Request for Crypto Startups

Tom Schmidt
Jul 13, 2020 · 7 min read

It’s a common myth that startups begin with a eureka moment — a single stroke of genius. It’s a tempting story, but it sells short the grit and determination an entrepreneur truly needs to navigate the idea maze. Many of the best teams we’ve backed have come to us with a wild initial idea, and gradually iterated their way to product-market fit.

There are so many companies and products that we want to see built in the crypto industry. So we put together this request for startups. This is not to say that we know exactly which companies ought to be funded. But after seeing many founders go through the crypto idea maze, we’ve got some hints for you about where future treasure might lie. (And whenever you’re ready to take the plunge, reach out to us. We’re happy to guide you.)

Most of these ideas have been tried before. But for whatever reason, it didn’t work: the tech wasn’t there, the ecosystem was too scattered, or the users hadn’t arrived yet. But don’t let this deter you. Almost every major innovation has a rich history of previous attempts that failed: the iPhone, the Telegraph, the Internet.

Perhaps the time has arrived for these products to succeed.

Open capital formation

Open capital formation was originally thought to be the killer app of cryptocurrencies. Ethereum, one of the best investments of all time, raised its initial funding through an ICO that let anyone around the world to invest. Decentralized capital formation was, in fact, one the first use cases the Ethereum Foundation promoted:

ICOs, in their original form, were riddled with bad incentives, and so most failed spectacularly. But the core idea of decentralized capital formation is an important problem worth tackling — perhaps even more so because it’s been gotten so badly wrong in the past.

Access to capital and freedom of investment are core pillars of economic growth, but current systems we have are simply too restrictive or rent-seeking, keeping many entrepreneurs and ideas from being funded and preventing talented investors from funding these ideas.

We’re interested in capital formation applications that scale across verticals, geographies, and project stages, which truly align incentives between investors and teams.

Unsecured lending

We’ve made no secret that we’re bullish on DeFi. It’s been exciting to watch the tremendous growth in AUM and loan issuance across the ecosystem over the past year. And yet, it’s clear that DeFi lending remains primitive; we’ve built better stone tools, but we haven’t learned to make fire yet.

Secured lending as it exists on DeFi today mostly appeals to people already holding cryptocurrencies. It only explores one small fraction of the total possibilities within lending. While we’re optimistic about onboarding new types of diverse collateral, such as invoices in the future, it’s still only skimming the surface of potential applications for lending. Unsecured lending is an opportunity to meaningfully grow the pie for DeFi — consumer credit card debt in the US alone topped $1T this year — and gives us a shot at seeing a crypto banking product with mainstream appeal.

We’re heartened by some of the current teams working on this problem, but we want to see more entrepreneurs take aggressive attempts at cracking this one. Bootstrapping credit ratings, building a two-sided marketplace, and figuring out how to make the entire product palatable to consumers is no easy feat. But whoever figures it out will be richly rewarded.

Synthetic assets

When people ask us what product-market fit looks like in DeFi today, the thing we always point to is Dai: giving people around the world instant, seizure-resistant access to the US Dollar. But you can think of Dai as a very specific application of a general idea: the creation of synthetic assets on public blockchains.

End users don’t have to necessarily care about the fact that these assets are created using a public blockchain; they’re just happy to hold a financial asset they otherwise couldn’t. This is not just 10x better, this is infinitely better — it’s the 0 to 1 that breakthrough products are supposed to enable.

Synthetic assets are already well on their way on Ethereum, from the over $100MM in Dai, to more upstart projects like Synthetix, UMA, and Derivadex. But we think there’s more room to grow. How do we get these products into the hands of 1MM, 100MM, 1B people? How do we make these systems scale up efficiently to meet those needs? How do we allow anyone to financialize any market from their bedroom?

