Can DeFi be revived?

Original title: "Some thoughts about the current market, stablecoins, venture capital, and angel investing"

Original author: Route 2 Fi

Original translation: Ladyfinger, BlockBeats

Editor's note:

In this article, we follow the perspective of a senior cryptocurrency market participant and KOL, and gain an in-depth understanding of his analysis of current market trends, reflections on his personal investment philosophy, and deep insights into the field of angel investment. Through his writing, we not only gain insights into the dynamics of the cryptocurrency market, but also appreciate how an investor constantly learns, adapts, and seizes opportunities in a rapidly changing financial environment. In addition, the article also provides basic knowledge of venture capital structures, providing readers with a comprehensive perspective to understand this multidimensional and dynamic industry.

Introduction

It’s been a while since I last opened a document, and I always have a hard time knowing where to start when I see a blank page. However, I do miss the feeling of being able to write freely. Unfortunately, there aren’t many such opportunities these days. So, I set myself a time limit of one hour, and in these sixty minutes, I let my thoughts flow, let my pen bloom, and finally turn my thoughts into words. No Internet noise, no external interference, just a blank piece of paper and the passage of time (in fact, the title you see now was decided by me at the last minute. At first, even I was not sure what I would write).

Current Market

The recent cryptocurrency market is quite sluggish, with altcoins falling continuously in the past three months, and Bitcoin has been stagnant. I expect this downturn to continue through the summer, with a potential recovery in August with the launch of an Ethereum ETF, the run-up to the presidential election, and potential rate cuts. However, this is just my personal opinion and is for reference only.

My activity has been relatively limited recently. Other than holding ETH, some yield farming through Pendle and Gearbox, and signing numerous angel investment agreements, I haven't been involved in much else, to be honest. Trading has become extremely difficult, and almost all airdropped projects in the market have been sold off, with very few exceptions, such as ENA, which is up about 50% since the TGE. We are in a completely new market environment. I have discussed the issue of low circulation, high FDV tokens in previous briefings.

Compared to 2021 and 2022, tokens launched in the past year saw little to no price action after their TGEs. As Cobie explains in his latest Substack article, the price action for these tokens actually occurred during the private phase. Therefore, unless you are a project founder, venture capitalist, angel investor, trader with inside connections, or KOL, you will find this bull run to be extremely difficult. Of course, there are some exceptions, such as October 2023 to March 2024, which was a good period overall, and if you participated in some emerging meme coins early, you can also make money. But other than that, most people will probably agree that this is one of the toughest bull runs they have experienced.

Interestingly, even the veteran OGs seem to have failed to fully utilize their advantages. Take Hsaka for example. Even though he is a key player in the market, we seem to only witness his presence when the market is easy to operate. Ansem is in a similar situation and seems to be a little lost. However, should we really blame him? Ultimately, we are responsible for what we buy, when we sell, and what trades we make. Although KOLs can create FOMO, at the end of the day, it is still us who decide how to manage our funds.

In 2023 and early 2024, I spent most of my time immersed in various trading interfaces, whether it was the PvP terminal, Tweetdeck/X Pro, or the alpha chat group on Telegram. However, recently, I have taken a more relaxed attitude towards the market. This is mainly because other trading directions seem unsustainable except for short-term trading (the rumor about ETH ETF a few weeks ago is an exception). This situation reminds me of the post-Terra collapse in May 2022, when the market was silent and we had to return to real life. Although I see some similarities with that time, I still think that DeFi is ushering in a new renaissance.

While I look forward to the return of traditional DeFi, Farming points and airdrop hunting seem to have evolved into a new form of DeFi. For example, the Ethena project allows you to lock USDe three months in advance and then earn returns in subsequent airdrops. Few people at the time foresaw that Ethena would quickly become so popular. I wish I had better grasped such opportunities at the time, and there is a new stablecoin protocol called Usual that brings me similar expectations. They are currently operating in a private phase and also offer a high APR. The key is whether they can accurately grasp the market timing like Ethena (their airdrop is scheduled for October).

Stablecoins

I still believe that this is the most critical and practical use case in the cryptocurrency space. It provides the possibility to store funds in personal wallets without being restricted by the network and send funds to any corner of the world in an instant. At present, there are some stablecoins with yields on the market, such as Ethena, Open Eden, Usual, etc. Although the stability and reliability of the yields of these stablecoins are still to be discussed, we have clearly surpassed the UST period of Terra. Take Open Eden as an example, it is a stablecoin protocol backed by government bonds, which can bring an annualized net return of about 5%. Recall that at the peak of the last bull market, Terra UST had a market value of 20 billion US dollars, while Ethena’s current market value is only 3 billion US dollars. I am very excited to see how big these stablecoins will grow, or whether there are other protocols that can challenge their position.

