crypto strategy

Six crypto investors talk about DeFi and the way forward for its adoption in 2023

The crypto venture capital industry has become more selective thanks to the general market downturn and shaky confidence caused by a host of scandals and market disruptions, but big corporate investors are still writing checks in the space. .

Amid market volatility, decentralized finance, or DeFi, is an area that continues to be a focus both in the crypto-VC world and in the wider community as new use cases, protocols and projects appear.

Between 20% and 50% of crypto-related locations today are DeFi-focused, said several investors we interviewed. This shows that there are a large number of DeFi projects seeking funding.

“To stand out in this crowded space, founders need to focus on highlighting a unique technology and a clear advantage for a specific use case, as well as a defensible moat,” said Alex. Marinier, founder and general partner of New Form Capital.

Ultimately, DeFi is a mirror image of traditional finance (TradFi), and founders who have deep industry expertise in TradFi, coupled with a fundamental understanding of blockchains will stand out from other teams, shared Paul Veradittakit, General Partner at Pantera Capital.

Last year, the crypto world faced a handful of industry changing events like Terra/LUNA ecosystem collapse in May and the cryptocurrency exchange FTX Collapse beginning of November. Both events brought down a lot of small startups and big players who got mixed up with these now defunct market players.

As the market looks to the future, some venture capitalists are revamping their investment strategies, while others are sticking to their current plans, with maybe a little tweak or two. Read on to learn how active investors think about DeFi, how they advise their portfolio companies in the absence of funding, how best to approach them, and more.

We surveyed:


Michael Anderson, Co-Founder, Framework Ventures

How big is the DeFi market today? How much do you think it will increase over the next five years?

When we think of the DeFi market, we look at the total market cap of DeFi assets, total value locked (TVL), and trading volume. While Total Value Locked (TVL) as a metric certainly has its flaws, we think it’s still a decent measure of activity in the industry. As TVL rises, we also think it’s possible that the total market capitalization will follow.

We closely monitor the relative activity of the sector, such as exchanges, volumes and users, compared to centralized alternatives such as exchanges. Despite the negative sentiment surrounding crypto today, we still believe that activity will eventually return to the industry. However, following all these dramatic Centralized Finance (CeFi) explosions, we believe that the next time users decide to enter the space, they will think twice before trusting an exchange or a CeFi company, and will choose to use decentralized protocols instead.

What were the biggest challenges your business faced in 2022? What measures are you taking to better prepare for 2023?

As with most space investors, our biggest challenge has been navigating the seemingly endless CeFi outbursts and failures that have rocked our industry. We were able to avoid the vast majority of these explosions because we handed over several FTX ecosystem projects.

As a result, Framework hasn’t been hit as hard as most major VCs in the industry, and we’re in a pretty strong position to continue to deploy capital into this new market.

These CeFi incidents have caused a lot of collateral damage in the industry, so a major priority over the last 12 months has been to ensure that all companies in our portfolio are strong, liquid, well capitalized and can survive the 1 to next 3 years. This means helping our portfolio founders reduce costs, prioritize high-growth businesses, and provide guidance on product, growth, and future fundraising strategy in a less friendly funding environment.

In general, our position is a validation of our fundamental theses over the past 3 years, and we will continue to double down on DeFi, Web3 games, etc. Given that many other companies are not actively investing at this time, we view this market as an excellent opportunity for Framework to selectively deploy capital.

How do you advise your portfolio companies heading into 2023?

We are working with them to reduce costs and focus on surviving the next 1-3 years. We believe in crypto for the long haul, but we don’t know how quickly the market might rebound, so survival should be the top priority.

We also encourage founders to think more strategically about project development. If a team were to focus on three different areas, we encourage them to focus only on the highest growth business.

Of all the pitches you get, what percentage are DeFi protocols or projects? What can they do to stand out in the wider crypto landscape?

Nowadays, around 30% to 35% of the pitches we receive are firmly focused on DeFi.

If a DeFi project really wants to stand out, we want to see that they think about where the puck goes. We are looking for projects that have the potential to be regulatory compliant. It’s a non-runner if the team doesn’t think about the regulations or thinks they can just figure it out later.

Additionally, we are interested in projects that have direct links to institutions or at least a compelling growth strategy that involves institutions. We don’t think retail will provide a large enough market for projects in DeFi in the next two years, so creating something attractive to institutions should be more of a priority than before.

We also want to see that the project differentiates itself from a product perspective. We are not interested in another Uniswap clone, or an Open Sea imitator of the alt-L1 flavor of the week.

What is your current strategy for investing in DeFi protocols and projects? How has this changed from previous quarters?

In 2020, at the height of the DeFi summer, the market was big enough for projects to court retail and DeFi degens. [a nickname for people interested in risky, niche, speculative crypto projects]. The market is totally different now.

Unfortunately, retail boomed in more than a dozen different ways in the past year, and it’s unlikely to return for a few years. Therefore, we focus more on projects that think they address new users and more institutional markets.

We understand that regulation is likely to happen, so we are very interested in projects that are pro-regulation, or at the very least, favorable to regulation.

What types of DeFi use cases do you think will see more mainstream adoption in the future? Which areas of DeFi are now seen as more important than before?

With the merger officially behind us, liquid staking has become a big area of ​​excitement for us. We believe that liquid staking projects will receive much more attention after Shanghai goes live and users will have the ability to withdraw their assets without worrying about illiquidity.

How to bridge the gap between traditional finance (TradFi) and DeFi?

We need to see more DeFi products and services that scale more realistically for institutions. This means projects that have pro-regulatory elements built into the products themselves, including KYC, the ability to limit certain assets, and more. The projects institutions will be able to transact with will not look like the traditional DeFi we are used to and will co-exist as a relatively different ecosystem.

How do you think regulatory frameworks can affect the DeFi space? Which country or region seems to be heading in the best direction?

At some point in 2023, we will have the landmark crypto regulations that everyone has been waiting for for years. More clarity could be very positive.

We don’t have a firm position, but at first glance it looks like the UK is fast becoming one of the most open, from a thought leader’s perspective.

How do you like to receive pitches? What’s the most important thing a founder should know before talking to you?

We really like a good script. We want to know why you are working on this issue, why it needs to be fixed now, and why you think you can beat everyone. Competitive advantage is essential for us.

Alex Marinier, Founder and General Partner, New Form Capital

How big is the DeFi market today? How much do you think it will increase over the next five years?

The DeFi market is currently around $50 billion in TVL. Over the next five years, we expect the market to split into two categories: licensed and unlicensed.

Authorized DeFi will gain traction among institutions as it combines the benefits of blockchain technology with the compliance standards of traditional finance. If just a small percentage of traditional financial activity moved on-chain, it could create a market opportunity worth over $1 trillion.

When you add permissionless DeFi, which is geared more towards individual users and makes up the bulk of DeFi today, the combined market has the potential to be worth between $500 billion and $2 trillion by 2028. .

That said, the growth of DeFi will depend on more than just an increase in use cases. It will also be influenced by developments in infrastructure, regulation and financial innovation.

What were the biggest challenges your business faced in 2022? What measures are you taking to better prepare for 2023?

Navigating the high profile slumps (Terra, Celsius, FTX) was certainly the focus of 2022. We had to take more time to support our founders and ensure they have sufficient track to withstand a prolonged bear market.

This year, our goal is to help founders find creative ways to grow in this market and position themselves for the next bull market. We are also focused on finding opportunistic investments at attractive valuations and incubating more projects internally.

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