 Hello and welcome to the coin telegraph research terminal. I'll be your host Michael to bone. I'm an economist with coin telegraph research Joining me today is Smeet Baridi from keychain ventures a crypto investment firm that engages in the investment of funds and other investment vehicles From dragonfly capital to sieve kaurishi Dragonfly is a global crypto investment firm that deals with many areas of the blockchain industry Including working with some of the most notable names and world-renowned private equity and venture capital investors and Venture capital has been a has seen a dramatic rise in recent years climbing from over 800 deals in 2020 at around 5 billion USD to over 1300 deals in 2021 with capital inflows of over 30 billion dollars Smeet, can you tell us a little bit about keychain and what you look for in a fund before you attach the keychain name to a firm? So when we look for funds we follow an institutional approach for fund selection and portfolio construction We do have our own list of criterias that we follow from an investment in operational decisions However, at the core of it we look for three things one funds that are set up to capture the opportunity in the blockchain space and two is what we call blockchain native teams and three is a repeatable track record and what would mean by The first one is basically we believe that investing in the blockchain requires its own approach and own playbook to to capturing the best opportunities and You know the funds that are set up for the blockchain space have usually different skill sets or tools to To capture these opportunities such as being able to run nodes design token economics or network incentives Providing liquidity and helping launching some of these protocols launching communities, etc. And that's that's for us quite important To have to be able to to invest and capture the best opportunities in this space and the second point about blockchain native teams is basically teams that are embedded into the ecosystem that have You know an access of unique access to these opportunities and to these founders and then lastly is repeatable track record for us It's quite important to see a clear repeatable investment process and strategy that will lead out That will lead to outperformance in in in the fund So and depending on all of this we run a very rigorous investment and operation due decisions We have our internal process and tools that enable us to Conduct or manage a selection with an institutional quality level and that's what we aim to bring to our investors You know anybody can write a white paper Put some numbers together and make it look like there's some some there there Haseeb can you tell us a little bit about dragonfly and what do you look for in a project before investing? What we look for when we're underwriting an investment So generally there are a few different kinds of investments that require different kinds of underwriting So, um, you know, first I'll just start with seed stage investments because I think they're the the easiest to kind of wrap your head around Usually when you're investing in the seed stage there are three general Factors that almost every investor is going to look for and different investors value different ones of these factors differently depending on what kind of investor they are so the three factors are team product and market And depending on what kind of investor you are you tend to you tend to really focus on one particular part of this So some investors are like look, I really care about market. I love nft infrastructure If I see a good deal in nft infrastructure, I'm going to go for it because I think it's a going to be a huge market Some people are like look it's all about product. I just want to see a beautifully designed front end I want to see an amazing experience and if I see that I'm going to invest and that's what drives me as an investor And then there are people who are driven by team like look I just want to bet on smart people and even if the product isn't really there yet Or if the market is a little unstructured or hasn't been proven. That's fine I just I think people are going to figure it out and it's ultimately about people So different investors sit on a different place in this in this kind of triangle And I'd say for dragonfly or at least for me personally I tend to skew much more team in the early stage where you know historically what I can tell you is that A lot of the founders that we have backed initially they didn't really have a clear idea of what the market was going to be Or the market didn't even exist yet You know defi is a perfect example of that is that in the early days of defi It was all betting on founders because there was no market. There was no traction like defi The term defi hadn't even been coined in 2019 when we started investing into defi Defi was a marketing term that was invented by dharma Which it came a good while after the market really congealed and became really tangible as a as a real meaningful thing And so back then And the products of course were all terrible or you know, most of them were pre-launch and the uis were all garbage The ux was really bad And so the only thing you could really bet on back then was people and And this this has really informed a lot of my view about how investing in early stage has to go Is it has to be about investing in people? but as You look later in later stage when you start