What to Watch in Crypto

There is no harder job in the world of asset allocation than that of the crypto investor. In its complexity, novelty, activity, and volatility, the crypto market represents a uniquely fiendish, perilous terrain, testing for even the brightest minds. 

The intelligent crypto investor has to not only be a swami of baroque technical matters but learned in economic theory, organizational design, community architecture, meme-psychology, and traditional finance. This investor must assess such dimensions in a sector overrun with charlatans, self-promoters, and price manipulators. They must think clearly while surrounded by millions of devotees, the noisiest of which tend to demonstrate both the pitch and unthinkingness of a Rajneeshee. 

To put it succinctly, this is the task before them: assess frontier technology ringed by religion. Oh, and they must do so in a market that never sleeps. No off-hours or bank holidays. Just endless, ceaseless ebb and flow, sickening drops and teeth-chattering spikes. 

The intelligent crypto investor must manage all of this while being an apostate, twice. They must believe the traditional financial system is a creaking, cronyist anachronism and then recognize that the frothy fringes of cryptoworld represent an added derangement. 

If even the professional crypto investor must mediate such a multitude of demands, what chance do casual believers have of identifying worthwhile projects?

Distractions and seductions abound. 

Doge spikes; should you try and catch the tail? A new yield farm offers 10% weekly interest; is it worth the risk? My friend who works at Coinbase likes Polygon; my uncle just bought Vechain; Paris Hilton is “very, very excited” about BTC; a friend of a friend of a friend said Enjin’s got something big cooking. 

I am not immune to these enticements. Starting in 2017 (maybe late 2016?) I began investing in crypto and, in my enthusiasm and ineptitude, bought into all manner of projects. Some made money, many didn’t. I lost about $1,500 worth of Nano when BitGrail was hacked. 

And yet clearly, opportunities exist. Despite my various follies, my investments in Bitcoin and Ethereum are among my best. Is this the solution for the casual spectator? To invest in Bitcoin and Ethereum and call it a day? Or perhaps we should all allocate to an index and wait?

That may prove best for some. But for those that see the challenges of the crypto economy and feel compelled to be a part of it, recognize its potential to upend institutions and genuinely transform the world, what projects should they pay attention to? 

The purpose of this piece is to answer that question. Or, at least, to begin to.

We have assembled a collection of ten of the most perceptive crypto investors and asked them to share the projects and spaces that excite them most. These are not the bombastic YOLO artists of Twitter, but deep thinkers and pragmatic asset allocators. 

Despite their metier, this is not investment advice, but rather a discussion of projects worth learning more about. My hope is that this encourages more circumspect technologists and investors to look beyond the veil and find the technological, organizational, economic magic occurring in so many parts of the crypto sector. 

Before we jump in, a few brief notes on the “rules of the game”: 

1. Investors were free to share any project or space within the crypto world. 
2. Investors could see what other contributors had selected to write about. 
3. Multiple investors could write about the same project if they wanted to. There’s value in finding commonalities.
4. Investors could choose to remain anonymous if constrained by compliance or as a matter of preference. 

Let’s begin. 

Disclaimer: I am broadly long on the crypto space and own several of the projects mentioned below. Again, this post should not be construed as investment advice. Especially in such a highly volatile space, it is vital to do your own research and diligence. 

Social tokens

What happens when culture and consumption become investable? NFTs were the first step, and as a primitive, digital scarcity is foundational. But NFTs alone aren't going to turn consumer social upside down; social tokens (i.e., fungible virtual currencies) will. 

Here's why. 

Today, 99% of creator economy companies are thinking about how they can sell more stuff to fans — the next iteration will involve constructing a framework for shared upside that rewards fan engagement and allows for long-term games. It's not about the creator economy. It's about creating an economy. 

Many games today sell in-game currency, but that currency is trapped within the walled gardens of the game, and generally cannot be cashed out for hard currency. Latent engagement value has always existed within closed-loop consumer experiences. What's different now is that engagement value can take on financial value. If you start with a fungible virtual currency that aligns the interests of the platform, creators, and users, and distribute it over time based on engagement and contribution, everyone can “play to earn.” We are about to witness what happens when the incentives of all become aligned under a rubric of common values and shared upside—the results are going to be explosive.

