Original title: Exploring the unicorn of the crypto market from the long-term value mission of IOSG
Today is the annual gathering of old friends, the atmosphere is very relaxed. Today is also a day to hand in transcripts. In the past year, the entire crypto economy has experienced ups and downs, but Ventures pursues value investment, adheres to value investment, pursues long-termism, and has always been friends with time. Here, as an institutional investor, I will share with you how to find a universal investment value in the changing decentralized economic market from our perspective.
First, I will introduce our investment style and philosophy. IOSG Ventures is an early encryption fund driven by research and community. Our encryption fund mainly revolves around the re-innovation of the encryption economy driven by the combination of finance and open source code, focusing on the entire Web3.0 infrastructure, to the entire open DeFi Finance, and then cross-chain.
There are three very key points here: seeing one’s heart, seeing action, and seeing far. Why do you say that? We hope that in the right cycle and at the right time, we can find the right team to help them build the best products to meet the needs of the market.
We believe that in investment, cycle is very important, and secondly, a good team must make a product that meets market demand, which is also very important.
In the end, how far a team can go depends on whether the founder of the team has leadership, because everyone knows that blockchain projects are open source projects. Open source projects face risks. How can they not be split by the community? Must have very strong community leadership.
Next, I will talk about how to think in three parts: past, present, and future.
Map of DeFi in the past, what are the changes in the past industry? First of all, I am a researchist, and I will show you the changes in the US Nasdaq stock index in the past 30 to 40 years. There have been several fluctuations, including the previous US stock circuit breaker. The Internet bubble reached its peak around 2000, and the subprime mortgage crisis triggered a financial crisis in 2008.
Every bubble will show that the United States is a barometer of the global economic index. It can be seen that every 10-year economic cycle will produce various innovations in biology, technology, medical care, and blockchain. See the earliest 10 From the era of hardware led by IBM to the era of open source software, from 1990 to 1999. In the software open source era, companies such as Microsoft, Apple, and Google have emerged; 2000-2008, this is an Internet era. In this Internet era, a large number of open source and open new companies, including Twitter, Airbnb, etc., have been produced. By 2008 After entering the wave of mobile Internet in the next year, mobile Internet saw the rise of WeChat and today’s headlines, and many giants have risen.
It can be seen that the entire Nasdaq index has a lag effect. For example, Airbnb, Uber, and Spotify, which were listed in 2018 and 2019, were all established in 2008. In 2008, Apple and Microsoft were all established in 98. The company established in 1998, the best performing stock market in 1998 was IBM. In terms of cycles, it appeared in 2009. Recently, PayPal opened more than 300 million users who were able to buy bitcoins. Square bought 50 million bitcoins. All the smartest Wall Street and Silicon Valley have poured into the crypto economy. Circle, what kind of cycle can be predicted in the future Web3.0 era, 10 years have passed from 2009 to 2019, and what kind of projects will guide the new smart contract or the new Internet era in the next 10 years? We will wait and see.
In addition, it is very interesting to talk about the infrastructure of open finance. We used to tell a story called “software swallows the whole world”. Now it is different. Blockchain is eating up the financial world. Finance is the world’s largest industry. Why do you say that? Each country’s GDP finance accounts for a very high proportion, and most of the financial products are currently trapped in very outdated technology. However, we have seen that DeFi open finance and decentralized finance have taken 3 years. It took 50 or 80 years of traditional finance to level it out in 3 years.
It can be seen that trading units, derivatives, lending, transactions and various infrastructure and modular components in DeFi are rapidly emerging and changing. We can see that the entire DeFi finance is from the outside to the inside, from the traditional finance Introducing to decentralized finance, this innovation will bring a very big outlet.
Next, we will talk about what we are doing and how we will probably do it.
First of all, IOSG Ventures was established in 2017. We invested a lot of projects in the DeFi field. The earliest investment projects were MakerDAO and DDEX in 2017. From that time on, DeFi was still very early in the blockchain world, but from 2019-2020 For more than a year, I studied the large and small DeFi projects on the market. At this time, we handed in a report card, covering everything from the entire Ethereum infrastructure to the protocol layer to the application layer to middleware.
