Interview with ParaFi Capital, the creator of DeFi outlets: the "barbarian" who entered the encrypted world from KKR
Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom), Author: Brother Xiao Mao, published with authorization.
Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, Author: Brother Xiao Mao, published with authorization.
Let's go back in time to 5 months ago. On March 12, the Wall Street Journal published a piece of news, disclosing that Benjamin Forman, an investor who has moved from the well-known traditional private equity giant KKR to the cryptocurrency world, made his first investment in the blockchain field: the encryption he founded Currency investment fund ParaFi Capital, along with Bain Capital and Uncorrelated Ventures, another crypto venture capital, invested in the decentralized lending protocol MakerDAO last year.
According to reports, the three investment institutions spent $7 million to acquire Maker tokens from the MakerDAO Foundation in the second half of last year. Their average purchase price is around $400-$450 per Maker token.
The news of this investment was not actually announced until several months after the completion of the token acquisition, but at this moment of announcement, it was somewhat embarrassing.
March 12, 2020, is a "Black Swan Day" in the cryptocurrency world. On this day, all kinds of assets around the world suffered severe shrinkage, and the cryptocurrency market was not spared. The biggest drop of Bitcoin was 50% on that day, and Ethereum also experienced a bloody storm. Various DeFi platforms on Ethereum were forced to liquidate a large number of pledged assets during the price plunge. Due to network congestion and oracle failures, the leading DeFi protocol, MakerDAO, generated more than $4 million in bad debts on that day-for a borrower who borrows through pledged assets This is a fairly significant loss for the protocol, which for the first time needs to be recapitalized by auctioning MKR tokens to pay off these undercollateralized distressed debts. The price of the Maker token dropped to around $210 at one point.
Although the price of Maker tokens is only half of the price of his investment at this time, Benjamin Forman is not worried about this investment. Lianwen got in touch with Benjamin Forman at the time and asked him how to face such "book losses". He told Lianwen: "We should look at this incident in this way. I am actually very encouraged by the resilience of the decentralized finance (DeFi) field and the MakerDAO community in this market crash. They quickly improved the mortgage asset auction mechanism. , introduced USDC as a collateral asset. I think MakerDAO is very good at improving its ability to resist further market deterioration.”
Five months later, the panic of "3.12 Black Swan Day" has long been a thing of the past. Decentralized finance has become a new mainstream in the cryptocurrency field, and more and more DeFi projects have been discovered by the market. If the rate of return on capital is used as a consideration for investment projects, in the investment portfolio disclosed by ParaFi Capital to Lianwen at that time, the DeFi lending agreement Aave and the DeFi liquidity agreement Kyber Network have achieved an astonishing rate of return of 3000% and 700% respectively since the beginning of the year .
Obviously, ParaFi Capital is a smart institutional investor who has laid out in advance and obtained opportunities in the DeFi field. Aave founder and CEO Stani Kulechov once revealed, "ParaFi Capital is one of the earliest and largest institutional investors in Aave's native token LEND." AAVE is one of the fastest-growing DeFi projects this year.
Founded in 2018 and headquartered in San Francisco, ParaFi Capital is a venture capital firm focused on blockchain and decentralized financial markets. It is especially worth mentioning that the founder of the institution, Benjamin Forman, is from private equity giant KKR and is a former employee of KKR.
According to public information, ParaFi Capital managed about US$25 million in assets at the end of 2019-in the field of cryptocurrency investment, this asset size is medium. However, we can boldly speculate that since the end of 2019, the success of investment projects in the DeFi field has brought ParaFi an enviable development speed.
secondary title
Demystifying ParaFi's investment landscape
Judging from the public information, ParaFi is very mysterious. It has not published its investment information on the website, and the agency's Twitter has only a few forwarded information. According to public information and multiple confirmations, Lianwen sorted out ParaFi's investment landscape within two years:
From the current investment portfolio, it can be seen that most of ParaFi Capital currently invests in the leading projects or infrastructure of the DeFi track. DeFi is the main investment theme of the fund. In addition, ParaFi also participates in investing in the blockchain Data index project The Graph and crypto exchange Coinbase.
In the field of DeFi, the specific projects that the institution participates in include:
DeFi Lending Protocol Aave
DeFi Liquidity Protocol Kyber Network
Synthetic asset protocol Synthetix
Stablecoin Project MakerDAO
Compound, a decentralized lending protocol
Decentralized Lending Project Teller
Ethereum Mutual Insurance Protocol Nexus Mutual
Privacy cross-chain protocol Keep Network
It can be found that projects such as MakerDAO, Compound, Kyber Network, and Aave that ParaFi has invested in are all top projects in various sub-tracks in the DeFi field, covering infrastructure including underlying protocols such as lending, stablecoins, and finance.