- Richard Kim, General Partner at Galaxy Interactive

Ethereum 

As a global multi-asset class allocator, I’m constantly searching for opportunities with long-term return potential that also offer portfolio diversification benefits (i.e., have low correlation to other risk assets).  Amid the ongoing bull market, such opportunities have been increasingly difficult to find.  Markets are awash with capital, making reasonably attractive valuations few and far between across asset classes.

Today, however, crypto may be an exception. The long-term promise of a more decentralized and equitable internet remains intact, highlighted by improving fundamentals, while prices continue to plummet, mostly indiscriminately. Today, June 22nd, most crypto projects are down more than 50% from the highs reached in early May. While investor exuberance had undoubtedly overrun in the short-term, certain projects now appear unusually compelling at current price levels. 

The most interesting opportunity to me today is Ethereum (ETH).

That may seem like an obvious or consensus choice, and in some ways, it is, but at current price levels, one need not be overly cute. You don’t get paid for the degree of difficulty as an investor, after all. Other projects certainly offer more upside potential, but the risk-adjusted opportunity of Ethereum seems particularly compelling relative to both the rest of crypto and other asset classes globally. At present, Ethereum appears to offer the model set-up of all of investing: long-term secular tailwinds, near-term catalysts, and attractive valuation, with the added benefit of broader portfolio diversification.

Let’s take a look at each of these, in turn.

Long-Term Secular Tailwinds

Ethereum serves as the base layer protocol for the first real product-market fit in crypto – Decentralized Finance (DeFi).  Despite some initial successes, DeFi remains very early and the long-term winners uncertain. Nevertheless, with over $46 billion in total value locked (TVL), user engagement is unmistakable, and the growth continues to be extraordinary – up over 6,700% since the start of 2020.  

Of the top 100 DeFi projects, 99 of them have been built on top of Ethereum, per DeFi Pulse.  Going forward, I fully expect DeFi to continue to institutionalize with the user base evolving beyond crypto insiders to a much broader group that may well include much of the nearly two billion unbanked globally. This is partly because the space offers financial innovation on a scale that fintech has been unable to provide due to legacy constraints. As an example, Uniswap, with just 21 employees, does similar daily volumes as Coinbase does with 1,000 employees.

More importantly, DeFi is merely the financial piece of a wide-ranging movement towards Web3 and the broader “ownership economy.” That movement remains nascent, but it seems likely Ethereum will play a central role (alongside other base layer blockchains). If you believe that DeFi and Web3 will continue to grow, then substantially more value should accrue to Ethereum as the “value layer” of this next iteration of the internet. 

Catalysts

Ethereum has three important upcoming catalysts that should attract investor attention and unlock further value – EIP 1559, layer two (“L2”) launches, and Eth2, the transition to Proof of Stake (PoS).  EIP 1559 is a proposal that improves the bid process for block space and changes the mechanics of gas fees. The critical development is that a substantial portion of gas fees will be “burned” instead of going directly to miners, thereby reducing the overall supply of ETH. In addition, this new mechanism should offset the majority of ETH issuance, enabling gas price stability with minimal token dilution. In some sense, this is similar to a stock buyback; a means to effectively return value to shareholders. EIP 1559 goes live on July 14th.

Later this summer, in the next month or so, various L2 scaling solutions will become operational, including Arbitrum and Optimism. These efforts should significantly improve scalability, which has long been a primary limitation of crypto, including Ethereum. This should allow for more throughput and encourage further developer activity, both of which ultimately drive gas fees (thus providing value to ETH holders). 

Lastly, after years of work, the transition to PoS seems close – most likely by the end of this year. This is critical for two reasons. First, it will dramatically improve the energy efficiency of the Ethereum blockchain, thereby making the ecosystem far more environmentally sustainable. As discussed more in a moment, I believe this is a much more significant development than most crypto insiders appreciate. Second, it marks a transition away from miners to validators, enabling “stakers” to earn yield, somewhat akin to a stock dividend.

