SMAPE market update — we continue to believe (but not blindly)
It’s been almost a year since we published our initial investment narrative. Now it’s time to post an update on how things developed and where we think all is heading next. In line with this, we have updated our view on our investment scope, which we divided into 6 segments (lists within these segments are non-exhaustive).
First and foremost, we see ourselves as Web3 and token-first fund with extensive expertise in token design, token utility and token value accrual mechanisms. This aspect is very important to us when evaluating prospective investments and is certainly a topic that we love to work on with portfolio companies and have done in the past. In addition, we have strong legal and regulatory understanding of the Web3 ecosystem within the team and our broader network, and can support our portfolio companies with the right partners. While we are not an ESG focused fund per se, we do take the energy discussion in this sector seriously and have incorporated these evaluation of these topics into our due diligence process as we believe it is also for investors to play an important role in this discussion.
In terms of our narrative, we correctly predicted that DAOs would undergo significant development and we see an increased number of projects aiming for ‘DAOifycation’. However, there are still basic infrastructural issues that need to be overcome, such as effective governance, inter-DAO communication, etc. The ‘one coin — one vote’ mechanism has shown its weaknesses and, in general, good voting incentives need to be developed to attract more community commitment and participation. During the past year, we have added PrimeDAO to our portfolio, which is spearheading the effort of e.g. DAO-to-DAO communication and collaboration (‘DAOplomacy’). However, since this sector is growing so rapidly we felt it was important to put forward a DAO assessment framework, introducing 21 objective metrics that can be used to gain an initial overview and understanding of any DAO. This framework is continually evolving and we welcome feedback.
We also made important investments on the infrastructure side, such as Subsquid, an indexing solution for Polkadot and beyond; and LiFi, a powerful bridge and DEX aggregator, which allows for cross-chain bridging, swapping and messaging. Projects from the infrastructure segment will represent a majority in our portfolio as interoperability (cross-chain bridges and communication across ecosystems) and scalability have not been sufficiently addressed by current solutions and a broader menu of supporting infrastructure is still required (e.g. oracles, decentralised identity and storage). We are always keen to hear about novel L0/L1 blockchains and L2 scaling technologies.
We have also ventured into the NFT space with investments, such as Darkblock, which provides a solution to upgrade and empower NFTs and keeps them more secure as these represent attractive, lucrative targets. We also invested in Meta Nanos, a fantasy-type racing game, which is set to launch later this year. We will continue to support NFT-based business models and feel there’s a bright future for these types of tokens in a number of decentralised applications.
DeFi is represented in our portfolio with investments such as Mangrove, Polysynth and Bit2Me. However, we see an increase in ‘copycat’ projects in our dealflow and less true innovation. We believe though that more work is needed in terms of higher security and user experience to build trust and to attract greater adoption of decentralised applications in this segment.
The ‘data & AI’ segment has been in development for a number of years and we will see an increase in sector-specific applications being built and put into practice (e.g. decentralised health-tech, decentralised science, mobility / IoT, etc). This is also something we see in our continuous trend analysis, which gets data points from e.g. personal networks and our in-house technical solution.
As an industry, we have experienced some set-backs over the past months — Solana, an infrastructure protocol, was halted 7 times; and the LUNA/Terra-based algorithmic stable coin UST experienced de-pegging, taking down the whole ecosystem and posing further questions on the status of the technology, not mentioning some major exploits in the NFT sector. While some events could have been anticipated, we shall not forget that building in this space is bleeding edge, meaning there will inevitably be challenges on the way, and it’s important to look beyond infrastructure silos and person cults, and keep collaborating at large. On the flipside, Ethereum has successfully introduced ‘the merge’ to their testnet Ropsten moving the infrastructure closer to a move from PoW to PoS. We expect to hear more positive news from other major infrastructure efforts, such as Avalanche, Celestia, Cosmos and Polkadot.
We have certainly hit a bear market in the past weeks. But how does the current market situation affect our appetite to invest? Not at all. We keep investing in high-quality pre-seed and seed-stage projects following our rigorous due diligence process where token utility and value accrual are core criteria. We firmly believe Web3 technologies play an important part of our future and offer opportunities for new business models and even whole economic systems as we transition from the internet of information to the internet of value. While recent geopolitical events have created strong pressure on the digital asset and other global markets, we stand strong with our thesis that digital assets and tokenised economies are here to stay and represent an overdue paradigm shift beyond economic systems.
