Author: Jims Young; Source: Author’s Twitter @JimsYoung_
The primary market has been quiet for too long, and it has been a while since we have seen anything new. However, in theory, the bear market is the time for VCs to enter the market. Based on this judgment, in June, I went to Singapore and discussed the direction in the bear market with many old and new friends. I discovered the consensus and non-consensus in many industries and also gained some insights. After sharing internally, I wrote this article for discussion and also welcome project parties and VC friends to communicate more. Due to space limitations (meaning it’s too long to write:P), this article focuses on the framework, and there will be more observations and judgments on specific sub-tracks in the future if there is time.
1. Consensus: What is generally recognized by everyone
2. Non-consensus: Huge differences are also opportunities
3. Thinking: Non-consensus opportunities glimpsed in consensus
1. Consensus: What is generally recognized by everyone
1.1 Two main investment strategies: 1) The return to the essence of finance 2) Huge opportunities in the application layer
Currently, there are two main investment strategies that are mainstream. One is to return to the original intention of blockchain – the financial approach, investing in RWAs, insurance, payment channels, banking-like projects, derivatives, stablecoins, and so on. In fact, this trend has become apparent since the Wanchain Conference in Hong Kong, but it has been appearing more and more frequently recently. There are two angles to this investment. One is that there is limited innovation within the industry, while the financial sector has already been proven to be a direction that is safe and has cash flow. The other is that the possibility of Mass adoption brought by compliance narratives is increasing, essentially betting on the expected income from future large cash flows entering the market.
The other is to bet on the application layer. More and more funds have begun to focus on the application layer, and even funds that previously focused on infrastructure are experiencing a paradigm shift. There are many reasons for this. One reason I believe is the most important is that there are no major barriers in the technology of the crypto industry itself. When one company’s technology comes out, other competitors can quickly pivot. The core competitive advantage of the chain lies in the ecosystem rather than the technology, and traffic is still the core driver of the industry. After the improvement of infrastructure, the real applications that attract users will eventually emerge, and the real value will also be deposited at this layer. In the end, super applications will choose infrastructure and have the ultimate dominance, as happened on Dydx. (Opportunities in the application layer will be further discussed in future articles.)
1.2 The slowing industry development speed and the actions under tightening liquidity are questions that all VCs must answer
Loose monetary policy is the driving force behind the development of soft technology, and bubbles are the engine for the rise of new industries. Although this statement may sound absolute, it is undeniable that the rapidly changing technology industry in the past few decades has largely benefited from the capital surplus after World War II. For a small market like Crypto, the most obvious example is the emergence of DeFi Summer, which resulted from the liquidity injection by the Federal Reserve. And standing at a time of tightening liquidity, both traditional VCs and Crypto VCs must answer the question of what to do when the waves are gone and how to handle the tide.
1) Regarding investment: The strategy of most funds may be: invest less, if you don’t understand, you don’t have to invest, you can choose to invest or not, but if you decide to invest, you can invest more. If you have enough confidence, you should bet, and in a bear market, you should stock up on food (so entrepreneurs, keep pushing forward, we still have liquidity). In addition, Crypto has started to pay attention to other industries such as AI, chips, and even biomedicine.
2) Regarding post-investment: When the pre-investment work decreases, there is actually more work to be done after the investment. In the Crypto industry, where the first and second levels of relationships are closely connected, more and more funds have put fine operations of projects and assets on their agenda.
2. Non-consensus: Huge differences are also opportunities
2.1 Crypto investment returning to traditional US dollar logic
Crypto, as an emerging technology industry, used to have a Tech Driven investment logic, with a deep understanding that you can invest once you grasp the technological advantages, and the essence of profit is efficiency. However, as the industry becomes more mature and gradually enters the logic of application investment, the general investment approach of US dollar funds may become more effective, which means investing in people and business models. Technology will be a direction worth paying attention to, but it is not the only determining factor. Compared to the technology itself, more attention will be paid to the new business models brought about by technological breakthroughs.
2.2 L2 and high-performance L1
This may be the biggest non-consensus at present. While L2 is becoming politically correct, there are still many new public chains eyeing the market, and new chains are disclosing new financing. Indeed, taking a long position on Ethereum through Long L2 seems to be the most secure choice, because the age-old developers, communities, and funds are all concentrated on Ethereum, making it the most suitable decentralized entity… with the premise that external conditions remain unchanged. Once new funds and developers enter, the story may take another direction.
