Consensus and Non-consensus: Countercyclical Direction in Bear Market
Original Author: Jims Young
The primary market has been quiet for too long, and it has been a long time since I saw anything new. However, in theory, for VCs, a bear market is the time to enter contracyclically. Based on this judgment, in June, I went to Singapore, and had discussions with many old friends and new acquaintances about the direction in the bear market. I discovered many consensus and non-consensus views in various industries and also gained some insights. After sharing internally, I wrote it down for further discussion, and I welcome project parties and VC friends to exchange more. Due to space limitations (meaning it will be endless:P), this time is more about the framework, and in the future, I can write more observations and judgments on specific tracks if I have time.
1. Consensus: What everyone generally agrees on
1.1 Two main investment strategies: 1) The essence of returning to finance 2) Huge opportunities in the application layer
Currently, there are two mainstream investment strategies. One is to return to the essence of blockchain - the approach in finance, investing in RWAs, insurance, payment channels, banking-like projects, derivatives, stablecoins, and so on. In fact, this trend has been evident since the Wanxiang Conference in Hong Kong, but it has become more frequent recently. There are two angles to this investment approach. One is that there is limited innovation within the industry, while finance-related projects have been validated directions, which are secure and have cash flow. The other angle is that the narrative of compliance brings the potential for mass adoption, and fundamentally, it is a bet on the expected income from future large cash flows.
Another way is to bet on the application layer. Recently, more and more funds have started to focus on the application layer. Even funds that used to primarily invest in infrastructure are undergoing a paradigm shift. There are many reasons for this, but the main reason, in my opinion, is that there are no major technical barriers in the crypto industry. When one company's technology comes out, other competitors can quickly pivot. The core competitiveness of the chain lies in the ecosystem rather than the technology, and traffic is still the core driver of the industry. After the infrastructure becomes more refined, real applications will ultimately attract users, and the real value will also settle at this layer. Ultimately, super applications will choose infrastructure and have the ultimate dominant power, as happened on Dydx. (Opportunities in the application layer will be further explored in future articles.)
1.2 Industry development is slowing down, and the action under tightening liquidity is a question that all VCs need to answer
Loose monetary policy is the source of growth for fintech, and bubbles are the engine of the rise of new industries. Although it may be a bit absolute, it is undeniable that the rapid development of the technology industry over the past few decades has largely benefited from the capital surplus after World War II. For a small market like crypto, the most obvious example is the emergence of DeFi Summer, which was driven by the Federal Reserve's loose monetary policy. And in the current moment of tightening liquidity, both traditional VCs and crypto VCs have to answer the question: when the waves are gone, how do we ride the tide?
1) For investments: The strategy of most funds may be to invest less. If they don't understand, they don't have to invest, and if they want to invest, they can invest more. When there is enough "bar," they should place bets, and during a bear market, they should stock up on resources (so entrepreneurs, go for it, we still have liquidity). In addition to this, the crypto industry has started to focus on other industries such as AI, chips, and even biomedicine.
2) For post-investment: As pre-investment work decreases, there can actually be more post-investment work. And in the crypto industry, where the first and second levels of relationships are closely connected, more and more funds are prioritizing the refined operations of projects and assets.
2. Non-consensus: Huge divergences are also huge opportunities
2.1 Crypto investments returning to traditional US dollar logic
Crypto, as an emerging technology industry, used to have an investment logic that was tech-driven and deeply understanding. To invest, you just needed to grasp the technological superiority and make efficient money. However, as the industry becomes more mature and gradually enters the logic of application investment, the general investment strategy of USD funds may become more effective, which means investing in people and business models. Technology will be a direction worth paying attention to, but it is not the sole determining factor. Compared to the technology itself, more attention will be given to the new business models brought about by technological breakthroughs.
2.2 L2 and High-Performance L1
This may currently be the biggest non-consensus. While L2 is becoming politically correct, there are still many new public chains eagerly eyeing for it, and new chains are announcing new fundraising. Indeed, taking a long-term approach to Ethereum through Long L2 seems to be the safest choice because the perennial developers, communities, and funds are concentrated on Ethereum, making it the most suitable decentralized presence... with the premise that external conditions remain unchanged. Once new funds and new developers enter, the story may take a different turn.