Valuation

In May, the most recent full month of data, Ethereum did $2.9 billion in fees, equating to nearly $35 billion on an annualized run rate-basis assuming zero growth for the next 11 months (an overly conservative estimate). 

At a total value of roughly $220 billion, that means Ethereum is valued at merely 6.3x NTM “revenues” in a world in which the top 10 SaaS companies trade at nearly 40x while growing at 73% (substantially less than Ethereum). With the shift to PoS, Ethereum should have unusually high “margins” combined with minimal dilution (or perhaps an even shrinking supply) due to EIP 1559. That combination of value and long-term potential is hard to find elsewhere in the world, as discussed at the onset.  Fundamentals continue to improve, the narrative strengthens, and catalysts are readily approaching. Nonetheless, you can buy into all of this for about 60% less than Ethereum traded just a month ago.

An Allocator’s Perspective on Further (Institutional) Adoption

For those who follow the space closely, much of the above is probably well-trodden territory, so I also want to provide a perspective that may be comparatively unique regarding where I think the future adoption of Ethereum will come from and why. 

From my seat, I regularly talk about crypto with endowments, foundations, and large asset owners. To date, most have done nothing, but interest is growing. Anecdotally, I’ve had more conversations with institutions about crypto over the past couple of months than in the previous five years combined.

We are starting to see institutional interest turn into action. For example, Coinbase institutional trading passed retail earlier this year, Bitwise surpassed $1 billion in AUM, most private wealth banks (such as Goldman Sachs and Morgan Stanley) finally made crypto trading available to clients, and venture capital allocations have skyrocketed. 

Figures on AUM raised in crypto are hard to come by, but venture capital funds have already invested over $17 billion into crypto projects so far this year, which is nearly equal to the total amount deployed in all previous years combined, per PitchBook. That doesn’t even include recently closed funds — $2.2 billion for a16z crypto, $300 million for Blockchain Capital, $225 million for Dragonfly, and $100 million or more for Multicoin, Framework, and 1confirmation, among others — and funds currently in the market including Pantera’s $600 million vehicle. 

I can tell you first hand this is a radically different backdrop than when these funds were last in the market. Nearly every crypto fund raised in 2021 has been significantly oversubscribed, often raising their hard cap. This demonstrates allocators’ interest in the space, which has never been higher in my estimation, and also suggests there is still unprecedented dry powder.  At least some of that (and perhaps a lot given current prices) will be deployed into Ethereum because while Bitcoin has become more consensus (and thus de-emphasized by most crypto funds), very few have excluded Ethereum from the mandate.

There are two other reasons why I believe institutional allocations to Ethereum will continue to grow meaningfully: cash flows and sustainability.  While Bitcoin has been the starting point for most allocators and institutional investors, it’s not a natural fit in many ways. Bitcoin is a superior digital analog to gold, but most investors don’t own gold, and many mock it. The inability to value Bitcoin or ascribe an intrinsic value may prove an insurmountable hurdle for many.  As previously laid out, Ethereum can be valued using more traditional cash flow methodologies, and that will become increasingly apparent with EIP 1559 and Eth2.

Similarly, environmental concerns have been a significant impediment for institutions, far more extensive than I think most crypto insiders realize. Many crypto enthusiasts believe the environmental concerns are misunderstood and overblown, and while I probably agree with that, it somewhat misses the point. Whether rightly or wrongly, the narrative has taken hold. It’s the first question I get in most conversations about crypto these days. Setting that debate aside, the move to PoS may gradually unlock a large new cohort of Ethereum adopters who have heretofore eschewed crypto altogether on environmental grounds. One way or another, there seems to be a lot more interest coming to the space with a growing focus on Ethereum.

Disclaimer: Views solely my own and not financial advice. Do your own underwriting and analysis. Special thanks to Michael Anderson and Michael Dempsey for editing earlier drafts of this.

- Myles Danielsen, allocator at Hall Capital Partners

Ethereum still feels like it’s just getting started. It’s on the cusp of its most anticipated upgrade to date, for example, the “London Hard Fork.” That should decrease the volatility of gas fees (it’s impractical to have them shifting non-stop and makes it hard for builders and customers to plan) and take ETH out of the market through a fee-burning process. This puts deflationary pressure on the network and is a monumental step in moving from PoW to PoS. 

