Highlights of IOSG DeFi Summit|
“Capturing Unchanging Value in an Ever-Changing Decentralized Economy”
Today is the annual gathering of old friends. In the past year, the entire crypto-economic circle has been ups and downs, but IOSG Ventures is instructed to invest in value, stuck to value investment, pursued 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 the perspective of an institutional investor.
First, I will introduce our investment style and philosophy. IOSG Ventures is a research-driven and community-engaging venture fund, focusing on the next wave of innovation of fintech combined with open source and really powered by blockchain technology.
We always say that we need to invest at the right time, invest in the right projects, partner with the right team. Regarding “invest at the right time”, we know that blockchain and Web 3.0 will lead the third decade of technological disruption. We are seeing acknowledgment of potential from institutions and governments worldwide. Regarding “invest in the right projects”, our investment thesis focuses on address gaps and challenges in Blockchain technology. Blockchain Fund II will focus on Open Finance, PoW / PoS and Web 3.0. Regarding “Partner with the right team”, we have a research-driven approach with a proven track record to execute. Solid industry network with exclusive access to quality investments at a discount to market.
There are three sections I want to share within today’s speech: Industry landscape for DeFi, our insights, and a new beginning for IOSG Ventures.
Industry Landscape for DeFi:
What is next in store for blockchain? The technology is gaining momentum through advancement in infrastructure, capital investment, community engagement, and increased awareness in academia and government green-light.
Blockchain and Web 3.0 leads the next wave of technological disruption and fourth-generation industrial revolution.
In the past, people talked about Software is eating the world. Now, we say blockchain is eating finance. Finance is the world’s largest industry. Most financial products run on outdated tech, we lived in Bretton Woods system 80 years. DeFi lowers the barriers to build financial products, finance is going to be transformed probably from the outside in.
Next, I am going to talk about our insights. How are we navigating through the sea of innovation and experiments in space? How to distill real insights from it? Here we go through a series of insights we have derived from research, discussion with leaders in the space, as well as our first-hand experience.
Based on our industry research on technical services and financial protocols in middleware stack, IOSG Ventures have invested the following projects: UMA, 1inch, KEEP, Gelato, Phala Network, Zenlink, Maskbook, Wootrade, Persistence, DaoHaus, dHedge, Oasis Labs, Roll, etc.
1inch is a DEX aggregator with smart running at backend. 1inch can significantly increase the user experience by providing traders with a convenient price comparing interface and transaction cost savings. We believe 1inch as a DEX aggregator is becoming the most important solution to solve poor liquidity and depth and slippage problems existing in DEX industry.
tBTC is an ERC-20 token that can be used in Ethereum. tBTC creates a much-needed decentralized bridge between Bitcoin and the DeFi ecosystem on Ethereum. There will be great growth potential with Keep’s unique random beacon and ECDSA technology.
UMA is a protocol for building synthetic assets. It provides smart contract templates that allow anyone to create a synthetic asset that tracks the price of any value subject matter. We believe UMA is becoming one of the most successful protocols in the middleware stack in Web 3.0.
Gelato builds a product that adds the next stage to smart contracts.
Automation is such a fundamental demand on a decentralized network that is going to be highly sought after as the types of dApps we are building and using proliferate. We are going to see more of such applications leveraging automation for reducing costs, improving efficiency, and really scaling up the businesses.
Next, we are going to share our insights regarding difference sections.
Part 1. Web 3.0
In the Web 3.0 era, users will have more control over their identities 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 will eventually ignite the pursuit of user rights over identity and data control.
When the technology cycle of Web3.0 comes, distributed systems, cryptography, and smart contracts are entering the lives of the people as never before, and leading the industry to a frenzied period of bubble. The inflow of investment capital (speculative value) is faster than that of production capital (utilitarian value), and asset prices continue to expand to the inevitable “crash”.
However, infrastructure technologies will still determine themselves 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 change from product-dominated users to a user-centered open-source product form. The Web3.0 technology stack constitutes the overall framework of the blockchain project, while token is the flesh and blood that drives the entire ecological operation. The Token Economy business model is also born, which promotes users to contribute content and data in applications by changing the incentive model and value distribution system.