looking at a series a investment a series b investment or a treasury sale And you're getting later in the lifecycle whether it be a company or a protocol That's when you start skewing more towards market Being more important and then more towards product being more important And that's when it's less about the the team the founder the vision doing the talking It's more about the metrics the traction, you know, sort of show me show me the goods Show me that this thing is actually working and has a path to scaling. Um, and so that's General high-level framework of how we think about underwriting investments Smith Is there something that you wish you knew When you started investing in funds that you know now Would it you know that you can go back in time? Let's say, you know, what could you tell yourself, you know a couple years ago? um Before you started throwing money at different funds well, I mean obviously, um, hindsight is always 2020, but um You know, the space is very nascent and I think what we've seen is teams and fund manager set up themself differently and and You know adapt to different You know different changes in the in the space in different ways and um, you know for us I think definitely The changing nature of this space with all this new new use cases that are being developed continuously like you know defy was the use case for 2020 nft is what the use case of 2021 and i'm sure potentially dows and scalability might be the use cases for 2022 going forward and and and that's and that's You know, what is what is makes this this space challenging from investment investment perspective And that's why for us focusing on that repeatable track record is is quite important And if you go back two years ago Uh, you know the space was pretty nascent from a funding manager perspective Most of them were around Three four years old today. Obviously you have more hindsight if you have more more track record to be able to judge on the performance Let's see What are some of the ways an up and coming project can start garnering the interest of dragonfly and firms like yours? And what should they have ready? Uh, it's a good question. Um Yeah, there's no there's no formula for Uh sort of garnering interest from investors Like what ultimately gets us excited is innovation If you have a new idea a new approach a new insight It doesn't have to be necessarily fully fleshed out within a protocol or a company But the the germ of something investable is You realize something that other people don't realize And it doesn't have to be something that no one's ever tried before actually almost everything in crypto that's worked was tried before right like ethereum even before ethereum there was mastercoin which which tried to You know enhance the the um the computability on top of bitcoin But ethereum was the one that got it right and you know in defy like before there was compounded ave There was we talked really about dharma right dharma was the first Lending protocol in ethereum before there was uniswap. There was a ether there was a ether delta And so it's not about being first. It's not about being the first person to even have an idea right even before uniswap There was a bank or which was actually an amm But the insight The thing that you realize that other people don't realize that is the most important thing that if I am you know Even if looking at a a seed round If i'm talking to an entrepreneur and I and I don't see that they know something that the market doesn't know They don't have some secret or some insight or some some earned Some earned knowledge about why this domain that they want to build something in is crackable Uh, that's the biggest impediment toward toward getting the first round of funding. Absolutely. It's very important and uh, Smead mentioned um that you know defy 2020 had its own trend 2021 had its own trend. It seems with nfts. We had defy defy summer You know salana summer perhaps 2021 and you know smith as we go forward into 2022 Do you see any other long term? perhaps Trends that you know are going to be picking up this year or anything like that going on that you guys see well, I think The way I see it. I think scalability is going to be a big big theme for 2022 scalability solutions through roll-ups of bridges and other things that will create more interoperability between All these different player ones And I think those those have already had a good run In 20 at the end of 2021 and I think it would continue and there will be different You know shapes and forms and use cases around ours and and and through links around ours. That is quite important To enable all of that Totally agreed. Um, Hasid do you see anything? Uh, yeah, I see a lot. I mean, I think uh, we're we're going to see later twos finally come to life And ideally in a more fully fledged way than they are right now um, I think we're We're still waiting to see what? Generation two of crypto gaming is going to look like right now. I think we're still very firmly in gen one of this kind of You know, we I mean, we just saw the largest hack in DeFi history happened basically yesterday with axe infinity. Um, and I think this this might be Uh, the beginning of the end for that, you know, very original vision of what plater and gaming was going to look like And I think we're now starting to see Some of the entrepreneurs more and more the entrepreneurs are coming into the space Um, especially on the gaming