Monetization for culture creators

How creators monetize has been radically upended over the last decade. Traditional monetization methods, such as selling media or auctioning off ad space, simply don’t make sense for new media formats. We now have a patchwork of new monetization methods: micro-subscriptions through services like Patreon, merchandise sales through services like Shopify, affiliate referrals, or sponsored content. But unless a creator falls perfectly into a few narrow buckets, it can be difficult to achieve sustainable funding. It feels like there’s still something yet to be unlocked here.

Some of the best monetization schemes don’t feel like “monetization” at all — they’re simply a better way for creators to connect with their audiences and be rewarded for doing so. Better yet, they should allow early followers to participate in the upside of their favorite creators (harkening back to the patronage model of Renaissance artists).

Pioneers in this space include 2100, which allowed followers to fund creators by “staking” them, receiving greater status and more content proportional to how early they staked. Meme Markets on Veil fell in a similar bucket, allowing meme connoisseurs to monetarily benefit from trend forecasting. We’re now seeing more teams tackle this problem, such as Foundation and Zora that let creators of physical goods and their evangelists capture more of the upside in cultural entrepreneurship.

2100 introduced a new model of aligning creator and fan incentives

Layer 2

It’s no secret that Ethereum has gotten expensive to use over the past year. While it’s every blockchain’s dream to have demand strong enough to support a robust mining or validating ecosystem, Ethereum’s demand has vastly outpaced the supply of block space in the near term, leading to often sky-high gas prices and poor UX.

Query by Alex Kroeger

Meanwhile, the Layer 2 ecosystem has matured substantially since the early days of federated sidechains and simple state channels. Projects like zkSync by Matter Labs deliver on something close to the idealized L2 experience: fast, cheap, secure transactions. But despite this progress, many of these initiatives have still seen little adoption as of late, in part due to the UX hurdles that remain to be crossed.

We’re looking for teams that are continuing to innovate in this space and combining technical breakthroughs with real traction and usage.

Prediction Markets

Since the announcement of Augur in 2015, prediction markets have been a powerful force in the crypto zeitgeist. And yet, we still don’t seem to have compelling decentralized prediction markets. Augur v1 had numerous problems, and though Augur v2 will likely represent a real improvement, it feels like this is a product that is still a ways away from getting solved.

Is a “prediction market” the right way of thinking about it, or will the winners emerge oriented around a specific vertical, such as sports or politics? (And is there demand for any betting vertical besides those two?) Will centralized players emerge and fork out their underlying decentralized protocols, like Veil tried to?

What would an actual idea market look like? (via meme.market)

We are confident that 5 years from now, someone will have gotten prediction markets to work. We would not be surprised to see a new contender come in and dominate this category.

Liquidity Aggregation

Dragonfly and its partners have a long history of backing centralized crypto finance companies. Our investment in this category dates back to before the inception of Dragonfly: we were one of the earliest investors in OKEx back in 2014. We are always looking to back entrepreneurs who want to improve or reinvent crypto capital markets.

Many investors and members of the crypto community try to map the crypto market infrastructure to that of traditional finance. While we agree that traditional finance is an important reference, we believe the most impactful crypto finance companies will be ones that are built from first principles to reimagine how crypto and capital markets, in general, can work. Trading crypto presents unique idiosyncratic features that are different from traditional markets — streamlining clearing and settlement combined with security is one of the hardest problems to solve. We are seeing startups that skillfully combine trading efficiency and security to solve trading workflows unique to cryptocurrencies.

Liquidity aggregators are one of these business models that exist due the unique structure of cryptocurrency markets. Because liquidity is often fragmented across many trading venues and because those trading venues carry different counterparty risks and cater to different geographies and demographics, aggregators play an essential role these in markets versus traditional markets like equities.

These are just a subset of the compelling opportunities we see emerging in the cryptocurrency landscape. Every day, we’re lucky to meet with talented, creative entrepreneurs pushing the boundaries of this technology, and we’re often blown away by many of the teams we back. If you’re interested in chatting more about your ideas, or any of the ideas on this list, reach out to us by email at hello@dcp.capital or on Twitter. Happy hacking 🤙

-Dragonfly Capital Team

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