There is a lot of interactivity and composability between protocols in middleware stack, which can make some derived application scenarios appear. Most of the DeFi projects are playing an increasingly downshifting, composable, and modular role in the open financial ecosystem. Their greatest value in the future is to provide a basic framework and basic business logic for many higher-level applications.
Part 2. DEX & AMM
Uniswap’s monthly trade volume exceeded Coinbase’s in September, which is a clear sign of the fast-growing of decentralized exchanges. We believe that DEXs would have to make further adjustments to sustain this trend.
Here are some future directions:
1. Hybrid AMM Models
The efficiency of AMM using oracles, like DODO, is several times higher than the basic AMM. We like to see innovations in the direction of oracle, such as allowing professional traders to influence AMM to become smarter and more accurate.
Hedging LP risks:
Liquidity providers must fully understand the risks and potential losses in the market making process. We expect to see hedging products can help LPs protect their positions.
New AMM model:
We expect more use cases for AMM. One potential area is the creation of AMMs suitable for derivatives trading with time decay
2. Derivative Markets:
Improvements in blockchain technology will eventually allow decentralized exchanges to win the derivatives market.
By eliminating intermediaries, we expect decentralized exchanges to significantly reduce costs and make traders and market makers the biggest beneficiaries.
Part 3. NFT
Over the past two years, we’ve seen the NFT field grow tremendously. From the underlying protocol and the public chain to the development platform, application and trading platform, the NFT now covers many levels. It is worth noting that DeFi’s combination of attributes, such as staking, lending, and insurance, will be the next NFT breakout point.
Now NFT is not limited to basic applications such as games and collectibles, but its unique social and artistic attributes are also emerging.
Once upon a time, NFT was associated with games and collectibles because it could carry one of its unique value properties. But we believe that scarcity is just the surface of the NFT. We dig deep into the deep properties of NFT, focusing in particular on its ties to DeFi and new NFTs like Social Token. Today, the total historical transaction volume of NFT is 13 million U.S. dollars. It can be predicted that with the blessing of DeFi attributes, the volume of NFT will exceed 100 million U.S. dollars in the near future.
Part 4. Layer 2
We generalize and summarize the expansion plan of Ethereum in a broad sense. It can be broadly divided into three categories: transaction batching,(like Roll up), state channel, Plasma, and other interoperable layer 1 chains, including side chain, etc. The most mainstream solutions are ZK Rollup and Optimistic Rollup. The difference between them is mainly use the zero-knowledge proof, or fraud prove. zkRollup (here mainly refers to the zkSNARK, zkPlonk) support for universal intelligent contract is less flexible, therefore only suitable for transferring tokens , which is one of the reason why it’s very suitable for the decentralized exchange or payment Optimistic Rollup can easily support any intelligent logic implementation contract, therefore is very suitable for complicated DeFi applications. The biggest difference between the Rollup solution and Plasma solution is that while the Rollup solution puts transactional data on the chain, Plasma simply notarizes out-of-chain data on the Ethereum mainchain, which leads to a usability problem, which makes Plasma a poor user experience and a lack of trust.
The scaling projects of the transaction packaging category are further subdivided according to the verification methods they choose respectively and whether the original transaction data is linked. One of the most popular technology paths for DeFi projects is Optimistic Rollup because it is easy to run smart contracts; And Zk Rollup, because of its powerful performance, transactions can be determined quickly. Both the state channel and the public/side chain have their own scenarios. Dapp with high latency requirements tends to choose the state channel, while many public/side chains provide strong performance and very low transaction costs.
We foresee a future in which most DeFi ecology will run on Rollup as a solution for the underlying technology, which will have powerful network effects, as well as monopolizing the head players. However, the market for Dapp goes far beyond DeFi, and there is plenty of room for a long tail of expansion schemes.
Far from being a temporary solution until ETH2.0 comes along, we believe that the second-floor expansion will make Ethereum suitable for a much larger number of applications than today’s users.
We believe that the next 6–12 months will be the critical time window for the completion of the two-tier expansion technology to achieve exponential growth. We are at the bottom of “hockey stick growth” and anyone who CARES about Ethereum should be excited about it.