To give a few examples, why invest in these projects, including, 1inch is a master of a decentralized trading platform that can aggregate all transaction data, tBTC is the most important bridge connecting Ethereum and Bitcoin, which can bring 2,000 Bitcoins The market value of billions of dollars, the future of DeFi, UMA builds a universal smart contract template, anyone can issue a synthetic asset of their own through UMA, Gelato, many people are liquidated when Bitcoin crashes, Gelato What it does is to help users automatically liquidate their assets.
Next, I will elaborate on how to look at each track and how to study it.
Part 1: Web 3.0 & DeFi
Last year we drew a Web3.0 technology stack map, from its lowest level infrastructure to Layer 1 to middleware, middleware is divided into on-chain and off-chain, to the application layer, and Open Finance in the application layer. Why talk about the technology stack of Web3.0? In the Web 3.0 era, users will have more control over their identity and data, and users will share data portrait rights with BAT. High replacement costs, strong network effects and user experience are the barriers of Internet giants, which will not be subverted in the short term, but the pursuit of the rights of users to control identity and data will eventually start a prairie fire.
When the technology cycle of Web3.0 comes, distributed systems, cryptography, and smart contracts are penetrating into the lives of the people as never before, and leading the industry to a frenzy period of bubbles. The inflow of investment capital (speculative value) is greater than the inflow of production capital (practical). Value) is fast, asset prices continue to expand to the inevitable “collapse.” However, industry-related infrastructure technology will still determine itself as the new default initial value of the industry, and platforms that continue to derive and define applications for subdivided industries will appear in this cycle.
The application form of Web3.0 will transform from product-led users to a form of user-centric open source products. The Web3.0 technology stack constitutes the overall skeleton of the blockchain project, and Token is the flesh and blood that drives the entire ecological operation. The Token Economy business model has also been gestated. By changing the incentive model and value distribution system, users are promoted Contribute content and data in the app.
See the opportunity of middleware in Web3.0. Middleware is a very important connector from the entire infrastructure to the application layer. Such a connector can make the entire blockchain usable and greatly improve the user’s acceptability. There is a large amount of interactivity and composability potential between the protocols and protocols of the middleware financial middle layer, which can allow some derivative application scenarios to appear. Most of the DeFi protocol projects are playing more and more roles in the open financial ecosystem. Sinking, combinable and modular. Their greatest value in the future is to provide the basic framework and basic business logic for many top-level applications.
Next, let’s talk about DeFi. We drew a DeFi map in March of this year, and in June it was circulated in many domestic public accounts. We draw this map with a very simple logic. One of the two logics is bottom-up. Ethereum has made a large infrastructure since
Viewed from left to right, there are interactive, combinable, and modular splicing between the agreement and the agreement, so this splicing gives DeFi a very high imagination.
Part 2: DEX & AMM
Next, I will talk about the next point, the recently very popular decentralized trading platform and AMM. According to the data in September, the transaction volume of Uniswap, which represents the decentralized platform, surpassed Coinbase. Such a transaction volume represents a big trend. The decentralized trading platform gradually swallows the transaction volume of the centralized platform. We see $57 billion The trading volume of is in the centralized platform, the spot is $3.7 trillion, and the derivatives market is $6.5 trillion, so you can see that its market is very large in the decentralized contract trading platform. We believe that if we want to maintain this momentum, DEX needs to make improvements.
Secondly, we also drew the entire AMM transaction map. You can see the earliest transaction model of the order book led by IDEX, to the automated transaction AMM model with Uniswap Balancer as the transaction, to DODO with an active AMM model, to an Aggregator aggregation Trading platform, there is an opportunity for AMM.
The efficiency of an AMM using an oracle like DODO is several times higher than the basic AMM type. We are optimistic about innovating in the direction of the oracle, such as allowing professional traders to influence AMM to make it smarter and more accurate. Hedging the risks of liquidity providers – Liquidity providers must fully understand the risks and potential losses in the market making process. We expect to see hedging products that can help limited partners protect their positions. We expect more use cases for AMM. One potential area is the creation of AMMs for derivatives trading with time decay.
For the derivatives market, we believe that improvements in blockchain technology will ultimately enable decentralized exchanges to win the derivatives market. By eliminating intermediaries, we expect decentralized exchanges to significantly reduce costs and enable traders to do Market merchants became the biggest beneficiaries. Recently, everyone has heard that the CTO of BitMEX has been sued by the US Securities Regulatory Commission. They have also seen that the UK and Europe are discussing the regulation of the derivatives market. Derivatives may be the next outlet.
