This episode offers a deep dive into the institutional adoption of crypto, particularly on Solana, through the lens of a TradFi veteran's transition and the evolving role of infrastructure providers like Jito.
1️⃣ Episode Introduction
This episode unpacks the journey of a Jane Street veteran into the heart of Solana's infrastructure with Jito, revealing critical insights into institutional crypto adoption, yield generation, and the maturation of market structures.
2️⃣ Structured and Narrative Organization
From TradFi to Solana's Core: Thomas Uhm's Path to Jito
- Jack Cuban, host of Lightspeed, introduces Thomas Uhm, the new Chief Commercial Officer at the Jito Foundation, who previously had a leading role in digital assets at TradFi giant Jane Street. Thomas shares that after scaling back his digital asset work at Jane Street in Q2 2023 due to US regulatory shifts and subsequently working on exotic options, he re-engaged with crypto by listening to podcasts like Lightspeed.
- A Blockworks survey highlighting Jito as a top project Solana founders wanted to work for brought the company to Thomas's attention. He humorously notes, "you guys are the ones who kind of brought Jito to my consciousness, you know, and one thing led to another and now I'm here."
- This serendipitous discovery, combined with a later introduction to Rebecca Reddig at Jito, solidified his move, marking a full-circle moment.
Jito's Institutional Focus and Diverse Business Lines
- Thomas Uhm explains his role at Jito involves helping the DeFi-native team engage with institutional players, translating Jito's offerings for a broader financial audience. Jito's business lines include its block machine, staking services, liquid staking (where users stake tokens and receive a tradable token representing their staked position and accruing rewards), and considerations around restaking.
- When asked what's most attractive to institutional types among Jito's offerings, Thomas prefaces that institutional approaches vary significantly.
Segmenting Institutional Crypto Interest
- Thomas Uhm, drawing on his institutional background, outlines key differentiators for institutional crypto adoption, such as domicile (e.g., a Dubai sovereign wealth fund faces different hurdles than a US investment advisor), fiduciary responsibility, reliance on intermediaries, and the degree of centralization in decision-making. He notes, "if you have a highly centralized decision-making structure...it is easier to kind of make the decision to go in and force like all of the changes that need to be done organizationally to adopt crypto."
- He segments institutions to tailor Jito's value proposition:
- Buy-side: End-users and investors like asset managers, long-only funds, RIAs, and ETF providers.
- Sell-side: Distribution and service providers such as banks, prime brokers, retail trading platforms, and infrastructure providers.
- Market Architecture Maintainers: Entities like trading firms, custodians, and clearing houses, often indifferent to specific investment theses but crucial for market function.
- Understanding the distinct needs of these segments is vital for Jito to articulate how its products address their specific requirements.
Jito's Value Proposition: Enhancing Solana Network Efficiency
- Thomas Uhm positions Jito as an infrastructure provider, analogous to his former firm Jane Street. Jane Street provided liquidity, risk warehousing, and price discovery, contributing to "fair, orderly, and efficient markets." Jito similarly enhances the Solana network.
- For users, Jito improves network efficiency by reducing spam (unwanted or low-value transactions that can congest a high-throughput blockchain), leading to a more stable experience, especially during market stress.
- For validators, Jito offers additional revenue streams and more equitable reward distribution, incentivizing high-quality network participants.
- For the broader Solana ecosystem, a more stable network allows for better planning and development of applications and services. This stability is crucial for institutions considering capital allocations, as reliable entry and exit points are paramount.
Value Capture: How Jito's Infrastructure Aims to Build a Sustainable Business
- Jack Cuban questions how Jito translates its valuable infrastructure into revenue. Thomas Uhm references a Lightspeed interview with Shayan Zadeh of Multicoin Capital that delved into Jito's value proposition and token value. He distinguishes pure market making (capturing the bid-ask spread, which is profitable but doesn't scale linearly) from the broader strategies of trading firms like Jane Street, which expand their risk profiles to increase returns.
- This segues into a discussion on yield in crypto. While retail investors might chase the highest topline yield, institutions scrutinize its source, wary of yields derived from increased counterparty or concentration risk.
- JitoSOL, Jito's liquid staking token, is designed for scalability with a flatter yield decay curve. Its autonomous, smart contract-based delegation to scored validators (mitigating "efforts of others" concerns under the Howey Test) and lack of direct counterparty risk to Jito itself are key differentiators. Thomas states, "if Jito goes away like the smart contract is still running like you can still mint and burn these things and collect yield in a you know in an autonomous fashion."
Investment Vehicles: ETFs vs. The MicroStrategy Model on Solana
- The conversation touches on Thomas Uhm's experience with ETFs at Jane Street and Jito's potential role in future Solana-based ETFs. Jack Cuban contrasts this with the "MicroStrategy play," where companies hold crypto in their treasury, offering equity as a proxy for crypto exposure.