I have a dream that after this bull run ends (and maybe at the bottom of the next bear run), we will have a stablecoin that is as safe as USDT/USDC and provides at least 5% sustainable yield. This market undoubtedly has huge potential, just think about Wall Street and the bonds held by those investors. The first step is to ensure the absolute security of this stablecoin, and hopefully we can get the support of financial giants like Larry Fink and Blackrock.

In this bull run, I am full of expectations for EigenLayer, Pendle, Gearbox, Hivemapper, and sports betting and prediction market protocols. I miss the high-yield mining projects in the last bull run, such as TOMB on the Fantom chain, which is full of speculation and high risk. Although there are still some similar speculative projects in the market, their TVL is not high and their popularity is limited.

In general, I prefer to support innovative products, as I doubt the necessity of the numerous forked versions of Pendle and EigenLayer. At the same time, I am also seriously considering starting my own project, although this is just a preliminary idea. If you are a developer and are interested in this, please feel free to contact me.

Due to the recent downturn in the market, I have been able to spare more time to immerse myself in reading. Let me share some of the books I am reading recently.

The books I read mainly cover areas such as philosophy, economics, and life hacks. In addition, since I have gradually become involved in venture capital over the past year and a half, I plan to read books in this category.

Some basic knowledge about venture capital

It is important to understand several core terms related to the venture fund structure when making a pitch to investors.

Please see the chart below, and we will discuss these terms in detail later in the text.

Venture funds are a sum of money specifically used to invest in start-ups, commonly known as "dry powder", which is the main investment vehicle. Each fund is managed as a limited partnership in accordance with the partnership agreement for a period of approximately 7 to 10 years.

The fund’s singular goal during this period is to make a profit, which it does in two ways:

· A performance fee on the fund’s returns, which is usually around 20%.

· A management fee, which is usually around 2%.

This explains why you’ve heard of the 2/20 model.

The management company, or venture capital firm, is responsible for the day-to-day operations of the venture fund. It is different from the venture fund itself, which is a business entity established by the firm’s partners.

The management company uses the management fees it receives to cover the costs of running the firm, including rent, employee salaries, etc. These management fees are used to support the deployment and growth of the fund.

The venture capital manager only gets a performance fee after the limited partners have made a return.

GP, or general partner, is a core member of the management company and is responsible for leading and supervising the operation of the venture fund. GP may be a senior partner of a large venture capital firm or an independent individual investor.

GP's responsibilities include raising and operating venture funds, making investment decisions, evaluating potential investment opportunities, recruiting teams on behalf of the fund, assisting portfolio companies in achieving exits, and deciding how to effectively use the funds they manage. In general, the role of GP can be summarized into two key tasks, one is to invest in high-quality companies with potential, and the other is to raise more capital for the fund.

GP's remuneration comes from the fund's performance commission and management fees. For example, if the performance commission ratio is set at 20%, then 20% of the fund's profit will be used as GP's remuneration.

The actual source of funds for venture funds is limited partners (LP), who are the financial pillars behind the funds. LPs usually include the following types of institutional investors:

· University endowment funds

· Pension funds

· Sovereign funds

· Insurance companies

· Foundations

· Family offices

· High net worth individuals

The core assets of venture funds are their portfolio companies, which are start-ups that receive preferred shares in exchange for investments from venture funds. While specific requirements vary by fund, companies that receive venture capital generally need to meet the following criteria: · They should operate in a market with broad potential · Have achieved product-market fit · Have a great product that customers love · Demonstrate strong economics and have the potential to generate significant returns for investors · Here is a list of some of the largest crypto venture capital firms.

Angel Investing

Angel investing generally refers to investing at an earlier stage, before venture capital, and angel investors tend to operate independently and write relatively small checks. This type of investment behavior mainly occurs in the "pre-seed" or "seed" round of a company, that is, when the product or service has not yet taken shape or is in its early stages of development. Although angel investment is riskier because most startups may not be able to develop sustainably, it also provides huge potential returns if the invested companies can successfully grow.

I am passionate about the angel investment field because it is a field where, regardless of background, a person can become an influencer in the field within 1 to 3 years by investing time, effort and continuous action. This field is new and dynamic, and even if you don't have a background in a top university, you can become an expert through continuous trial, error and curiosity.

