Interviewee: Arthur 0x, founder of DeFiance Capital

Original compilation: Deep Chao TechFlow

In this issue of Crypto Market Wizards, Taiki Maeda interviews Arthur 0x, founder of DeFiance Capital. As a veteran cryptocurrency expert and investor, Arthur 0x shares his in-depth insights into the crypto market, including his personal investment strategies, market analysis, and predictions for the future of cryptocurrencies.

Moderator: Taiki Maeda, founder of HFA Research

Speaker: Arthur, founder of DeFiance Capital

Arthur 0x personal background

Arthur said he entered the crypto space in 2017 when he was 20 years old and found it very interesting due to its global nature and active participation. After exploring different roles within the industry, including running his own startup and working for Layer 1 protocols, Arthur found success in investing.

He added that he became an investor based on fundamentals and focused on potential use cases for cryptocurrencies outside of speculation. This prompted him to delve deeper into DeFi in early 2019 and take advantage of the opportunities presented by DeFi Summer.

market conditions

Arthur mentioned that the crypto market has changed significantly since the last conversation 3 years ago. Many well-known organizations or individuals have collapsed, and the crypto space has experienced a reshuffle. The mortgage sector, in particular, no longer exists, and this shift has had an impact on market infrastructure.

Arthur believes that while it may take time for people to adapt again, the need for leverage will always be there. He predicts that transparency and auditing requirements will increase before undercollateralized loans become more common again.

Arthur said he is bullish on current market conditions. While he doesnt think the market will reach a peak like 2021, the market has bottomed out and is currently experiencing a mini-bull run.

Advantages of Liquid Crypto Markets

Arthur stressed that unbalanced capital inflows could lead to structural distortions in the crypto market. He divided market participants into four categories: retail investors, crypto companies, large companies and VCs. Among them, VC capital inflows may disrupt the natural flow of the market.

Arthur explained that retail investors often have a negative view of VCs due to their influence on market dynamics. He believes it is important for retail investors to understand how VCs operate and their role in shaping the market.

Arthur discusses some of the distortions caused by uneven capital inflows:

• Due to excessive VC funding, some projects are overvalued.

• Resources were misallocated and projects prioritized financing over product development.

• Competition for VC funds among projects has intensified, leading to inflated valuations.

Arthur stressed the need for a balanced market structure in which each category of players plays their role and no one group is overly dominated. He suggested that a healthy market structure would allow for fair competition and innovation.

Arthur said that due to the frequent fluctuations in cryptocurrencies, many investors choose to invest in cryptocurrencies through venture capital transactions. They seek out private deals and hold their investments until the lock-up period ends, and large institutions generally do not buy crypto assets directly.

Healthy capital markets require early-stage VC and public market investment, he added. Due to the volatility of cryptocurrency prices, many investors only focus on venture funds. However, having liquidity in public markets is critical to sending accurate market signals.

Arthur said that in the crypto space, there is an oversupply of capital chasing a limited number of high-quality private transactions. Institutional investors often overlook good projects with liquid tokens because they invest exclusively in venture funds. This distortion has gradually corrected over the past 6-12 months, but before then, approximately 80% of crypto financing was concentrated in venture funds.

Fundamentals vs Narrative

Arthur said fundamentals are important in crypto investing, but are not defined in the same way as traditional stock markets. Community and narrative are considered part of the fundamentals of crypto investing. While narratives drive attention-based markets, empirical evidence suggests fundamentals still play a role.

He added that assessing the fundamentals of cryptocurrencies involves more than just cash flow revenue. Community concerns and other intangible factors are part of evaluating the fundamentals. Simply having good fundamentals may not be enough, new information or developments may affect prices.

Arthur said the narrative-driven nature of crypto markets is influenced by attention-based markets. Narratives about speed, innovation and other factors can capture attention. It’s unclear whether fundamentals or narratives will have a greater impact on price increases during the next wave of adoption.

He added that good fundamentals may not be enough without new information that affects prices. Strong fundamentals combined with new marginal information can influence price action.

Features of Home Run Trading

Arthur said home run trading involves identifying trends that end up being bigger than expected, with examples including DeFi and gaming, as well as NFTs.

Deep Tide Note: Home Run Trades are commonly used in the financial and investment fields and refer to those trades that achieve unusually high returns.

He added that early entry into trends is critical to maximizing returns. Increasing position size depends on risk tolerance and market volatility. There are no hard and fast rules for position size, but for high-conviction investing, its usually between 10% -20%.

Decentralized derivatives

Arthur added that decentralized derivatives are seen as a promising area in DeFi. The derivatives trading unit expects annual revenue of $10 to $15 billion. There is still room for growth in certain subcategories within DeFi that can offer good risk-scale returns.

