, Hitesh Bhardwaj. He’s the founder and CEO of a project called CapX. Can you introduce yourself and explain how you got into crypto?

Hitesh: Hi, everyone! My name is Hitesh, and I got into crypto around five years ago. I entered the ecosystem by contributing to the Cosmos blockchain, which is one of the top blockchains in the world. I have an engineering background and was curious about what this technology could bring. We started an initiative called Cosmos India, and we became the team contributing to the core Cosmos. Cosmos is all about interoperability, and one of our biggest achievements was when we did the first IBC transaction in the world, which put us on the map. 

 After working on Cosmos, I co-founded a liquidity staking protocol in the Cosmos ecosystem called Persistence. I started Persistence around three years ago with my co-founder Tushar Aggarwal. With Persistence, we were building core infrastructure on the Cosmos blockchain, and we launched a token that is still doing pretty well, being one of the top 50 tokens in the market.

 As an entrepreneur and founder of a token, I gained new avenues of access which lead to the creation of CapX. I observed that over the past five years, the industry has evolved and changed a lot. But, there’s still a lot of misunderstanding in the market regarding tokens as an asset class. There’s not a lot of information out there or a definite way to quantify these assets. I also observed a lot of institutional capital entering the space, and they were trying to classify tokens very similarly to how you classify equities as an asset. Capital markets are publicly traded, and tokens behave much like equities. But, one analogy I always like to give is that when Elon Musk buys 100% of Twitter, Twitter will still be valued at 50 billion, but if Elon Musk buys 100% of the Bitcoin supply, bitcoin would go to zero. And although there are similarities between equities and tokens, they are fundamentally two very different instruments. The success of an equity company largely has to do with the business, but the success of a token project largely has to do with the token distribution. That’s why we see a lot of meme tokens with no utility doing great in this market.

 Considering all of that, what we are building is the underlying infrastructure for tokens as an asset class. When equities were launched onto the market, there was a lot of misunderstanding around it. Now you have an entire Wall Street dedicated to equities as an asset class. Similarly, we believe tokens are in a very early cycle right now. It will take a lot of time for the market to understand this asset and build infrastructure around it. We want to be that underlying infrastructure in terms of helping token projects go to the market.

vVv: You have far-reaching experience and knowledge in the financial market. Can you tell us about your experience in this area?

Hitesh: My journey started mainly out of curiosity as my background is mostly from an engineering standpoint as I did my bachelor’s in computer science. I never had a professional degree in finance, and in general, the experience mostly came from talking to a lot of industry experts and problem-solving, as a lot of these financial problems came to us. Other than that, I also read a lot of books and watched a lot of YouTube videos.

Initially, I was looking at the technical side of things and what the industry could bring to the table. The more I worked in this industry, the more I realized one of the biggest use cases is finance. I became curious about the financial side of things, and back in 2019, I was one of the co-founders of a project called Comdex. Comdex is derived from commodities decentralized exchange and building infrastructure in terms of decentralized infrastructure to facilitate commodity trading. When goods are loaded onto a ship, a document called a bill of lading is issued. We have built out the entire infrastructure to facilitate trading and financing. We have done north of 100 million dollars in transactions. So that’s how my financial journey started. I understood a lot of the banking and financial side of things. And after launching a token in the market, I learned about the properties around publicly traded assets. Crypto markets are much more aggressive than equity markets because equity markets are only open eight hours a day, five days a week, whereas crypto markets are open 24/7.

As a founder, I firmly believe you need to have a lot of knowledge of the financial markets because, at the end of the day, it’s a publicly traded asset. Once you understand the depth of this asset, then you can do many great things as a founder supporting this particular asset. 

vVv: The best way to learn is by doing it. The theory is not enough in this space, you need experience. When I first read about your project, I felt it was counterintuitive in crypto. Everyone has this idea of diamond handing and the good partners being those that hold forever. Conversely, the quick flippers are the bad guys destroying the market. As far as I understood, that is exactly your concept, to open up these restrictions and break these boundaries that we see in the market. Can you elaborate on this?