Ultimately, ETH is getting closer to becoming the “internet bond.”

- Anonymous, fund manager

Uniswap

All the world’s value will be tokenized, and it will need a venue to trade. I think Uniswap (UNI) may be the solution. 

While the average crypto investor may be more familiar with centralized exchanges like Coinbase, an increasing number are flocking to decentralized exchanges (DEXs). Of those that exist, Uniswap is the clear leader, with over $5 billion in TVL, making it the sixth-largest DeFi project by that metric. It’s also the most sophisticated, with its v3 improving on liquidity (among other additions), and an expanding ecosystem with more than 200 integrations.  

Finally, the team recently brought aboard a major addition: Mary-Catherine Lader joined as COO. A Harvard JD/MBA, Lader comes from BlackRock where she served as Global Head of Aladdin Sustainability. 

- Anonymous, fund manager

DeFi Pulse Index

Having looked closely at fintech and crypto for the past few years, I see DeFi as the solution to a few problems fintech started to tackle. That is, DeFi offers step-change improvements in:

1. Programmability and automation
2. Access and alternative underwriting
3. Composability and interoperability. 
   

Those meaningful benefits have struck a chord with retail investors —  we saw $134 billion in DEX volume in May alone. These are big numbers, and yet, it’s still extremely early. Crypto is still early in penetrating the financial world, and even within crypto, less than 2% of wallets use some form of DeFi. There’s still a chance to get in early. 

Within DeFi, there are a few ways to invest including via decentralized exchanges, wallets, aggregators, synthetic assets, and lending protocols. I’m particularly excited about The DeFi Pulse Index (DPI) as a way to deploy across these.

DPI is a capitalization-weighted index that tracks DeFi projects. They limit tokens by a few criteria, including availability on Ethereum, DeFi association, that they’re bearer asset tokens (no derivatives or synthetic assets), a predictable supply rate with more than 7.5% already circulating, no penalty for passive holders, and significant usage with over 180 days in market. The index is adjusted monthly and is powered by Set Protocol and DeFi Pulse (a top stats source).

Currently, over 80% of DPI is indexing the top six projects in the space: Uniswap. Aave, Maker, Compound, Sushi, and Yearn. The opportunity of each of these innovative projects is incredible — Uniswap and Sushiswap’s volumes have exploded past Coinbase’s in the past year and stand to benefit greatly from reduced frictions as Ethereum migrate to Level 2. That duo earned $229 million in revenue in May alone. 

Aave, Maker, and Compound have seen similarly startling upticks, earning $109 million in May revenue, with $21 billion in loans outstanding. Again, it feels like these projects are just getting started — they’ve all hinted at expanding access to their liquidity sources via scaled applications and user bases. Aave, for example, has hinted at a “permissioned pool” to facilitate institutional investment. Maker is partnering with Centrifuge (CFG) on funding real-world assets, and each has a path to plug into fintechs via APIs. 

So given all of this incredible momentum, why invest in DPI as opposed to the individual tokens? 

Though exciting, DeFi is still only about one year old. The space is prone to forking, resulting in considerable competition. We saw this in the battle between Uniswap and Sushiswap (the latter is a fork of the former) last year. And since the markets here are so massive, talent is flooding in. All of that suggests to me that we’re going to see many new projects flourish. 

Certainly, early projects have earned moats around liquidity, governance, and ecosystem engagement, but I think we’ll discover that challengers have late-mover advantages, particularly around feature completeness and ease of use. 

The price is close to where it was at the beginning of the year, while DEX volumes are up ~2.5x, loans increased ~7x, and users rose by ~2.4x. Those metrics are lagging — they don’t yet account for the additional venture funding, technical talent, user awareness, and ecosystem support like Visa’s via USDC that has emerged since January. Ultimately, I’m happy to diversify with DPI because of those dynamics (and since I’m long on the space in general). It feels like a perfect time to join the movement. 