side have a very different vision of how gaming is going to work Within crypto and so I think that that's probably going to come to fruition over the next couple of years Um, I think we're seeing a lot of advancement in zero knowledge and cryptography uh, and I think that It's always too early to know how quickly this stuff is going to be Usable is going to come to market in a way that can actually be relied upon for robust security. Um I think the other thing I would say is that it's probably going to be the year, uh for Interoperability and really robust interoperability. Um, and also the the year where we start to realize that like Multisig security is bullshit And you know, we we we can kind of ignore it for a long time obviously the the hack that happened yesterday was precisely that it was a multi-sig and The we can ignore it for a long time as long as hacks don't happen And once the hacks start rolling in and you start to see the things that, you know The the technologies for a long time have been warning about like hey, you guys are you guys are right now you know, you're building on top of a foundation of sand and eventually you will pay the price for the insecurity that's undergirding a lot of the Blockchains that are that exist today, right? Like why why do people tell you you should trust a roll-up and not a sidechain this is one of the answers right the sidechain is secured by a multi-sig of nine people and A roll-up has a security of the underlying blockchain, which has never you know Ethereum has never seriously failed in the basically seven years since it's existed and I think that is going to become more and more important part of the story over the next year or two out of all of the All of the sources for funding The still the top number one sources is funds across the entire world and the number one is the united states But coming up the ranks to number six now for last year was dows and dows are increasingly becoming a Source of funding and they're their own funds within themselves Does keychain Work with dows and is there a particular complexity that that exists working with dows because it's not like you can contact one person Or just one person Necessarily you have to deal with just them you're dealing with proposals and votes and everything else Does keychain work with dows or does look or potentially work with dows in the future, especially as they become a huge source of funding potentially in 2022 and beyond So I mean for for us we're an institutional investor and what we provide to our investors is an institutional grade platform for for Fund manager access and selection So unfortunately dows will not fit our criteria of For for reinvestment or operational due diligence There is no I mean the legal structures around them are still To be formed or still unclear and it's it's it's it's difficult for us at the moment to engage with them But definitely we believe in the future as as the dows structures evolve It could actually become an interesting Interesting interesting access or an interesting Way of accessing the blockchain space through dows Excellent See as far as a philosophy of an investment For your firms. Do you look for projects that just fit one sector of the market? I know you mentioned before that you like to be involved with everything You know, but is there more, you know, so you'd like to have diversity across all the areas of the crypto verse But is there you know more are you guys tilted more towards some things? Or is it just a splattering of a little bit of everything? I'd say we're we're pretty agnostic like I mean, I think a large part of being a crypto investor is Being open to having your mind changed as crypto evolves underneath you Right, like if you if you came in in 2017 and you were just like, okay I'm going to invest in the things that I like and this is going to be my investment mandate You would just be absolutely screwed because almost nothing that people were investing in 2017 Is what they're investing in today, right? Except maybe, you know, new layer ones is like the only thing in common in the thread You would have missed all of defy You would have missed all of nfts. You would have missed all of gaming You would have that, you know, half the farm into security tokens and into, you know, random weird blockchain for Supply chain provenance or whatever like that that was what people were investing in in 2017 and the The reality is that, you know, the way that I view it your job as a crypto investor is to shut up and learn And to pay attention and change your mind Faster than the market is is learning and changing its mind And so that's one of the reasons why I mean, you know, there's a there's a meme going around about how Paradigm, which is one of the leading funds in crypto keeps hiring high schoolers and You know, it's uh, it's actually And we've hired very young people as well It's it's actually kind of one of the hallmarks of the industry is the fact that so many of the folks who are really successful in crypto Are extremely young and why is that? You know, we in a lot of traditional firms when you look for Um, you know, prodigious gps or investors very often you're looking for graveyards who've been doing it for 20 years Who have you know the wealth of experience? That's not what the greatest investors in crypto look like the greatest investors in crypto Have the the the thing that you value most is suppleness of