Part 5. Insurance
Introducing the Industry Map for Decentralized Insurance
The decentralized insurance concept is broad, covering the following four categories:
-Smart contract risks, such as Nexus Mutual’s guarantee covering losses caused by code bugs
-Real-world risks, such as Arbol provides compensation for insufficient rainfall
-Financial product risks, such as Opyn’s use of options to provide a hedge against the price changes of Ethereum
-Event risk, betting on football results and even presidential elections through prediction markets such as Augur
We are most bullish on DeFi insurance.
DeFi is booming, but reliable insurance products are still missing. The traditional insurance model cannot guarantee the risks of Dapp and DeFi. The following three risks require DeFi’s original insurance products to cover:
1. The oracle risk: For example, Synthetix had a KRW price error
2. Smart contract risks: such as the theft of bZx
3. Price risk: such as the 312 black swan events.
We expect the DeFi insurance market to reach US$1.4–4.5 billion in 2022 and US$2.5- 15.2 billion in 2025.
The current market TVL is 10b. Assuming that 10% of TVL buys insurance and the premium is 5% per year, then the market size is 52m and the premium income is 2.5m.
We are optimistic about the future of DeFi Insurance in two directions:
-Insurance aggregator, such as 1inch for AMM aggregation products
-Reinsurance project to provide cover for systemic risks in the field
Part 6. Transfer Bridge
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. New growth will definitely be on a larger platform. This market needs us to 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, 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. 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 7. Wallet
As the entrance of traffic, the wallet has the effect of helping the blockchain to get out of the circle and attract more users. The mainstream application of the 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. To manage your own wallet, the use of smart contracts is a key innovation for the wallet project to become a novice user.
We believe that in the wallet track, the security of assets is still the most important consideration. In terms of attracting users, only relying on capital operation to compensate transaction fees is definitely not a long-term way to attract traffic. We believe that a simple and easy-to-use user interface is 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 items.
Wallet is still a track that IOSG pays great attention to at the user aggregation level. We look forward to supporting excellent teams to create a convenient and easy-to-use wallet product while ensuring asset security.
In conclusion, Smart contracts are the building blocks for the developer sandbox of finance. Firstly, DeFi is “transfer of value”. DeFi developers can creat a bank, an insurance company, or a derivatives product in a few lines of code. Secondly, tokens are a brand-new design space for incentivizing user behavior, decentralizing governance, and building community- owned financial applications. Thirdly, DeFi developers can get instant distribution through crypto exchanges and wallets for their financial products, opening up financial markets to users who would otherwise not have access. Finally, speculation and entertainment are converging to form the next mega-wave of consumer internet applications, and DeFi is the best and most expansive platform on which to build these applications.
We, IOSG Ventures, have a proven track record of investments in the cryptocurrency space. Due to our broad industry network, many notable founders and industry experts have joined our board of advisors to provide strategic guidance and perspectives on our investments. So, what’s next? We’re embarking on a new beginning of our journey.
IOSG Ventures is uniquely positioned to identify quality projects to address existing concerns hindering the development of blockchain technology. We select the best algorithm-based projects to join our portfolio of 68, incubating and managing them with a proven approach.
Next 5 years will likely be the fastest growth phase for blockchain in terms of prolific development and usage of user- centric use cases. To contribute real value, add and be able to capture the unchanging value in such a fast-paced and ever-changing space requires unprecedented collaboration as well.
We’re soon going to launch IOSG Ventures Fund II, which will mark a new beginning of IOSG Ventures. New visions and dreams to be realized, for us, for the community of blockchain and decentralized economy, and for our generation!
Wherever we’re, let us work hand in hand for a thriving anthesis of the decentralized economy!
🦄 About IOSG
Founded in 2017, IOSG Ventures is research and community-driven with offices across China, US, Singapore and Germany. We focus on Open Finance, Web3.0 and cross-chain ecosystems, investing in teams with top potential worldwide. Our portfolio covers more than 60 projects, including Layer-1 blockchains (Near, Polkadot, Cosmos), middleware (Celer, Raiden, Reach) and applications including DeFi (MakerDAO, Synthetix, UMA). We have been actively involved in various developer & DAO communities. We believe in long-term partnership and we work closely with our portfolios to advise and support them along their journey of entrepreneurship.
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