Regarding AI, there is a tricky point. AI, an industry that emerged in the 1960s, has already had several waves of popularity. If I remember correctly, in the middle of last year, whether the AI track is feasible was still a topic of discussion. The investment circles in Silicon Valley were discussing whether they should first invest in Vertical data, then ML, and finally AI. However, after the emergence of GPT3.5 this year, all doubts disappeared instantly, and it became a collective arms race for all funds. 😛
More than half a year later, whether AI is a track or a bubble is still a mystery. Echoing @Laobai’s threads, besides the disputes over large models and application layers, the traditional direction has begun to discuss AGI occurring at the level of embodied intelligence (that is, AI+robots, as you can see, Web2 is also good at creating concepts). But no matter what, it is visible that this AI boom has brought obvious experiential improvements for C-end users, whether it’s New Bing, Claude, PoeAI, they have all provided a good (at least for me) direct experiential improvement. And I still believe that there is potential for the integration of AI and Web3 in the utilization of long-tail resources. Regarding this point, I can write a separate article later.
3. Reflection: Non-consensus opportunities glimpsed in consensus
3.1 Infra as an “APP”?
Infrastructure is often compared to utilities like water, coal, and electricity, and there is concern that it will become a truly foundational infrastructure that cannot capture high returns. However, returning to first principles, if we bet on the ultimate business model, infrastructure, or blockchain as a tool, still has the potential to independently generate application scenarios, such as AI chains, payment chains, etc. In fact, it’s already good enough for one chain to do one thing well. Although it may be far from us today, there is still a great possibility of it happening.
3.2 What is the main contradiction in the industry?
My own answer is two-fold,
1) There are not enough high-quality assets on the chain.
If we bet that there will be a large amount of capital entering in the future, the premise is that there are interest-bearing assets on the chain that at least exceed the return on US Treasury bonds and can attract big money. The main contradiction currently is that firstly, the liquidity of assets is completely insufficient, and secondly, there are not enough excess return assets. As for the long tail of money, if suitable geographically arbitrage assets can be found and implemented in the appropriate regions for centralized on-chain and off-chain asset ownership, RWA is indeed a direction.
2) There is almost no consumption on the chain.
Essentially, the vast majority of cryptocurrency users are small B-side users, with almost no C-side users. The original intention of speculators in the cryptocurrency market must be to make money, and the vast majority of NFT holders also hold a bullish attitude. Only a very small number of NFT enthusiasts will hold small pictures for the long term regardless of high or low prices and become the ultimate consumers. In this case, without real consumption, there will always be only pyramid schemes and Ponzi schemes.
3.3 Is the upgrade of Web3 enough?
“Leapfrog theory: Due to the characteristics of technological change, developing countries have a latecomer advantage, and the technological level of advanced countries may be locked in a small range of changes due to technological inertia. In this case, the latecomer country may surpass the original advanced country, which is the “leapfrog” process.
Recently, I have talked to many friends in traditional industries, and many people feel that the industry upgrade brought by Web3 is somewhat interesting, but not significant. Yes, this is similar to promoting scan code payment in countries where everyone has credit cards. When the benefits brought by paradigm shift are not enough to offset the conversion costs, technological change becomes difficult. Similar to technological innovations in several past cycles, developing countries easily surpassed the conversion costs due to their outdated technology, thereby creating technological breakthroughs. From this logic, when the innovation of Web3 is limited, the possibility of disrupting the systems of developed countries is much smaller, but there may be great opportunities in developing countries.
3.4 Becoming an industry oracle, thinking out of the box
In the development of the blockchain industry today, due to the inherent characteristics of Infra, it has been able to establish more or less connections with various fields including IoT, finance, and even daily necessities. The solutions to many problems may actually lie outside the industry. For example, as discussed with @siyuan, the problem of Ethereum’s state explosion may be solved by reducing the cost of storing this physical entity. Ultimately, it may be Moore’s Law that solves the software problem, rather than technology from the Crypto Native.
When there are no answers within the industry, one should look beyond. Become an industry oracle, take a step back, gain a higher perspective, in this era where Beta is invisible, seek Alpha.