mind speed of learning willingness to kind of go down and get your hands dirty and and deal with the actual protocols and the dows and the governance and all that kind of stuff and and generally speaking the people who are most Capable and also closest to the metal of how this innovation is happening are the people who are coming straight out of college And have been living and breathing and eating this stuff since, you know, they were in high school One more topic. I wanted to bring up. I thought was very interesting. So out of the top 10 investors last year firms and individuals It seems like Nine of them focused mostly on defi Defi was the biggest thing that they focused on the least focused on was c-fi And the only two people that really vote did those two things was coin-based ventures and um I'll made a research which are dealing with exchanges on their own And then everything else is broken up between nfts infrastructure and web 3 Do you guys? I I kind of think that that pattern is going to continue with defi is going to also be You know heavily invested in do you guys see that same type of uh, do you guys think it'll change or there's changing wins? And you know somehow c-fi is going to rise from the ashes somehow Or do you think that defi, you know, it's going to be defi decade not just defi 2021 summer or 2020 summer 2022 summer is it going to be the defi century? So my view here is that I agree with the latter part is that I think defi is going to increasingly become more and more important Although, you know, it's obviously worth acknowledging that defi was very hot in 2021 and there's been a kind of secular decline and Or sorry in 2020 and then in the early part of 2021 and then later part of 2021 there was kind of a secular decline and in demand for defi assets and You know, we haven't seen the kind of growth in trading volumes in tvl In um in borrow lending volume that one might have liked to see If the if the defi Growth was really going to be meteoric from where it is today So I think it's a lot of the reason why the defi market broadly has cooled but Long term. I'm incredibly bullish on defi. I think defi is going to continue to grow and is a showcase of one of the most valuable parts of What crypto enables which is permissionless innovation and composability across You know different tools that any entrepreneur can pick up and build together to create something new Now that being said on the question of c-fi investing like why haven't we seen More c-fi investments happen, especially over 2021 You know, the primary investments that took place in c-fi were basically ftx It was you know, almost everything that got funded in in 2021 was ftx and I think there there's a couple reasons why we've seen that I mean the reality of course today is that the largest companies in the world in crypto are all c-fi companies The two things that I think will always change that one is you should never underestimate The ability of great entrepreneurs to find a wedge and use it to open up a market That wasn't obvious to the players there, right? Binance became finance by finding a strategy that other people didn't realize Which was leaning very heavily into ico's and and the growth of you know other kinds of tokens Obviously ftx did the same thing. They appeared out of nowhere. There wasn't even a real gap in the market And they managed to out of sheer execution build themselves a platform that ended up becoming very successful And so one you shouldn't discount the ability for entrepreneurs, especially folks who really are dedicated and operationally Capable to find a wedge to build their way into the market And the second thing that you shouldn't underestimate is regulation Because regulation is the one thing that can always Shift the tectonic plates that we're all working on top of right? And so right now Binance obviously by far the largest exchange in the world has something like 70 global market share in crypto massive massive massive Uh market share, you know, they're the equivalent of like the google in our space But of course they are on the back foot with respect to regulation and you never know what can happen within a year or two Smya, do any of your institutional funds Worry about regulation? Yeah, definitely. It is it is something that is That is often brought up and it's a very important element for for the space. I mean, definitely There is There is You know, it's still a long way to go on the regulation. I think we have seen over the last Quarter a number of positive trends Around that and I think some of the governments are starting to think about that But also regulation is in my view what will enable the adoption, you know, I think Some people are still not willing to jump fully into blockchain or crypto because of the lack of regulation and they are not They're unsure what what it means for them and what are their rights or You know guarantees or protections and that that's what uh, you know I see I see it also as an enabler once regulation comes in and gives more clarity It's might push also more innovation in defi and more innovation around other use cases I'd like to thank everyone who joined us on the panel today It was extremely interesting hearing the different takes on the venture capital side of the blockchain industry And from all of us at coin telegraph research. Thank you for watching. We look forward to presenting you with another great panel very soon