So how did I get started in angel investing?

To explore this question, let's go back to the beginning of the story. Before getting involved in cryptocurrencies, I was a member of the stock market, focusing on stock trading and improving the quality of life. In January 2019, I created a Twitter account to mainly share these contents. Before Twitter, I also ran a blog discussing investment topics and wrote some press releases (which have now been deleted). In 2021, I quit my 9-to-5 job and devoted myself to the cryptocurrency field full-time a few months later. At first, I just randomly invested in NFTs, DeFi projects, and some niche coins on Binance. But as I continued to share my insights, I started to receive opportunities to participate in transactions. At first, I declined these opportunities due to my lack of experience, but I soon realized that many people who were even less experienced than me were already involved.

This experience made me realize that although I knew very little about cryptocurrencies at first, through learning and practice, I was able to gradually accumulate experience and find my place in this field.

As you all know, I am a KOL, although I don't like this title very much. With 300,000 followers on Twitter and 30,000 subscribers on Substack, many founders of projects will contact me and ask if I am willing to invest in their projects, usually without any strings attached. However, there is an unwritten rule that you should publish some content for the project, which makes perfect sense. The project gets exposure → people start to pay attention → more people buy → the price goes up.

Therefore, I think there are more KOL rounds in this round because many founders feel that VCs don't contribute much. Yes, they do have network resources, but usually don't have a huge audience. KOLs, on the other hand, have a huge audience and usually have solid network resources. Therefore, many VCs have also transformed into semi-KOLs in order to share more benefits. To be honest, I don't blame them.

Basically, I followed my curiosity and dabbled in multiple areas in the Crypto and Web3 space. I wouldn't call myself an expert in any field, but rather a well-rounded person who knows a little bit about a lot of topics. If I don't have an answer myself, I'll use my network resources in the field to find the answer. Many opportunities come from people contacting me after seeing what I wrote or posted. However, I do think I have certain advantages in some areas. In the DeFi space, I am personally most interested in trading DEXs, stablecoin protocols, and revenue narratives, such as EigenLayer, Pendle, Gearbox, Mellow, Symbiotic, etc. I am also fascinated by trading, whether it is on CEX or DEX. My dream is to have a competitor to Binance/Bybit one day, so I also like to work with teams that have this goal. I also have an advantage in marketing, and I know what methods work and what doesn't work as a KOL.

How should I get trading flow?

In the crypto space, it is essential to have specialized niche knowledge or to build a strong personal brand. Ideally, it is best to have both.

Angel investors with a significant personal brand or a large audience base perform well because companies value their support, which not only enhances credibility but also helps promote and distribute products. When reputable individuals stand together with companies, the association itself sends a positive signal and helps spread the word about the company's products or services.

In addition, seeing your name when a founder mentions their list of investors in a pitch is a strong trust indicator in itself. For example, if you see Cobie is also recommending this project, many people may choose to invest without a second thought, even without doing in-depth due diligence. After all, if a project can attract a well-known person like Cobie, it should be a good choice for you as well.

Main factors to look at when deciding to do a deal

When I consider whether to do a deal, timing is undoubtedly a key factor. I need to carefully evaluate the deal conditions, including our current market conditions and market expectations for the next 3 months, 6 months, 12 months, and even 2-3 years. This is especially important considering that the vesting schedule may be long.

I also deeply consider whether the team is developing products with innovation and market fit, and whether these products are sustainable. I explore how they will align with the market narrative and which VCs might be involved. Next, I talk to people in my trusted network to get their perspective, including why certain VC friends are not involved or why they are not investing at a larger scale.

I also consider the competition and assess the current TVL as well as future potential. Additionally, I need to ask myself if the protocol can sustain itself after the incentive program ends or will it be abandoned by the market. These questions are integral to the decision-making process.

I have outlined the role of VC firms and a basic understanding of angel investing. Here are some more in-depth insights from Ben Roy on angel investing:

To wrap up on this topic, I want to share a quote I particularly like from @DCbuild3r’s recent article on angel investing:

“The cumulative effect of social capital is just as powerful as the growth of your financial capital, and perhaps even more impactful. I believe that social capital is a key driver of professional success in any career pursuit, whether it’s sales, technology development, academic research, or philanthropy. It is critical to have a network of well-rounded friends who not only have extensive connections, capital, and new insights, but also the wisdom and ability to spark change. If you make friends with this group of people, you will be able to work together to truly improve the world.”

That’s all for today.

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