Thanks for the support from our friends Dong Mo, Deniz Omer, Marvin, and Pan Zhixiong.

IOSG wishes you a happy new year! 🧨 🎈 🎉

As the Covid-19 virus spreads around the world, the U.S. stock market experienced a historical meltdown in March: 2020 witnessed multiple black swan events. As an observer in crypto investing, IOSG Ventures navigates the crypto space, explores breakthroughs, seeks opportunities in challenges and risks. Looking back into 2020, IOSG has built a diversified portfolio. Similarly, we are constantly improving on how to empower our portfolio projects to grow faster and make great achievements. We look forward to working with entrepreneurs who have the ability to embrace the future, constantly discovering and creating long-term value, and doing difficult but right things, rather than just the following suit.

Acts where the knowledge indicates: Time Machine Theory takes you through the past and witnesses the future

The history of money is as long as the history of civilization. Compared to the progress of the Internet, the development of the entire financial industry is still slow. The world financial crisis of 2008 deepened the nascent risks of the world monetary and financial system. It is against this backdrop that Nakamoto created bitcoin. In the past two decades, the Internet has rapidly engulfed the whole world, but in the last five years, we have seen a trend that blockchain is cannibalizing the financial world. The open network running on Ethereum has begun to produce decentralized financial applications ( hereinafter referred to as DeFi) with different verticals.

In the past 20 years, the democratization of financial innovation is still slow. In the past year, many innovations have emerged in the DeFi space, leveraging the low entry cost and permissionless features of the Ethereum blockchain. Theoretical innovations in academia have been implemented and put into practice in DeFi and the cryptocurrency space, with the development of the infrastructure and protocol layer. In the time machine investment thesis, we believe the evolution of the DeFi protocol follows the same pattern as the history of traditional finance; from the emergence of the basic currency Dai to the middleware protocol which captures value, and then to the user’s engagement which creates value. At the same time, the development of the DeFi industry — from lending-borrowing products to synthetic asset protocol, and then derivative leverage projects, prediction market protocol, and insurance protocols — a series of basic tools needed for the construction of the traditional financial systems, such as leverage, margin, bookkeeping unit, trading infrastructure, loan and issuance infrastructure, have emerged in the world of DeFi. This evolution process is similar to the development of traditional finance.

In the past year, DeFi has achieved explosive growth. We believe that the middleware of the open financial stack in DeFi serves as the tools to maintain the underlying network security and the value flow of the top-level user application interface, and also plays an important role in bringing added value to the whole ecosystem. Among them, stablecoin protocol and decentralized trading and aggregation protocol play the role of decentralized value transmission. On this basis, there are various financial primitives. At the same time, with the reduction of the marginal cost, there will be the economy of scale effect and network effect in DeFi, which also helps us to invest in more promising high-quality DeFi projects. In the world of Web3.0, the value of DeFi is rapidly transmitted. How to maximize the efficiency and capture value of fat protocol and thin application is our research field and direction.

IOSG Ventures Investment portfolio in 2020

In 2020, we have experienced a black swan event, the heat of DeFi summer, and also welcomed the rise of Dao. Leveraging the efforts and hard work in the past three years, blockchain has become the frontier platform for open finance. DeFi has found the most widely-adopted application scenario for blockchain. Dao was born on the blockchain, but not just on the blockchain. The explosive growth of new Daos and DeFi projects and the decentralized governance of their organizations have attracted more and more attention and user participation. In addition to increasing investment in blockchain infrastructure projects, from 2018, 2019 to 2020, the overall investment of IOSG on DeFi starts with the underlying infrastructure (such as MakerDAO issuing stable currency DAI) to the middle layer protocol (such as UMA, Synthetix) to the top-level aggregator and traffic aggregator (such as 1inch, Matcha, dHedge).

IOSG Ventures 2020 investment portfolio

• 1inch (DEX aggregator)

1inch is a DEX aggregator. It aggregates liquidity and offers the best pricing for DeFi by aggregating the upstream users and the downstream protocols, and gathers users through network effect and price advantage. One of the reasons why IOSG invests in 1inch is that the liquidity in the field of DeFi are too fragmented and there are many protocols, so the market urgently needs aggregators; the second reason is that it provides a deeper liquidity pool for different DEX and can obtain the best price in various schemes.

Facts have proved that DeFi Blackhorse 1inch has been recognized by the market: at present, the daily trading volume of 1inch is 389m, the average number of active users in a single day in the past seven days is more than 3000, and the community is also very active. In 2021, we will see 1inch and aggregators play an important part in the infrastructure of the DeFi ecosystem, and help the DeFi industry attract more user groups through the “one-stop” service model. We think that 1inch as a DEX aggregator is becoming the most important solution to solve the problems of DEX liquidity fragmentation.