He said that decentralized platforms are expected to grow five to 10 times due to increased market share, assuming total crypto leverage trading volume remains unchanged. This growth provides opportunities for significant returns.

dYdX Unlocking Impact on Price

Arthur expressed a high degree of confidence in the decentralized platform dYdX, mentioning that they were the main investor in dYdX’s Series B funding round and continue to be optimistic about the project.

Arthur says not all unlock events are created equal and two factors should be considered:

• Investor Base: VC firms with a long-term view are more likely to hold, while smaller investors may be selling.

• Project Performance: If a project achieves the expected returns, or investors realize their investment thesis was wrong, they may choose to sell.

He added that cryptocurrencies are a reflexive asset class, meaning market conditions can affect investor sentiment. In a bear market, investors may become pessimistic about their investments and consider selling. Conversely, during a bull market, they may see further growth potential and hold on to their investments.

Arthur said unlocking events can be a catalyst for price movement and draw attention to a project. However, the unlocking event itself should not be the sole basis for investment decisions.

He added that despite significant investments in decentralized derivatives projects, none have been able to replace dYdX as the market leader.

Arthur believes that from a valuation perspective, dYdX is not expensive compared to other projects with similar valuations, adding that many investors prefer to hold on to well-performing category leaders rather than sell their positions .

Arthur is optimistic about the track

Arthur said the decentralized derivatives trading protocol offers investment opportunities due to its revenue sharing model with token holders. These protocols derive value from transaction volume, making them investable and exposed to the crypto market.

Layer 1 solutions like Solana and Layer 2 solutions like Polygon are also considered trustworthy investments, he added. Solana has demonstrated significant growth and resilience during market declines. People have a bullish attitude towards Polygon due to its information asymmetry advantage.

L1 & L2

Arthur said EVMs dominance in the L2 ecosystem is unlikely to disappear anytime soon. Non-EVM chains face difficulty competing with the established EVM ecosystem due to incentives for developers, user base, and tool availability. While it is not impossible for a non-EVM chain to succeed, it is extremely challenging. L2 solutions that manage to compete without EVM, such as Solana and Cosmos, are outliers, not the norm.

Arthur believes that the technology behind Polygon, especially its zkEVM technology, is an important factor in its bullishness. He highlighted potential challenges with Optimistic Rollup, such as a lack of fraud protection and withdrawal time issues. From a technology perspective, ZK-Rollups are expected to gain greater adoption in the future.

He mentioned that developers prefer to build on familiar smart contract languages, which makes zkEVM an attractive option. The market may have overlooked these factors, making Polygon one of the best L2 solutions out there.

game

Arthur believes gaming is a good fit for cryptocurrencies due to its community-driven nature. Gaming is considered an important industry, even bigger than the revenue from music and movies combined. Cryptocurrency can bring improvements to the gaming industry.

He added that tokens can gain value depending on how they are designed, such as through governance or in-game currency. Timing plays a big role in determining the success of a token’s integration into a game.

He added that Web3 games offer game studios an opportunity to reach global audiences without relying on traditional publishers. Big publishers often slash game revenue and impose restrictions on studios. Some mid-sized game studios see Web3 as a way to get around these challenges, especially in Asia.

Arthur said not all games have the same lifespan, with some genres having shorter lifespans. Single-player games with limited playable content may not be suitable for cryptocurrency integration. MMORPGs and strategy games are considered genres that offer long-lasting gaming experiences. Community involvement and an active user base contribute to the success of these types of games.

He expressed a preference for longer-lived games rather than short-term projects. Different game types have different levels of longevity, affecting their suitability for integrating cryptocurrencies.

The operating logic of Atom Osmosis

Arthur said Osmosis should be viewed as a combination of DEX and L2 protocols. It is the central liquidity pool of the Cosmos ecosystem and acts as the IBC hub. Historically, the Cosmos project has faced liquidity and accessibility issues, and Osmsion aims to solve these issues.

He added that Osmosis has become the de facto IBC center for Cosmos application chain tokens. Many high-profile projects in the Cosmo ecosystem have launched on Osmosis, increasing demand for their tokens. $OSMO is used as the base pair for trading other Cosmo Application Chain tokens via IBC.

Arthur said Osmosis would benefit greatly if liquidity flows into the Cosmos ecosystem. Pairing new Cosmos tokens with $OSMO on DEX will create more demand for $OSMO. Decentralized derivatives are expected to gain market share among CEXs, further benefiting Osmosis. Taking these factors into account, investing in Osmosis can offer good risk-reward potential and capture the growth of the ecosystem.

Common characteristics of successful traders

Arthur says risk management is crucial to successful trading. Lack of risk management can result in significant losses. This is an example of some traders who, despite all their advantages and resources, suffer losses due to lack of risk management.

He added that successful traders have a trading framework that fits their style and are able to stick to it. Its easy to be influenced by the opinions of others in the market, but having a clear framework helps avoid unnecessary risks.