2.3 AI+Web3?
Regarding AI, there is a tricky point that the AI industry, which emerged in the 1960s, has already had several waves of hype. If I remember correctly, in the middle of last year, whether the AI track is feasible was still a topic of discussion. The investment circle in Silicon Valley was still debating whether to invest in enterprise cloud and sink into Vertical data before ML and ultimately AI. However, once GPT 3.5 appeared this year, all doubts were immediately dispelled, and it has become a collective arms race that all funds are rushing into. :P
And more than half a year later, whether AI is a track or a bubble is still a mystery. Echoing @Laobai's Threads, apart from the noisy big models and application layer judgments, the traditional direction has started to discuss AGI happening at the level of embodied intelligence (that is, AI + robots, just like how Web2 could also come up with concepts). But regardless, what is visible is that this AI craze has clearly improved the user experience for C-end users, whether it's New Bing or Claude, PoeAI, they all have this nice improvement in (at least my) direct experience. And as for the combination of AI and Web3, I still believe there is potential space in the utilization of long-tail resources. Regarding this point, I can write a separate article about it later.
3. Thinking: Non-consensus Opportunities Revealed in Consensus
3.1 Infra as an "APP"?
Infrastructure is often metaphorically referred to as water, coal, and electricity, and there is concern that after becoming increasingly perfect, it will become real infrastructure that cannot capture high returns. But returning to first principles, if what we are betting on is the ultimate business model, Infra, or blockchain as a tool attribute, still has the potential to independently generate application scenarios, such as AI chains, payment chains, and so on. In fact, if a chain can do one thing well, that's great. Although it may be far away from us today, there is still a great possibility of emergence.
3.2 What is the main contradiction in the industry?
My own answer is twofold,
1) There is not enough high-quality assets on the chain.
If we bet that there will be a large amount of capital entering in the future, the premise is that there are at least interest-bearing assets on the chain that can surpass the return on US Treasuries and attract big money. The main contradiction at present is that firstly, the liquidity of assets is completely inadequate, and secondly, there are not enough excess return assets. As for tail-end money, if suitable geographical arbitrage assets can be found and implemented in areas where centralized and off-chain asset provenance is appropriate, RWA is indeed a direction.
2) There is almost no consumption on the chain.
Essentially, the vast majority of users in the cryptocurrency community are small B-side participants, with very few C-side participants. The original intention of these users is definitely to make money, and most NFT holders also hold a bullish attitude. Only a small number of NFT enthusiasts will hold onto small images regardless of their price, becoming the ultimate consumers. In this case, without real consumption, there will only be perpetual pyramid schemes.
3.3 Is the upgrade of Web3 enough?
Leapfrog theory: Due to the characteristics of technological change, developing countries have a latecomer advantage, and the technological level of advanced countries may be locked in a small range of minor changes due to technological inertia. In this case, latecomer countries may surpass the original advanced countries, which is the "leapfrog" process.
Recently, I have talked to many friends in traditional industries about the industry upgrade brought by Web3, and many people feel that it is somewhat interesting but not substantial. Yes, this is similar to promoting QR code payment in countries where everyone has credit cards. When the benefits brought by paradigm shift are not enough to outweigh the conversion costs, technological innovation becomes difficult. Similar to technological innovation in previous cycles, developing countries easily surpassed the conversion costs due to their outdated technologies, thereby creating technological breakthroughs. From this perspective, if the innovation of Web3 is limited, the possibility of disrupting the systems of developed countries will be much smaller, and instead, there may be great opportunities in developing countries.
3.4 Being an industry prophet, thinking out of the box
With the development of the blockchain industry today, due to the attributes of infrastructure, it has had various connections with IoT, finance, and even daily life. The solutions to many problems may lie outside the industry. For example, as discussed with @siyuan, the problem of Ethereum state explosion may be solved by reducing the cost of storing physical entities. Ultimately, it may be Moore's law that solves the software problem, rather than technology from the crypto-native world.
When there is no answer within the circle, one should look beyond the circle. Be a industry prophet, take a step back, from a higher perspective, in this invisible Beta era, Seeking Alpha.
Disclaimer: This article represents only the author's personal opinions, not the opinions of the author's institution. This article does not constitute any investment advice and the author is not responsible for any consequences of actions taken based on this article. Readers are strictly advised to comply with local laws and regulations. For any public reporting or references, please indicate the author and source.