- Monica Desai, Principal at Kleiner Perkins

Solana

With crypto, I like to focus on use cases that have firmly crossed over from “toy” to early adoption. Because crypto markets usually touch money, they’re usually plentifully sized. That means evaluating projects becomes more about timing and differentiation. And with intense price volatility, I advocate for operating with a five-to-ten year venture-style horizon and ignoring liquid movements. Again, much like venture, I’ll add as technological milestones are met and risk (theoretically) declines. 

Three years ago, I felt crypto’s only proven use case was bitcoin as a store of value was the only clear, proven use case (it was clear that would endure and build retail and institutional value). Now, I see programmable money in Ethereum and Ethereum’s competitors as the next proven use case, with the massive influx into DeFi and NFTs a critical proof point. Each of those use cases represent meaningful improvements to their non-crypto alternatives: DeFi offers universal access to credit, lending, and equity; NFTs offer dynamic links between assets and monetization that can evolve.  

As the use cases grow, it’s increasingly clear that Ethereum cannot and should not support all of them. Instead, alternatives will emerge. This issue might be solved via L2 solutions like Polygon (MATIC) or Optimism, which take transactions off of Ethereum’s mainnet (“Layer 1”) to improve speed and cost. Ethereum will become a source of central truth and core infrastructure that secures the ecosystem but is only accessed when essential. As L2s emerge, I believe it’s inevitable we’ll see other chains, too. Any Ethereum alternative necessitates better cross-chain tools, so more chains can succeed once we cross the chasm. That splintering will enable better verticalization of applications and access at lower fees with higher functionality.

Solana (SOL) is the most creditable challenger. 

Many have tried to take on Ethereum in the past, but this time it feels different. Three reasons:

1. Timing. We are finally at a point of adoption with enough development and usage to warrant alternative chains at a real depth of use. 
2. Community. Solana’s community exhibits the highest momentum of engagement of the alternatives. Key projects in the ecosystem like Audius (a portfolio company of ours) have bet heavily by building with Solana. 
3. Positioning. Solana is less of an Ethereum replacement than a complement. Projects like Audius have discovered that it’s not about bettering on Ethereum or Solana; Ethereum and Solana is the most potent solution.
   

So, what makes Solana special? 

First of all, the network’s unique “Proof of History” approach affords low latency (~1s finality), high throughput (50,000 transactions per second), and transaction fees under $0.01. Solana is perfect for the kind of high-frequency interactions which never live on Ethereum L1. 

This is especially true for “micro-interactions” of the like required by Audius. For context, Audius is a peer-to-peer music streaming platform. Using Solana, they’ve been able to unlock lots of free interactions around engagement and usage. Many other platforms will require this — think “likes” on content, social tokens, and streaming payments. Trying to make this happen on the mainnet would be infeasibly expensive and slow. 

All told, Solana looks well-positioned to become the default platform for developers building in gaming and media (including social media). That will be true both for crypto-native platforms and those companies that migrate over the crypto world over time.  

- Monica Desai, Principal at Kleiner Perkins

We’re watching Solana very closely. DeFi applications are increasingly turning to the network to solve their scaling problems. If you’ve ever had to pay a few hundred dollars (or more) and wait 15-30 minutes for a transaction on a crypto app to go through, you understand how much room there is for improvement when it comes to speed and user experience. Solana has quickly become the most creditable solution for crypto apps to grow stably and predictably. 

- Kyle Samani, Managing Partner at Multicoin Capital

Radicle

Software is eating the world, and open source is eating closed source. Ironically, however, we have spent the past couple of decades weaving the open protocols of the internet into our social, economic, and political lives using closed, privately-owned code hosting and collaboration platforms like GitHub. 

Corporations own these platforms - GitHub, for example, is owned by Microsoft. They can (and do) implement user bans and censorship in response to political pressure, they own all of the social relationships around the code they host (stars, likes, follows, reviews, comments),  and they are free to alter their terms of service at any time. This  “open source” code, while ever more fundamental, has become ever less free. 

...users [must] have the freedom to run, copy, distribute, study, change and improve the software. Thus, free software is a matter of liberty, not price."

— Free Software Foundation

Restoring and preserving the resilience and health of the free open source ecosystem is more important than ever.