• UMA (Middleware)

UMA provides DAPP with Oracle and smart contract templates, allowing anyone to create synthetic assets that track the price of any assets. We started to research UMA in 2019, got in touch with the UMA team, and participated in investment in early 2020. We firmly believe that UMA will become one of the most successful protocols in Web3.0 middleware stack, and they will be of the greatest value in the future, providing the basic framework and business logic for many top-level applications.

At present, UMA has made progress in cooperation with a number of community projects in the near future, including yam, BadgerDAO, etc., and the user community has increased by 9664. This is just the beginning. We are looking forward to seeing UMA achieve greater success in the future.

• NEAR （Open Web）

Scalability is an urgent issue for blockchain and NEAR is a highly scalable base layer protocol, which supports DAPP running fast enough on mobile devices. The use of fragmentation technology makes it more friendly to developers and users, allowing the number of nodes in the blockchain and network to expand linearly, with the goal of 100000 TPS. NEAR leads technological innovation by building infrastructure. Among the projects that can compete with Ethereum, NEAR is the most powerful competitor. With the delayed development of Sharding in Ethereum 2.0 roadmap NEAR has become the current leader in Sharding technology. The core investment thesis of IOSG Ventures is to help prospective teams like NEAR develop, unleash their creativity, and work with them to build a more usable platform.

NEAR’s progress in the last year is obvious to all. The ETH-NEAR rainbow bridge, which was officially released in December last year, has been running between near and Ethereum’s main network. There are a number of private test projects in progress. NEAR has a market value of US $947.8m, with a daily transaction volume of 10k-30k. Its community has also grown rapidly, with 50K members of the global community of WeChat, Discord & Telegram. NEAR’s capacity expansion and low fees greatly reduce the threshold of use, so more and more Ethereum projects are also considering migrating to NEAR’s platform. We will see more projects migrate to the NEAR platform in the upcoming future.

• Polkadot（Web3.0）

In the next few years, we believe that more and more developers will choose to build applications on the blockchain which is optimized for specific application scenarios. Substrate greatly reduces the technical difficulties for developer teams that take this route, and Polkadot makes these different chains interoperable and composable in the ecosystem. This will enable a new generation of applications that cannot exist on a single smart contract platform. Therefore, we invested heavily in Polkadot and the Polkadot ecosystem in the early stage. The ultimate mission of Polkadot is to build a fair and open cross-chain ecosystem.

In addition to the amazing market performance after its launch, Polkadot is the most active and involved community besides Ethereum and has the strongest attraction for developers. At the moment when parachains have not been launched, we are glad to see a large number of teams creating core DeFi infrastructure based on Polkadot, including DEX, lending, synthetic assets, equity derivatives, privacy, etc. In addition, we are impressed that some community-driven work has created developer tools, educational materials, and hackathons. This means that the most valuable thing in Polkadot today is not the Polkadot blockchain itself, but the prosperous ecosystem that it quietly gathers together. Once the main network is open, many subjects in ecology may be able to maximize the synergy and complete the new leap forward with the fastest speed.

• Synthetix (Synthetic assets)

The reason we are optimistic about synthetic assets is that synthetic assets can increase TVL in DeFi and improve liquidity by absorbing capital from traditional finance space. Synthetic assets in Synthetix are composable in DeFi, and the user community in the Synthetix ecosystem is also composable, which will bring rapid user growth. We see that the Synthetix ecosystem is expanding, and more users on community projects and partner platforms are using Synthetix platform. As a result, weekly active users of Synthetix platform have more than tripled in this year.

At present, it can be seen that the daily maximum trading volume has increased from 16.7M to 186m, with a year-on-year growth of 1013%, and the number of highly active users has increased from 3136 to 7777, with a year-on-year growth of 148%. As more teams and developers enter the synthetic asset vertical, asset classes that can be tokenized will continue to grow. Compared with borrowing, synthetic assets are still a small vertical, and we expect this vertical to have more amazing growth in the future.

Long Term Value: Create value upon research, never forget why you started

IOSG 2020 Investment Focus & Underlying Logics

Investment Decisions are made by thoughts and reflections. The track records IOSG had can be attributed to the continued thought process poured into the industry. As seen from our portfolio, our investments not only cover topics such as DeFi, Web 3.0, Synthetix, but also Layer2 and Polkadot ecosystems that have been popularly discussed in the community. In the following paragraphs, we will be outlining our current focus, underlying reasons, and the overall investment logic.

🔥 Web 3.0

Investment targets: Polkadot, NEAR

Since 2017, IOSG has started to focus on the Layer1 track, including cross-chain platform Polkadot and Cosmos, lead sharding project NEAR, and many other Web 3.0 and Open Web Projects. In 2019, based on past and current research, we sketched out a Web 3.0 tech stack map and published a Web 3.0 research report, collectively representing a trajectory from the lowest infrastructure to Layer1 to middleware. Then, in the map, the middleware is further divided into on-chain and off-chain, which led to the application layer and Open Finance. In the past two years, the industry has been slowly evolving alongside our map. In the era of Web 3.0, the user will share the digital portraiture rights with BAT. Despite the Internet, Giants enjoy high switching costs, strong network effects, and user experience advantages, which are difficult to overturn in the short run, the user’s need for identity and data control will soon establish its dominance.

