Original source: Bankless

Original source: Bankless

Original compilation: The Reading Ape

Arthur Cheong (Arthur0x), founder of DeFiance Capital, Asia's largest DeFi-focused fund, shared on the Bankless podcast how he turned a 6-figure portfolio into a 9-figure portfolio in just 3 years.

He explained the fundamentals he was focusing on in the protocol, what metrics he used for valuation, and he shared which tokens are currently undervalued. Which of the Ethereum Killers will Arthur bet on?

The following is The Reading Ape's compilation of podcast highlights:

1: Who is Arthur0x?

Founder and fund manager of DeFiance Capital (one of the largest DeFi-focused funds in Asia), one of the most successful DeFi investors in the entire cryptocurrency space, turning a 6-figure asset into a 9-figure asset in 3 years number. DeFiance Capital's investment style is: based on fundamentals, not narratives or emotions.

Arthur0x's crypto journey began in the spring of 2018, when he thought about running a cryptocurrency research start-up company, but failed to find a product-market fit, so he decided to focus on investment during the 2018 bear market, and bought a lot of funds that were not available at the time. A token that people care about.

• Two: The secret of Arthur0x's success

• Do your homework and research and focus not on the present but on the ongoing trends

• Persevere, especially in a bear market, people usually give up in a bear market

"Believe we're building something bigger than just speculating" - Arthur Cheong

• I think cryptocurrency is a level playing field for individuals from all backgrounds. I am not from a very wealthy family and I only came to Singapore 10 years ago. For everyone willing to put in the effort, cryptocurrencies truly offer an opportunity.

• It's possible to go into the crypto space, look around the environment, form a view of what's going on, and then turn that into a fund or something

Spend time in the community, communicate with the protocol team, and give support. By doing so, you may have an impact on the operation of the protocol in the future

• Three: Token value accumulation

• In a bear market, after the token drops 90%, it will drop another 80%, so there must be a floor for the price, because there are still people using the product

• This should give token holders more confidence in tough times

have to be aware of is:

• have to be aware of is:

• Is the token well designed and is the token itself well integrated into the platform?

• Does the token have strong value accumulation?

• Could the token serve as a catalyst for protocol growth?

How does the project party plan to distribute tokens?

• Example: Synthetix

• Loved Synthetix's token economy from the very beginning.

• They pioneered the use of token inflation to incentivize the community and early adopters

The level of inflation starts very high and then tapers off to reward early adopters who believed in the protocol and took the initial risk.

By taking risks on the Synthetix protocol, token holders are rewarded from the fees generated by the protocol, including the original token and additional fee income generated when people transact in the protocol.

• Example: Bancor

• After a lot of iterations, a reasonable token economic model was finally reached

• Bancor creates the most value for token holders - 40% to 60% of fees go to Bancor token holders, not in the form of income, but in the form of burns.

• At the same time support the new liquidity pool

The mechanics are still very complex, not many people understand this, so it's not highly rated

• Example: Aave and Compound

• The value accumulation between the two is very similar

• Credit a small portion of the depositor's interest to the Treasury

In the future, token holders can vote on how the Treasury's accumulated reserves are spent, either returned to token holders or invested further in the protocol.

• Four: How to build confidence and have faith?

"When you keep doing something and it keeps getting validated by your actions, your confidence grows" - Arthur Cheong

• Confidence is the memory of victory. And I believe it should be the same for everyone. For example, when you are doing something and you are constantly getting some form of validation from your actions, then your confidence will continue to grow.

• Arthur's first heavy holding was Synthetix in the bear market.

• It took 1.5 months to write a very comprehensive Synthetix report, which received a very positive response after publication

• Confidence is built as the market starts to react to this a few months later

As a result of his constant repetition of this approach, despite Bitcoin's dominance, his operations managed to outperform Bitcoin's performance, which gave him the confidence and signal to start DeFiance Capital

• Five: Advantages of DeFiance Capital

• One of the top crypto-native funds that can invest directly in The DAO

• Have worked in this field for a long time and are familiar with this structure

The DAO structure also offers some protection to investors, as the majority can influence decisions

Six: Fundamentals

1. Team quality, such as the track record the team has built

2. Valuation of the agreement

3. Technical Architecture

4. Community Engagement

5. Token Value Accumulation

6. Near-term catalysts

• About decentralization

• Decentralization only prevents protocol hacks

• Doesn't help prevent associated risk as everything falls at the same time (bear market)

However, in a bull market, some protocols will do better than others based on fundamentals

• About MEME Investing Overshadows Fundamental Investing

• Similar to traditional stock investing, no one had a way to correctly value stocks until Benjamin Graham published his book "Security Analysis"

About Decentralized Exchange (DEX) Valuation Metrics

• Trading volume

• Trading volume

The fee charged relative to the market cap of the protocol is 0.05% of transaction volume for non-stablecoin protocols and slightly lower for stablecoin protocols (e.g. 0.04% for Curve)

• Similar to Price Earnings (PE) in Tradfi

• Total Value Locked (TVL) - Indicates how much capital the protocol has guaranteed

• Capital efficiency - subject to agreement

Users and user growth - For example, Uniswap has no cash flow because there is currently no value capture, but it has a huge user base and has done the best in the industry in terms of user growth, so its valuation is very high

• Seven: Buy back and burn

• Arthur0x believes that buyback and burn is not the most ideal solution, especially when a protocol still has great growth potential.