Part 3:
Next, let’s talk about NFT. NFT is very popular now. Today, SuperRare has an exhibition at our Summit. In the past two years, we have witnessed the growth of the NFT field. From the underlying token protocol and public chain to development platforms, applications, and trading platforms, the NFT has now covered multiple levels. It is worth noting that the combination of DeFi’s pledge, lending, insurance and other attributes will become the next explosive point for NFT.
Nowadays, NFT is not only limited to basic applications such as games and collectibles, but its unique social and artistic creation attributes are gradually emerging. In the past, people combined NFT with games and collectibles because it can carry one of the unique values. But we believe that scarcity is only the surface layer of NFT. We dig deep into the deep attributes of NFTs, and pay particular attention to new NFTs such as DeFi and social tokens. Today, the total historical transaction volume of NFT is 13 million U.S. dollars. It can be predicted that with the support of DeFi attributes, the volume of NFT will exceed 100 million U.S. dollars in the near future.
Part 4: Layer 2
We generalized and summarized the expansion plan of Ethereum. It can be roughly divided into three categories: transaction package roll up, state channel Plasma, and other interoperable public chain solutions, including side chains. The most mainstream are ZK Rollup and Optimistic Rollup. The main difference between them is that the former uses zero-knowledge proof, and the latter uses fraud proof zkRollup (this mainly refers to zkSNARK, zkPlonk, etc.). The support for universal smart contracts is poor, so it is only suitable for token transfer in the short term. , Which is one of the reasons why it is very suitable for centralized exchanges or payment transfers, while Optimistic Rollup supports the implementation of arbitrary smart contract logic, so it is very suitable for complex DeFi applications. The most important difference between the Rollup case and the Plasma case is that the former puts the transaction data on the chain, while Plasma just puts the off-chain data on the Ethereum chain for a notarization, which will trigger a data availability This makes the user experience of Plasma very bad, and there is no way to truly do without trust.
The expansion projects of transaction packaging are further subdivided according to their respective verification methods and whether the original transaction data is on the chain. The most popular technical routes for Defi projects are Optimistic Rollup, because it is easy and simple to run smart contracts; and Zk Rollup, because of its powerful performance and transactions can be determined quickly.
Both state channels and public chains/side chains have their own suitable scenarios. Dapps with higher requirements for latency tend to choose state channels, while many public chains/side chains provide powerful performance and very low transaction costs.
We foresee that in the future, most Defi ecosystems will run on Rollup as the underlying technology solutions, which will produce powerful network effects and monopolistic top players. However, the Dapp market is far more than Defi, and there will be enough space to form a long tail market for expansion plans.
We believe that the second-tier expansion plan is not just a temporary solution before the arrival of ETH2.0, but can make Ethereum suitable for more use cases, and the scale of absorption is much larger than today’s users.
We believe that the next 6-12 months will be a critical time window for the exponential growth of the second-tier expansion technology. We are at the bottom of “hockey stick growth”, and anyone who cares about Ethereum should be excited about this.
Part 5: Traditional Finance
Next, I will talk about traditional finance.
I just talked about what problems traditional finance can solve and what problems it can’t solve. Everyone knows that the DeFi protocol is still efficient and still faces poor infrastructure. What is most lacking now is users. In addition to traditional finance without encrypted users, there are also some very usable traditional assets that can intervene in the DeFi field. We have studied several companies, Centrifuge and Persistence, all of which use traditional supply chain finance assets to connect to the DeFi chain. In addition, Teller Finance allows users in the entire encrypted circle to use credit data, and through the credit data of the traditional world, they can complete lending behavior in DeFi.
Therefore, we said that finance is an outward-inward innovation. DeFi must be driven by centralized finance, and the users of centralized finance are still very high-quality users in this industry. Therefore, many traditional financial information islands have arrived in DeFi. Become more composable and gatherable.
Part 6: Insurance
Next, insurance is also a hot topic. The concept of decentralized insurance is broad, covering the following four categories: 1. Smart contract insurance: such as Nexus Mutual’s guarantee covers the loss caused by code bugs; 2. Real-world risks: such as Arbol provides compensation for insufficient rainfall; 3. . Financial product risk: For example, Opyn uses options to provide a hedge for the price changes of Ethereum; 4. Event risk: Betting on football matches and even presidential elections through prediction markets such as Augur.