Radicle (RAD) is an open, protocol-first solution to code collaboration based on Git. It uses peer-to-peer replication to ensure that code repositories are genuinely decentralized. It does not require internet connectivity, DNS, or online portals to function. Every artifact of the system is attested with cryptographic signatures and verified. In short, it combines all of the advantages of “free” bazaar-style solutions (like mailing lists) with the main benefits of code collaboration platforms (user-friendliness). 

An optional economic incentive layer underpins Radicle, allowing desirable behavior to be incentivized and offering solutions to long-standing problems like maintainer incentivization (see Heartbleed/OpenSSL) and decentralized governance. 

With all of these pieces in place, Radicle is starting to take shape as a high-potential alternative to code hosting platforms like GitHub that returns us to the founding principles of open-source software development.

- David Fauchier, Fund Manager at Nickel Digital Asset Management

Helium 

Helium (HNT) is a new business model for deploying and managing wireless networks, where the network itself is owned and operated by anyone who wants to participate. Those that do are rewarded with HNT.

This represents a total reinvention of the traditional telecom network model. Usually, these companies have serious costs, including land, labor, and running backhaul (connections between the core network and smaller networks). These companies also have to coordinate with municipal governments and homeowner associations to secure the licenses and position their towers. That’s a logistical, political, and operational nightmare. 

Helium, fittingly, decentralizes the process. Anyone can buy and set up a Helium hotspot — roughly the size of a router — and get up and running. This removes most of the material costs described above — land, labor, backhaul, and city coordination costs go to zero. It also makes the network more localized. If someone is unhappy with the coverage on their block or in their neighborhood, they can just set up a hotspot. That will not only improve their range but can do so at an offset cost by providing service to others in the area, even if they’re just walking by. 

There are some technical benefits beyond these financial and operational ones. For one thing, Helium’s protocol is agnostic to radio frequencies. That means it can work on WiFi, Bluetooth, and 4G. Helium’s first version operates on the LORAWAN 900MHz frequency band, usually used by low-power IoT devices.

Since we first invested in Helium, the network has grown rapidly. Today there are more than 60,000 Helium hotspots live around the world, and more than 400,000 hotspots back-ordered. We think another inflection point is coming soon — Heliums v2 is launching soon with support for 5G. Again, hotspots are back-ordered.

We think there’s a good chance the wireless networks of the future will be community-owned. If that’s the case, there’s no better-positioned company than Helium. 

- Kyle Samani, Managing Partner at Multicoin Capital

Yearn Finance

One project I am excited about is Yearn Finance (YFI). 

Yearn acts similarly to a "decentralized hedge fund” — independent strategy writers create “vaults” where users can deposit their assets and earn interest as the assets are automatically allocated in the highest yielding DeFi protocols throughout Ethereum. 

The project is also known for its composability — allowing other popular DeFi protocols like Alchemix Finance to build on top of their vault strategies as a means to attract more assets to the platform. 

Today, Yearn has ~$5 billion in assets invested on the platform and generates annualized fees larger than traditional fintech wealth management platforms like Wealthfront and Betterment. 

- John O’Connell, Investor at True Ventures

Futureswap

“Perpetual futures” are a type of futures contract without a specified delivery date. That means they can be held indefinitely. While reasonably well-trodden in traditional finance, perpetual futures only moved into the crypto world starting in 2016. 

Despite their presence, it doesn’t feel like anyone’s nailed offering decentralized perpetuals just yet. Futureswap (FST) might be the one to figure it out. The project is built on top of Arbitrum and offers perpetuals for ETH and any other ERC-20 tokens. Users can go 10x long or short on these assets. 

Though they haven’t announced it, the team raised a round from blue-chip investors, which signals the promise of what they’re doing. A v3 of the platform is expected to roll out within the next few weeks or even days—one to watch.

- Anonymous, fund manager

Collateralizing NFTs

I’m keeping my eyes open for a protocol that provides low-interest loans collateralized by NFTs. In their current instantiation, NFTs are a way to represent ownership on the internet, but they can be used for so much more. Some NFTs of art, prestigious memberships, or digital real estate are selling for thousands to millions of dollars. In the future, NFTs will represent music rights, physical real estate, luxury items like Hermes purses or Patek watches, and so on. Even if they are immaterial, they have actual value that can and should be leveraged in the broader DeFi ecosystem.  A lending system built on top of NFTs as collateral could unlock billions in value.