• In the early-stage startups in the TradFi world, no one is doing stock buybacks or paying steady dividends.

• If it still has a lot of potential for growth, the capital should be reinvested rather than burned directly.

• Areas for reinvestment could be: more education, more outreach work, more translation so that those in non-English speaking communities can join the fray

Giving dividends to token holders may have tax implications, but there should still be better ways to design them

Sushiswap

• Eight: Which DeFi protocols are undervalued and why?

• Prices shouldn't be where they are given their trading volume

• Others believe that Uniswap V3 will kill Sushiswap because it is like an older version of V2 design

• But it didn't work out at all

• Uniswap V3 is more suitable for active liquidity providers (LP), that is, professional market makers, and it is difficult for retail players to become passive LPs of V3.

• Some tests (albeit with a small sample size) show that V3 does not necessarily perform better than V2

At the current price, the price of Sushiswap is zero growth, which is unlikely to happen

• Aave and Compound

• Lending is the easiest way to build a moat in DeFi

• A similarly designed new lending protocol on Ethereum won't be able to disrupt Aave and Compound in a year

• Why? It takes a long time to build trust. These two protocols have been in operation for more than a year, and no security incidents have occurred (Note: Compound has had an oracle attack incident)

• It also takes a long time to build network effects because you need to have enough deposits on the platform for people to borrow

Finally, due to the higher value of the tokens, the liquidity incentives they give are also more effective

• Nine: Will there be only one automated market-making market (AMM) in the future?

• Arthur0x does not believe in the power law (only one AMM exists to dominate the market)

• Why? Liquidity is fungible and has no loyalty

• If there is a new AMM with a superior design, liquidity will flow to it and it will dominate for a while

• When in balance, there may be several dominant AMMs and their market shares will not change much

Also, once the order reaches a certain size, people start using aggregators too

• Ten: Ethereum Killer

• Currently, more than 95% of DeFi and NFTs are on Ethereum, and in the next two years, we may see this number drop to 80%.

reason

• reason

• Other protocols start from scratch, so they will grow faster than Ethereum

• Some ETH killers are using a blue ocean strategy to target new users who have not yet joined

• Ethereum’s network effects run deep

• EVM-Compatible Scaling Solutions Further Help Strengthen Ethereum’s Network Effects

• Ethereum itself is constantly improving

Ethereum has a clear roadmap of how they plan to further decentralize

• More on Ethereum Network Effects

• Binance previously tried to build their own DEX, but failed, and quickly became the cryptocurrency company with the largest user base after they grasped the essence of Ethereum network effects.

"Switching base layers is not an easy task, unlike switching Dapps" - Arthur Cheong

I think the best analogy is the App Store. Like right now, the two most important app stores are Google and Apple. Even if a technology company as big as Microsoft wants to compete in this area and has its own app store, it can't do it.

A good analogy is like Google and Apple have their own app stores, but when big tech companies like Microsoft try to compete in this, they also fail.

• Eleven: Which ETH killer will Arthur0x bet on?

• Solana is the best competitor to Ethereum

• Can’t compete at what Ethereum does best, must take a whole new approach

• Solana will not be as decentralized as Ethereum and they will have a lot fewer nodes due to higher hardware requirements

Would rather bet on something completely different than on another protocol that makes marginal improvements to Ethereum

• Twelve: What are the differences between East and West in their views on cryptocurrencies?

• Asia can be divided into 2 distinct parts: English-speaking and non-English-speaking

Historical and cultural factors will determine the pace of adoption

• english speaking area

• Such as: India and most of Southeast Asia

• Adoption is quite common

• Understand DeFi and use it in important ways

• Have a decent DeFi community

Need to see more built-in checks and balances in protocols

• Chinese speaking region

• Such as: China

• In 2018, I was initially skeptical (whether these places could become popular), but after the DeFi summer in 2020, many new users can be seen.

• Slightly less focus on crypto concepts

• More focus on self-custody of assets as they saw the OKEx incident where no one could withdraw any balance for two months

Their trust is more in the team behind the protocol

• Japan and Korea

• Due to the language barrier, not many people use DeFi compared to other regions.

• Currently, more than 95% of DeFi and NFTs are on Ethereum, and in the next two years, we may see it drop to 80%.

• Language barriers can be overcome by using translators and building a strong foreign language community

Citing the example of Vitalik going to China to promote Ethereum, there is now a large committee in China, and the atmosphere for sharing ideas is very good.

• Thirteen: The Singapore government’s views on cryptocurrencies

• Regulators at the highest level really try to understand cryptocurrencies, and their level of understanding is probably one of the highest in global regulation

• They know the benefits of DeFi, but whether they buy it 100% remains to be seen

• They want to wait and see if the benefits of DeFi translate into real-world activity

• Follow the FATF guidelines drafted by major countries such as the US and the EU

Much less prosecuting and aggressive

• Fourteen: Views on the cryptocurrency industry in the second half of 2021

• After the success of Polygon and Binance Smart Chain, there are more scaling solutions

• More users will join, there are 1 million users now, but it may increase to 5 million to 10 million by the end of the year

• Forecast TVL will reach 200 billion by the end of the year