Hitesh: As I said earlier, equities and tokens are very different instruments. A lot of people are trying to use their past experience in evaluating these particular asset classes. At the same time, equities are all about value and will function on how the company is doing. It doesn’t necessarily matter if you have 100 people owning the equity or a million people. But with tokens, it’s very different. It’s all about how many people are holding that particular token, and that’s what the goal of decentralization is. The primary function of a token is to decentralize something, and that is directly proportional to the number of people holding something. The faster a token can go from 10 to 20 and from 20 to 100 to 10 million, the better. Most projects will have a private sale. They build out the product, and when they launch, you have 10 investors and 10 team members. In this scenario, token distribution among these 20 people is not decentralization. Decentralization is all about how we can get the tokens from the hands of these individuals to a larger set of people. We envision a world where the community can be onboarded much earlier. It’s sad to see that the only role of the community has become exit liquidity and where a lot of the early investors will just sell the token upon unlocking. The only way the community can now own these tokens is by purchasing them at high prices on the open market. If you look at successful projects, Bitcoin, for example, never did a private sale. They just incentivized people to do actions that are in line with what the protocol is about. If you look at Ethereum and projects like these, they have amazing communities, and millions of people have made money. The community is all about how many people are aligned with your goal and how many have benefited. This entire ethos of having just 10 to 20 investors or just holding on forever to particular tokens is not something in which I’m a strong believer. The second thing we also need to understand is the alignment of stakeholders. For example, a fund manager has a fiduciary responsibility to raise capital from LPs and deploy it to projects with some return. The fund manager has no business holding onto these assets for hundreds of years. Founders should acknowledge this and devise their strategy and tokenomics around the principle that fund managers will sell at some point. Investors who sell are very normal, and at the same time, decentralization is about bringing tokens from the investors’ hands into the hands of the community. We don’t want 20% of the network to be held by 10 people. How these tokens move needs to be optimized.

Today, a Web2 company takes 13 years to market with an IPO. In contrast, a crypto company is doing the same in 18 months. It’s a very aggressive timeline in an aggressive environment. Investors sell on the community yielding high returns, and the community takes a hit. We also feel that fund managers should have other options besides selling to the community. We are building out infrastructure where investors’ positions are much healthier, and they are not selling it all on the community. If only 10 to 14 investors can get into a project, imagine the 1000 others who have missed out. If they can buy directly from the investor, the tokens go from 10 to 50 to 200 investors and then go into the community. It’s all about decentralization and token distribution. We believe our constructs will help tokens in terms of starting from a genesis start point into reaching a market cap of 10 million.

We are building out infrastructure where investors’ positions are much healthier, and they are not selling it all on the community.

vVv: Most TGEs have s similar pattern where their launch follows a price pump and dump. Some projects never recover or require a long time period before reaching a price stabilization. What is your approach to preventing such cycles?

Hitesh: In crypto, the selling pressure is mainly from token unlocks. You need to counter this by investing in sub-capital. A project must do a lot of marketing and conference sponsorship to gain traction, encouraging investors to be associated with the project. But that is a very expensive cycle. One way a project can be mindful to ensure that these pumps and dumps don’t occur is to optimize the race from the start. Something very common in this industry is that projects raise absurd amounts of capital, which they probably don’t even need over a longer period of time. There’s a reason why equity companies do up to six rounds of fundraising. You don’t want to raise much capital when you don’t need it. You could see a four or 10-person team raising something like 20 million dollars, but that will translate to sell pressure at some point. One of the key possibilities to start is for project founders to be much more mindful of how much capital they need and not blow it on random things. If a project has raised a lot of capital, having active participation in the secondary market could help because a lot of investors over a period will want to get some liquidity back on the tokens in which they invested. It’s like how hedge funds are functioning in the market. They are not necessarily only buying into private sales, they are also buying stocks from the NASDAQ. You’ll want to have conversations with more mature and liquid hedge funds, ones that can buy these allocations directly from the investors, so the community doesn’t get hurt in the process. This is common in the equities and capital markets but will also come to the tokenizing industry. Of course, it will take time for this to mature.

vVv: How is it possible for VCs or other early investors to participate in such a system where OTC deals do not have a definitive structure?

Hitesh: That’s something we have been working on for a long time. We believe that the current constructs of OTC deals are very immature, and at the same time, blockchain as technology allows you to put a lot of trust into these equations. But a lot of practices in this industry are still very primitive. The documents have a lot of regulatory recourse, and trusting these third parties and individuals is very risky. We have seen many trusted partners go down, for example, Alameda Research or 3AC. These were some of the largest OTCs in the world, and a lot of people trusted them. 