This is less a suggestion for what protocol to invest in and more of an advanced signal to keep an eye out for players in the space. Someone will figure this out. 

- Maria Shen, Investor at Electric Capital

NFT Social Networks

I think there’s room for a social network based on NFT ownership. Already, niche communities have sprung up to support the ecosystem of people that own a specific NFT — think NBA Topshot, cryptopunks, or Bored Ape Yacht Club.

A social media platform could give these different groups a chance to connect and would create a truly unique social graph. Unlike anything mapped by Facebook, TikTok, Instagram, or Twitter, an NFT platform would map fandom, investment, transaction history, and ownership — all at once. There’s an ample opportunity here; again, I think investors will want to keep their eyes open.

- Maria Shen, Investor at Electric Capital

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THORChain

THORChain (RUNE) is also worth spending time on. 

In short, THORChain is a decentralized exchange (DEX) that enables asset swaps across different blockchains. For users, this means they can trade assets that live on different blockchains (think Bitcoin and Ethereum) without using a centralized intermediary. The platform also features “Impermanent Loss Protection” for liquidity providers, mitigating the risk of their liquidity position losing value over time which is a common problem for other DEX’s.

Since its launch in April, THORChain has ~$195 million in total value locked (TVL) in the platform and has facilitated ~$2 billion in trading volume. 

- John O’Connell, Investor at True Ventures

The Graph

For those willing to tolerate a bit more uncertainty and a wider range of outcomes, The Graph (GRT) has several compelling attributes today.

To start with, what is The Graph (for those that don’t already know)?  

The Graph is an indexing protocol that allows users to query data across various blockchains, including, most notably, Ethereum. Blockchain data is the building block of all crypto, but up until recently, that data was surprisingly difficult to access and utilize, especially across chains. The Graph is the first project to make this data readily accessible. In their words: 

[I]t allows developers to easily search, find, publish and use the public data they need to build decentralized applications, without needing to rely on centralized servers and proprietary infrastructure.

Since beginning in 2020, query volume has surpassed 20 billion and is averaging about 1.3 billion queries per month. More than 20,000 developers use it. 

Moreover, in December, The Graph launched its mainnet, initiating the migration from a hosted service to a fully decentralized version that serves as the API layer of Web3. This step is instrumental in unlocking the fully decentralized promise of Web3 and all the application layer projects and protocols being built in the space. It’s worth noting that this will serve in stark contrast to the status quo: most applications currently operate on highly centralized servers such as AWS and Azure, which restricts data access and user ownership.

This exciting promise is starting to become a reality.  On June 16th, The Graph welcomed eight decentralized applications utilizing data from its fully decentralized mainnet and paying fees for processing queries. Those eight projects – Audius, DODO, Livepeer, mStable, Opyn, PoolTogether, Reflexer, and UMA – serve use cases from music and video streaming to various DeFi applications.

It remains early, and there are still many outstanding questions, including exactly how the token economics will play out. That said, The Graph is quickly becoming an essential primitive with solid traction, an impressive investor base, and a highly capable team that continues to attract top talent. On the last point, I’m impressed by the team’s conviction, technical capabilities, and most of all, ability to navigate through difficult times. The path has not been straight and smooth, but it seems the team, community, and protocol have come out stronger as a result. At the early stage, that’s the type of team I want to back, especially in emerging areas like Web3. 

As for the entry point and valuation, it’s difficult and perhaps unnecessary to be precise.  Much remains to be seen in terms of how large the TAM is and how fees will accrue. It’s likely more significant that The Graph is becoming a central component of one of the most exciting areas of crypto. 

That said, at $4.9 billion (on a fully diluted basis), the valuation remains reasonably steep in the near term for a project with so many outstanding questions. The upside, of course, is many multiples higher. As evidence, the valuation was more than 4x higher just two months ago, in mid-April.  To me, this suggests a reasonable entry point for a project that has a very good shot of playing a critical infrastructure role in the future of Web3.

- Anonymous, fund manager