Defi is booming, but reliable insurance products are still missing. The traditional insurance model cannot guarantee the risks of Dapp and Defi. There are three risks that require Defi’s original insurance products to cover: 1. Oracle risk: For example, Synthetix had a KRW price error; 2. Smart contract risk: For example, bZx was stolen; 3. Price risk: For example, the 312 Black Swan event.
We predict that the Defi insurance market will reach US$1.4-4.5 billion in 2022 and US$2.5- 15.2 billion in 2025. The current market TVL (TVL: Total Value Locked) uses 10 billion. Assuming that 10% of TVL buys insurance and the premium is 5% per year, the market size is now 52 million and the premium income is 2.5 million.
We are optimistic about the future of Defi insurance in two directions: insurance aggregators, such as 1inch for AMM’s aggregation products; reinsurance projects, to provide cover for systemic risks in the field.
Part 7: BTC-Ethereum Bridge
Next, I will talk about the transfer bridge of Bitcoin. It is very gratifying to see that Bitcoin has risen from hundreds or thousands to tens of thousands in the past six months.
The market value of DeFi has reached 15 billion U.S. dollars (occupying 1/3 of the market value of Ethereum), which shows that the assets that Ethereum itself can contribute to Defi are very limited. The new growth will definitely be on a larger platform. This market needs We break the barriers of different blockchains and create a larger financial market. We see that bringing Bitcoin into Defi is likely to be an opportunity for Defi to maintain sustainable growth. If there is a project that can introduce part of Bitcoin into Defi, then it will definitely be a unicorn that will change the entire Defi ecosystem.
At present, most Bitcoin cross-chain bridges are centralized, which violates the most important part of decentralized finance, which is decentralization. Therefore, we believe that decentralized Bitcoin cross-chain will be a must Road, this is why we invested in tBTC. In the future, we hope to see more decentralized cross-chain solutions. These projects need to be able to solve the common capital inefficiency and inefficiency problems of decentralization through technological improvement while ensuring the security of assets. We believe In the future, decentralized multi-asset cross-chain will be an investment direction leading the development of the industry.
Part 8: Wallet
As the entrance of traffic, it has the effect of helping the blockchain to get out of the circle and attract more users. The mainstream application of blockchain is inseparable from the mature development of front-end wallets. We see that the current wallet projects have been developing to the mobile terminal. Among the mobile wallet projects, many projects have developed smart contract wallets using the editability of smart contracts. These wallets allow users to log in, use, and restore through web 2.0. , Manage your own wallet, and the use of smart contracts is a key innovation for the wallet project to move towards Xiaobai users.
We believe that the security of assets is still the most important consideration in the wallet track. In terms of attracting users, only relying on capital operation to compensate transaction fees is definitely not a long-term drainage method. We believe that simple and easy-to-use user interfaces are now highly competitive The wallet market has become the basis for success, but the most important thing is to create a one-click asset management platform that is highly integrated with the defi project. Users can complete all defi transactions without leaving this wallet application and learn about all DeFi projects.
Wallet is still a track that IOSG pays great attention to at the level of user aggregation. We look forward to supporting excellent teams to create a convenient and easy-to-use wallet product while ensuring asset security.
Finally, let’s talk about how we are going in this industry in the future and what we have expectations.
In the past three or four years, we have invested in 60 or 70 companies in the entire crypto world, including many star unicorn projects. In 2017, we looked at all the platform infrastructures, including NEAR Protocol, Avalanche, Oasis Labs, adhering to the pyramid investment logic, and building from the bottom up. But in this era, only money is not enough for investment funds. To imagine what value it can bring to partners, we have been participating in the governance of the community and joined the Ethereum Enterprise Alliance to help them provide various suggestions. Provide a variety of suggestions to provide more value than investment.
Therefore, I think that in the past three years, our performance has gained the trust of the market that is obvious to all, and LP also trusts us in particular. We will continue to implement investment logic and pursue investment values in the next 5 years, and I am very grateful to help us along the way My old friends, because of your perseverance, let us realize the power of perseverance. Whenever we set off, there must be waiting. We must live up to our expectations and carry forward the past. We will also launch our Fund2 soon.
I believe that in the age of the growth of all things, let us walk hand in hand regardless of the problem.
thank you all.