 At CapX, we are working on a financial instrument that is on-chain. This instrument ensures downside protection for anyone who’s holding. It’s very similar to how liquidity pool tokens work. If you put 100k of USDT in a pool, you get LP tokens, and our product is similar. How it works is that if you as an investor are investing in a project called ABC, over a period of time, you are supposed to receive 10,000 ABC tokens. We work with the founders to issue a wrapped vesting token on top of it. It becomes like a receipt on your tokens that are being issued. If you, for example, are supposed to receive 10000 ABC, you will now already receive 10000 xABC tokens which are 1:1 redeemable. As an investor, you can now be mentally at peace because you hold the tokens and are not at the mercy of the founder or anyone else to get your tokens after the vesting cycle ends. This liquidity token is very powerful as you can store it in your wallet, transfer it to another wallet or even go out and find liquidity against it. A possibility is to go to a peer and tell him you invested 10k into this project, and now it’s worth 80k, but it’s locked for a year, and ask him if he wants to buy it at a 50% discount rate. What can happen then is that you get transferred 40k, and your peer gets transferred the tokens. We are also building the infrastructure to do this, and it’s called CapX exchange. It’s a privacy-enabled order book exchange that works like an OTC, but it’s noncustodial. CapX can never touch your funds. If you trade with someone, your funds go into a permissionless escrow secured by the blockchain. If you find a buyer for your tokens, you put in your tokens, and the buyer puts in the money. You get the USDT for what you sold and that all happens in a permissionless infrastructure. We want to create a paradigm shift regarding how the secondary markets are perceived, which is mostly negative. The most successful tokens in the world have had the highest operating volumes. We want to bring a lot of structure to the market by providing critical infrastructure and tooling while ensuring you don’t have to trust people anymore. We are talking about a trustless economy on the blockchain.

We want to create a paradigm shift regarding how the secondary markets are perceived

vVv: That can be an essential tool to revolutionize and disrupt the OTC market. Do you have any insights on the current volume in the Web3 OTC market?

Hitesh: A close friend of mine works for a big OTC desk, and I asked him what was the largest daily volume. During the Luna crash, it was around 300 million dollars a day, and that’s just one of the many OTCs worldwide. Of course, much volume comes from Bitcoin, Ethereum, or other assets. What we try to do is target a small portion of it, which are the unvested tokens. I’m sure these also hold a significant amount, but I do not have any numbers as it’s a very private market.

vVv: That’s impressive. To summarize your base concept, am I correct to say that your platform allows early seed investors to wrap vested locked tokens and trade them for USDC in an OTC marketplace thus allowing investors an early exit. 

Hitesh: That is absolutely correct.

vVv: What role does the community play? I find it fascinating that you cover the full lifecycle of token economics and how you think about community growth. Last time we spoke, you mentioned you had 100k users on your platform pre-launch. Can you dive a little bit into the community aspect of your project?

Hitesh: One problem is that when a project launches a token, they start working on the product side of things and follow the same patterns and behavior as Web2 companies. But the ethos of Web3 is all about building in public and finding community members at a very early stage who can become contributors to your project. One of the things that don’t allow founders to do that is that they don’t have a token, and without a token, there is no incentivization for community members. Some projects have experimented with rewarding early supporters with NFTs, badges, or experience points, but that doesn’t translate into anything. If a user puts time, effort, and energy into being an early contributor, they must be rewarded.  That’s why we thought about rewarding them with sweat equity. It doesn’t necessarily have to be a lot, but it must equate to contributions. And that is exactly what we did with our CapX community beta pilot program. With this pilot program, we want to educate them about CapX. Because when community members are educated about our topics, they can become much stronger contributors and figure out what role they can play in the ecosystem. Second, we also want to inform them about future projects on our platform and gain their support. Thirdly, we want our community members to spread the word. If they get friends onto the platform, we want to incentivize them for that. For that, we came up with our IOU token called xCapX. It’s a 1:1 redeemable token for when our CapX token is launched. We have already started incentivizing our early users by distributing these IOU tokens. For example, if you watch a video on what CapX is and can answer all the questions about it, we will reward you. If you bring friends to the platform, we will  also reward you. A lot of projects will go to the market without having a community and this IOU token solves that exact problem. The numbers turned out great, and now we have around 115k users on the platform while having spent 0 dollars on marketing. We only did token incentives and are happy 115k people are holding some tokens from CapX. We want the community to be large, and we want the community to contribute and feel part of something great. Our CapX community has been getting stronger every day, with more people joining the ecosystem and getting incentivized.

vVv: How is the IOU token differentiated between the different projects and communities, will there be a different ticker and/or smart contracts?