ParaFi Capital stated that the investment in Kyber Network, a decentralized liquidity aggregation protocol, is in the form of non-public direct purchase of the project's native token KNC.
Benjamin Forman
Blessing by traditional capital giants
The agency's core team has three members, namely founder Benjamin Forman, partner Santiago Roel Santos and director Kevin Yedid-Botton. Benjamin Forman previously worked in the credit business of private equity giant KKR and served as the head of the cryptocurrency and blockchain research department; Santiago Roel Santos previously worked at JPMorgan Chase and served as the director of research and business growth at the biotechnology company Elysium Health; Kevin Yedid-Botton previously founded Silicon Valley startup Tenzar Technologies.
image description
When working at private equity giant KKR, Benjamin Forman was mainly engaged in the credit business. After he left in 2018, he founded ParaFi and received investment from KKR co-founder and US billionaire Henry Kravis. This is the first time that Henry Kravis has invested in an encryption venture capital company, and Henry Kravis is one of the co-founders of KKR, a traditional private equity giant-one of the three letters of the "KKR" company name "K" comes from his surname Initials.
The full name of "KKR" is Kohlberg Kravis Roberts & Co. LP. This institution is hailed as the "Old King of Leveraged Buyouts" by traditional financial circles. One of the most prolific private equity investment institutions, KKR's current asset management scale is approximately US$98 billion.
image description
In addition to KKR, Bain Capital and Dragonfly Capital Partners, a blockchain investment fund founded by Feng Bo, are also investors in ParaFi Capital.
This is an institution that has a deep relationship with the traditional financial field. Benjamin Forman was previously in charge of cryptocurrency research at KKR, but he said that he is not optimistic about investing in the blockchain field at KKR, a private equity firm, because this established company does not meet the best environment for blockchain investment. He also expressed his ambition in the interview, "I don't want to seek crypto investment in KKR, but I want to build KKR in the field of crypto investment."
As Benjamin Forman said, traditional capital giants may not be able to operate in the field of cryptocurrency investment due to factors such as internal environment, policy risk aversion, etc., and by supporting new encryption investment companies independent of traditional capital, KKR also tasted encryption The sweetness of investment may bring a good example for traditional capital investment institutions to enter the encryption investment field.
Another fantasy brought to us by ParaFi is that because ParaFi focuses on the DeFi track, it brings not only the successful value investment of DeFi projects to the traditional capital represented by KKR, which supports it, but also the high returns of DeFi funds. The rate may also attract more off-market traditional funds in the future.
Investment Model Change: Deeply Participate in DeFi Project Governance
Different from traditional investment, except for direct investment, ParaFi Capital has stated that it will actively participate in the governance of DeFi projects. Since the tokens of most DeFi projects are governance tokens, in a sense, this is also an improvement made by capital to adapt to the "decentralized" nature of DeFi projects.
Taking Kyber Network as an example, ParaFi Capital stated that it will cooperate with the Kyber team to jointly develop the Katalyst version, and will discuss and actively participate in the governance of KyberDAO, including voting on network parameters. With the development of on-chain governance and DAO in the DeFi field, this has become a new paradigm for the continuous investment and common development of capital and DeFi projects.
Benjamin Forman said in the interview: “We believe that investing in cryptocurrencies, especially DeFi, requires aggressive action, which means helping portfolio projects as early as possible.”
Harvest the long-term dividends of DeFi projects
Due to the perfect development of DeFi and Stake models, compared with traditional investment project equity or tokens, most DeFi projects have begun to bring investors platform governance rights and more long-term development dividends, such as handling fee dividends, Stake rewards, etc. passive income. ParaFi Capital stated, “We choose to invest in blockchain projects with product-market fit and attractive token economic models.”
