What do projects need most to scale for success
Rockaway Blockchain Fund
The following data will no doubt be outdated in only a week after this article is written. However, it is worth highlighting some trends from early Q4 2021 for context around the current environment for investing in digital assets.
In 2021, the total market capitalization of cryptocurrencies increased nearly 4x to about $3 trillion by mid-November.
The total supply of stablecoins has increased about 4.5x since the start of 2021 to nearly $130 billion.
In the last year, Total Value Locked (TVL) on Ethereum Layer 2 (L2) scaling solutions increased more than 50x in terms of ETH, and nearly 600x in terms of US$, reaching almost $5 billion. It is still small at ~3% of the ETH locked on Ethereum L1 but growing.
Data Source: l2beat.com
Yet, even with this impressive growth in 2021, the adoption of digital assets is in its infancy when compared to the number of users of the internet globally back in the 1990s.
This prospect for growth has attracted significant venture capital investment into digital assets, which we estimate has reached more than $24 billion so far in 2021. And while a Chainanalysis report highlighted that crypto adoption was highest in Western Europe in 2021, it has been reported that only 12% of funds actively investing into DeFi are based in Europe.
Data Source: Chainalysis
To us, this means there is a huge opportunity for a European VC to raise capital locally and deploy it globally. So what should a VC do in order to be a sought after partner for projects raising funds to launch and scale? Our answer: We help founders ship products faster.
We take a hands-on approach to investing, and do this in several ways:
We run validators and staking infrastructure. This is done by members of our team, not outsourced to a third party, and they achieve higher than 99.9% availability and actively participate in governance initiatives proposed by the community. In addition to mainnet validators for projects like Solana, Terra, and Pokt, the team also supports testnet validators for Agoric and Vega.
We arrange security audits of smart contracts. The use of smart contracts in protocols effectively mitigates counter party risk in transactions. However, this holds so long as the risk of hacks is sufficiently mitigated. We’ve partnered with Ackee Blockchain, which works with well-known security experts to identify flaws before they are exploited.
We are liquidity providers. In addition to development and buildout, new projects also benefit from the availability of capital to facilitate transactions in liquid markets. Our dedicated asset management team employs various strategies to help provide this liquidity for projects and thereby generates yield on otherwise idle capital.
We publish our analysis. Early-stage investing in the digital asset space requires quick decision making, and we focus primarily on the quality of teams behind each project as well as estimates of market potential. These estimates are based on a variety of assumptions and we believe it is important to share this analysis, both to be challenged in our thinking and to explain the conviction in our position.
We can help find developer talent. Our portfolio companies span the globe and our roots are in Central Europe, which has a long history of producing valuable IT and security companies from a deep pool of developer talent. Nearly every project we speak to identifies a lack of depth on their development team as a limitation to scaling quickly. We are uniquely positioned to help match passionate coders with the best projects building the future of the blockchain.
Taken together, we believe these are the five ingredients that best position projects to scale rapidly and succeed.