Hitesh: There will be one smart contract that manages multiple pockets of these tokens, but the tokens will have different tickers for each community. For the CapX community, this will be xCapX. We will put an x before the token to differentiate it from the original token.

vVv: Can you provide insight into the use case and functionality of the CapX token in the wrapping of vesting tokens? What is the base principle?

Hitesh: Everything we built from the ground up is in keeping with the ethos of Web3. At no point will any of the services or business offerings will be billed in the business. There aren’t going to be payment gateways with company benefits. Everything has been structured so that all the money and revenue generated goes directly to the token. One of the first fundamental properties of the token will be securing the Polygon Supernet. We will have our own set of validators who will validate transactions on-chain, and the CapX token will be used as a gas fee to facilitate all these transactions. It will be very similar to the Polygon token or any proof-of-stake token. We have also been working on the value side of things. We want the token to grow in value and the project to run as a completely decentralized business. The first part is customer acquisition costs. When you want to attract users to your platform, that can bring a high cost considering it’s very difficult to find the exact users who are well-tailored to your particular product. Because we have a large community at CapX who will be ready to invest time, effort, and energy in contributing to early projects, we can charge a small fee for customer acquisition per project. This fee will be accrued in a pool which will go back to all CapX token holders.

Similarly, the OTC markets are one of the biggest money-making businesses out there, but it doesn’t matter how regulated they are, they will also be risky to use. Blockchain helps us to run this in a trustless fashion. Our CapX exchange will create value, but we also want to return this value to the users. So, we have gamification parts regarding the token, where we incentivize actions like staking. People who are staking will have a little bit more value, and there will be different tiers of access. The larger vision is that most OTC markets are open to institutions and accredited investors. We want to open this up to retail investors as well. Rather than buying a token on Binance for 10 dollars, we want the CapX investor to buy it on the CapX exchange at a discount of $4 because it’s locked for a certain period of time.

All of our revenue streams, also future ones like when we enable lending on these assets, will accrue value and we will assign that value back into the token. The DAO will completely manage our token. Our DAO will take every single decision that will be taken on-chain. We are 100% on-chain decentralized. The CapX token is essentially a very big part of that ecosystem.

vVv: Will the CapX exchange be limited to tokens launched through your protocol, or will it offer OTC services for other projects?

Hitesh: We are keeping in mind all the principles of decentralization, and that’s why our platform and infrastructure are fully compostable. Even the wrapped tokens issued on our infrastructure don’t necessarily have to be traded on the CapX exchange. They can exit our ecosystem and vice versa. Thus, our exchange is not limited to assets issued through CapX. 

vVv: Which blockchain will you launch your protocol, and how is it structured?

Hitesh: We want to build our core infrastructure on the Polygon ecosystem but extend our services to all EVM chains. We will go live on the Polygon blockchain because it gives us a lot of scalabilities, and many EVM-based projects are interoperable with Polygon. At the same time, we are also working on our Polygon Supernet, a scalable Layer2. We will use this for dApps with high frequencies or those with a high number of transactions to optimize both the cost and the security of the applications. We will be interoperable and multi-chain, allowing us to offer our services to almost all the EVM chains like BNB, Avalanche, and Ethereum. Later we will also offer services to other chains and ecosystems like Cosmos.

vVv: Is this similar to liquid Dot in the Parachain Auctions?

Hitesh: Not really, the Parachain Auctions are primarily about onboarding more parachains into the Polkadot ecosystem. The winners of those auctions are the ones who get to make their own parachain like MoonBeam. Polygon Supernet is different because there are no auctions, and there are no mechanisms for onboarding limited numbers of chains or assets. There is no concept of an auction in general when it comes to building a Supernet on Polygon.

vVv: Do you already have some projects that signed up for your services?

Hitesh: Yes, we have some very exciting projects lined up. Right now, we have around 40+ projects that will be coming to CapX very soon. In March, we will be opening the product to build communities on top of it. We will have a lot of projects and communities who will start using our service, and when the market gets better and these projects launch their tokens, that will happen through the CapX exchange to allow the use of our vesting functionalities.

vVv: Regarding community building, which services do you offer to newly founded projects?