The economic model of DeFi tokens is very important to ParaFi's investment considerations. They believe that good token value capture will bring different "moats" behind the protocol.At the same time, due to the transparent and open mechanism of DeFi projects, both institutional investors and retail investors will participate in models including liquidity mining or Staking under the same open mechanism. Taking Kyber Network as an example, ParaFi Capital can not only participate in project governance through KNC tokens, but also obtain trading platform fee dividends in the form of ETH by participating in Staking KNC tokens. Under this model, better token value capture can better motivate investment institutions to make long-term investments.secondary title
Hear what ParaFi has to say
Lianwen once published an article "
Which areas are Asia's top blockchain venture capitals most concerned about? Not DeFi anyway
"The report reads: "We found that these top Asian blockchain institutions are relatively cautious about investing in the concept of DeFi. They still lock the most capital in exchanges with entry-level products and very clear profit models, and The underlying blockchain technology of cryptocurrencies itself.”
Compared to ParaFi, which focuses on DeFi investment, we may be able to learn some lessons from ParaFi's experience and views. Why has ParaFi already laid out and continues to invest in the DeFi track? What are their plans for the future?
We chatted with Benjamin Forman, founder and CEO of ParaFi Capital, about the firm's approach to investing:
Lianwen: We noticed that ParaFi Capital announced earlier that it has invested in Kyber Network and will participate in KyberDAO's mortgage and governance. What are the main reasons to invest and buy Kyber Network?
Benjamin Forman: We are excited about Kyber Network's potential to become the liquidity protocol for all decentralized finance. We are impressed by the huge growth of Kyber Network's key figures including transaction volume. In the past year, the monthly transaction volume of Kyber Network has tripled, exceeding $15 million in March this year alone. Kyber Network has also been integrated by many related projects, including 1inch, Trust Wallet, and Argent. At the same time, the project has designed and implemented a thoughtful token economic model, and the Kyber team has done an excellent job of executing the project's roadmap.
Recently, ParaFi worked closely with the Kyber team on the highly anticipated Katalyst release. We look forward to actively participating in KyberDAO governance, voting on network parameters, and working with professional market makers to bring more trading volume to the Kyber Network.
Lianwen: Someone suggested that DEX (decentralized exchange) is replacing CEX (centralized exchange). What kind of DEX do you like?
Benjamin Forman: We see promise in both automated market makers (AMMs) and traditional order shop models. AMMs like Uniswap, Balancer, Curve, and others facilitate permissionless trading of virtually any token and offer token holders the opportunity to earn passive income. AMMs also allow projects to channel the initial liquidity of their tokens without relying on listings on decentralized exchanges.
We are excited about the next generation of automated market makers as this model focuses on specific use cases and more efficient transactions. For example, Curve has developed more efficient stablecoin transactions through an optimized AMM curve model for low-volatility assets. Balancer and Uniswap v2 allow more modular trading pairs and lower slippage, effectively improving trading efficiency.
In terms of the order book model, we have also begun to see the emergence of decentralized exchanges combined with new expansion solutions, including DeversiFi with STARK integration and IDEX 2.0. As these protocols develop and these projects add more tools for larger market makers, we expect to see greater trading volumes enter the DEX space. ParaFi Capital is also excited to be part of the Chicago DeFi Alliance and to see some traditional large trading firms exploring the DEX space.
Lianwen: We understand that the ParaFi team has previous experience in the field of traditional investment. What is your main focus in the field of cryptocurrency investment?
Benjamin Forman: Our focus is on the field of decentralized finance (DeFi), which represents the next wave of financial innovation and is rapidly going global. The benefits of an open and decentralized financial system will be hard to ignore. ParaFi invests in the infrastructure of financial markets on the blockchain at the same time. These financial market infrastructures provide tangible benefits over the existing financial system, such as decentralized currencies. markets, stablecoins, insurance, and derivatives markets.
Lianwen: When do you think DeFi will really have an impact on traditional finance? If there was a real shock to financial institutions, what would it be?
Benjamin Forman: In terms of the total value of locked assets, the number of users, the number of projects, etc., we have obviously seen the explosive growth of DeFi, and this growth has begun to confirm some of DeFi's core advantages over traditional finance, including unlimited global access , Minimal counterparty risk, guaranteed privacy, lower transaction fees, faster processing speed, etc.
At the same time, DeFi brings new financial raw data, such as flash loans and automatic market-making mechanisms. Although still in its infancy, we believe DeFi is already starting to have a real impact on traditional finance.
Taking stablecoins as an example, the supply of USDT and USDC has almost doubled to date. This huge demand can be attributed to the ease of use of stablecoins in terms of transfers, reduced fees, custody and open access. We’ve seen cryptocurrency traders continue to use stablecoin trading pairs amid market volatility, and at the same time, demand for an easy-to-use digital dollar continues to grow.