- Thomas views the MicroStrategy-like leveraged Solana plays as companies raising debt to buy Solana, offering equity holders increasing beta to Solana relative to financing rates—essentially a levered bet.
- ETFs (Exchange Traded Funds), in contrast, offer more investor protections, representing a claim on the underlying asset (e.g., Solana) that typically cannot fall below the asset's value. Different ETF structures (grantor trusts, '40 Act funds, Exchange Traded Products/Notes) exist, each with specific characteristics.
- The risk profiles are starkly different: equity in a leveraged treasury company is junior to debt and can go to zero under various scenarios beyond the underlying crypto's price falling to zero.
Unpacking Genuine Institutional Interest in Solana
- Thomas Uhm emphasizes the need for genuine end-investor interest in Solana, driven by a clear investment thesis—whether as a "decentralized NASDAQ" or an optimal smart contract platform. Jito engages with various institutional segments:
- Buy-side: Discussions focus on staking benefits and the features of JitoSOL, such as its continuously compounded total return nature and potential for tax-efficient, regulatory-compliant exposure.
- Sell-side: Interest lies in yield enhancement and the capital efficiency of using Liquid Staking Tokens (LSTs) like JitoSOL as collateral. Packaging Solana-based yield into ETFs, structured products, and QIS (Quantitative Investment Strategies)—strategies designed by banks for institutional clients—is a key area.
- Trading Firms: These entities are interested in the unique trading mechanics JitoSOL offers, such as its daily drift, the interplay of entitlement accrual versus epoch-based reward payouts, and the potential for enhanced basis trades (profiting from price differences between a spot asset and its derivative) with an "embedded call on future network activity."
Thomas Uhm's Evolving Perspective on Solana
- Thomas Uhm candidly states his initial attraction was to the people at Jito, rather than a pre-existing deep conviction in Solana, as Jane Street maintained a product and blockchain-agnostic stance. His Solana thesis is still developing.
- He finds Solana's high throughput, low transaction costs, and active development (by the core team and ecosystem projects) compelling for institutional adoption. He notes, "the core ethos of Solana is one that is very attractive to me."
- Upcoming upgrades like Firedancer and improvements aimed at reducing block times are expected to enhance network resistance and determinism, which is a critical institutional need. Blockchains' probabilistic nature contrasts with institutions' preference for deterministic systems.
- Priority fees on Solana (and Jito's role in this via MEV, or Maximal Extractable Value, though MEV isn't explicitly named) are seen as a way users pay for increased determinism, similar to how TradFi seeks to reduce transaction failures through regulations like CSDR (Central Securities Depository Regulation).
Crypto Market Making: Incentives, Sustainability, and Jito's Role
- The discussion shifts to crypto market making. Thomas Uhm notes Jito is more engaged with crypto market makers than Jane Street was, which avoided paid-for token market making. The crucial factor is understanding incentives.
- Short-term incentives can bootstrap adoption, but if the underlying system isn't robust, it can falter when incentives are removed. Jito focuses on building robust system architecture.
- If market makers are primarily compensated via token unlocks rather than by "making sensible markets," the incentives may not align with providing genuinely valuable, sustainable liquidity. Thomas observes, "it feels like, you know, a lot of these arrangements are actually not incentivizing um like valuable market making services."
- The goal is a system with embedded, long-term sustainable incentives. The current crypto market making landscape, in many cases, appears to have misaligned incentives.
The Evolving Landscape of Crypto Market Making
- Thomas Uhm acknowledges that pure market making in crypto can be a tough business, often requiring supplementary revenue streams. While crypto innovates in areas like expanded trading hours and intraday collateral flexibility, it's also relearning lessons from TradFi regarding sustainable market structures.
- A healthy market has makers economically incentivized by genuine liquidity demand. Paying market makers in the absence of such demand effectively means underwriting their cost of capital, which can be high for crypto-native firms.
- The current oversupply of tokens relative to natural demand might necessitate this underwriting. The question for investors and researchers is whether these arrangements are truly bootstrapping liquidity for viable projects or are merely an "expensive way to get listed on an exchange."
- For products like JitoSOL, a first-order derivative of Solana, Thomas believes the economic incentives for market makers are clearer due to inherent trading edges and utility as yield-bearing collateral. However, he anticipates continued margin compression in the broader market-making business.
3️⃣ Reflective and Strategic Conclusion
This discussion underscores the critical role of robust infrastructure and aligned incentives in attracting sustainable institutional capital to crypto. Investors and researchers should scrutinize the source of yield and the long-term viability of market-making arrangements, favoring projects that build foundational, systemic value.