Hitesh: We offer different community-building services such as managing your Telegram, hosting AMAs, and marketing your product. We feel like a lot of that comes second. If the project ends up issuing tokens to incentivize the community, a lot of these things will come into place. I’ve been in the industry for five years and spoke to many founders with this common experience of building a community a year before launch. But no one in that community would stay because they are waiting for the token the launch and will only come back when it is launched. Many founders and projects essentially miss out on that time. With CapX, we would like to solve these fundamental problems. This IOU token solves one aspect of that. In our case, we didn’t do any marketing and got 115,000 users in four weeks, which is a respectable number for this industry. When we are solving this fundamental problem, a lot of these other things will get aligned as well. 

vVv: What is your roadmap for CapX business development?

Hitesh: On the business development side, there are two verticals that we have to take care of. First, having a constant onboarding flow for many new and upcoming projects, speaking with them in the very early stages, understanding what they’re building, and advising and working with them in terms of helping them distribute their tokens. For that part, we have partnered with a lot of accelerators, incubators, and investors around the world to get information on these new and upcoming projects. At the same time, we also run a tokenomics cohort. We have around 25 projects in that cohort whom we educate on tokenomics. I have some experience as a founder in launching a token, but that doesn’t necessarily mean we know everything. But we try our best to cover many aspects, and we bring a lot of industry experts to the table to help these founders. Many of these things help in terms of the credibility of CapX and help build out that initial trust we have with many of these projects. We have a very good pipeline where many of these early projects are coming in. 

The second important thing for CapX is building relationships with the liquidity endpoints. By that, I mean, for example OTCs and other ventures who have access to capital. These people have access to both sides of the equation where you have people who want to sell tokens in the secondary market and people who want to buy them. For this, we have been talking to a lot of these OTCs and other institutions worldwide. We have a very strong business development team, and the idea is to keep talking to these people and educating them on the services CapX offers. We are partnered with a lot of these institutions and will keep building these relationships. That’s a very long-term game for us.

vVv: Since the order book is on-chain and the transactions are peer-to-peer, does that eliminate the need for liquidity providers? Or are LPs still used in the CapX exchange design?

Hitesh: We think that AMMs (Automated Market Makers) are very synthetic ways of price discovery. For many long-tail assets, it’s generally the project providing liquidity or the people who have been incentivized with crazy APRs. Generally, if you provide liquidity to an AMM, you’re on the bad side of the trade. While an unlocked liquid token might need a lot of liquidity to have active trading around it, we feel that a lot of these secondary market tokens don’t necessarily have to be traded every day. It could be where a token was sold to investor A at 10 cents. Then after six months of holding it, he sold it to investor B for 30 cents, and after another three months, it got sold to investor C for 90 cents. In that case, we won’t see a lot of crazy volumes, and there shouldn’t necessarily be a lot of liquidity provision. It’s very peer-to-peer based, and that’s good for certain projects where you will see sell orders getting paid very soon. But there also are projects who aren’t doing that good and don’t have a lot of demand. For those projects, you might not be able to find liquidity for those assets. It’s our job to push the teams to find people who would like to invest. For the secondary market, we feel we shouldn’t be having this synthetic way of price discovery as there is no other way to incentivize liquidity providers. We are sticking to the basics of how everything is done on secondary markets, and that’s order book based.

vVv: CapX was selected for the Coinlist seed batch, and we are familiar with this process as one of our other investments, Nillion, was also chosen. How did you enter this and what is the process?

Hitesh: It was a very extensive process. I contacted Coinlist about five months ago, and the team advised me to apply for the seed batch. Many projects apply for this program, but they are very selective about it. Generally, they choose five to six projects. We applied, then underwent a long process of due diligence, both in terms of how we have been doing things and planning the future. In the end, they liked what we are doing and selected us. It’s great to be selected and gives us a lot of credibility in the space. Especially when we are trying to innovate and build something new. 99% of the projects in this space are copy-pasting, and there are in the realm of 600 AMMs. We are trying to do something fundamentally different, and having this stamp of approval from one of the largest names in the world is very helpful. Ever since we got selected, the outlook around CapX and how people perceive CapX has changed a lot. We are definitely pushing boundaries, and we will continue to push these as we evolve and grow.

We are definitely pushing boundaries, and we will continue to push these as we evolve and grow.

Watch the Youtube video below for the full CapX AMA.

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