The Ethereum ecosystem is the most core infrastructure that supports the development prospect of Web3.0. IOSG participates in network operation through node verification for Ethereum 2.0. At the same time, IOSG is one of the key strategic investors in public chain projects (Polkadot and NEAR) in Asia, and also actively invests and participates in emerging infrastructure layer agreements such as Avalanche, Mina, and OASIS.

On the other hand, through secure and efficient Layer2 solutions, Web 3.0 applications will leverage different options for the deployment of transactions, communications, and incentives when Layer 1 resources are limited.

Starting from the investment theory of “fat protocol, thin application”, we believe that with the rise of open finance in DeFi, middleware protocols and DeFi applications will emerge. There will also be an opportunity for synergistic and rapid development of the underlying infrastructure and the innovative application of the upper layer.

🔥 DeFi

Investment targets：KAVA, MakerDAO, Kyber, 1inch, UMA, DDEX, dHedge, tBTC

2020 was more like a carnival for DeFi, which experienced explosive growth and absorbed nearly $50 billion of new liquidity throughout the year. IOSG also made DeFi an investment focus during the year to carry out multiple strategic deployments. In the end, the projects all performed very well in the market. As for the overall picture of the DeFi projects, we have made a “DeFi project panorama” on the IOSG official account, in which we will not go into further detailed discussion. Here, instead, our focuses will be on two important tracks: Synthetic assets and AMM.

Synths

“Synths” are mirrored simulations of the target asset through price anchoring. Holding synthetic assets doesn’t mean holding the mirrored assets, but instead, helping to mitigate the exposure of its price risk. In addition to leading projects such as Synthetix, UMA, and their ecosystems, there are also a number of emerging protocols such as Synlev, Mirror, and Deus.

With the blockchain financialization setting in stone in 2020, synthetic assets offer DeFi access to traditional financial assets as well as more diverse and complex trading strategies. As long as the system and the oracles provide support and integration, synthetic assets can track gold, stocks, bonds, various traditional or crypto indexes, etc. Theoretically, they can trade everything including the Pop culture market, Meme market, individual Token market, etc. Synthetic assets unleash more liquidity than native cryptocurrency assets, and we predict that 2021 will be the year for synthetic assets to shine.

AMM

There may be situations in any market where there is not enough organic liquidity to support active trading, and market makers are essentially agents who alleviate this problem by facilitating transactions that do not occur in those markets. In traditional CEX, many market makers are professional teams or institutions. AMM (Automated Market Maker), in turn, gives their role to true decentralization. AMM replaces order matching with a mathematical formula including algorithms and bonding curves. AMM serves as a market for new coin offerings, and the most popular solution for new protocol listings and facilitating long-tail token trading. Due to the permission-free nature and the ease of launching new tokens, these AMM features will remain a long-term unique advantage. This is why we have invested in 1Inch, 0x, and DODO.

In 2021, we will see the inception of new DeFi product arrivals. The underlying protocols of these products are the financial infrastructures built on Ethereum in 2020. 2019 realizes the maturation of liquidity supply, and in 2020, liquidity incentives produced liquidity mining and other innovative mechanisms. We’ve seen crypto assets be packaged into more complex forms, and new dApps starting to add more functionality. We’ve witnessed dApps that offer contracts, futures, forwards and options. The high composability of Ethereum itself will make it easier for dApps to iterate. In addition, with the influx of new developers and the growth of Layer2, derivatives will continue to evolve and allow a DeFi performance similar to that of traditional finance. DeFi products can be programmed to eventually surpass traditional finance. So, the future of the field is very promising.

🔥 Layer 2

Ethereum’s scalability has always been a challenge. As early as three years ago, the community realized the importance of scalability and introduced Plasma and state channels as the first generation expansion solutions. However, it was only after the rapid growth of DeFi applications and users that the community realized that the bottleneck of throughput was restricting the ecological development of DeFi. Layer2 technology provides a secondary framework built on top of the existing underlying blockchain to address its potential scalability issues. More and more DeFi projects are beginning to think about which Ethereum expansion scheme to choose to reduce on-chain transaction costs for users, while also taking into account the combinability and security of DeFi. The Rollups design addresses the data availability issues faced by other solutions such as side chains, state channels, and plasma.

Vitalik, the founder of Ethereum, began to call on the community to promote the expansion of Ethereum Layer 2 with “Rollup” as the leading solution. Other expansion schemes will also be promoted to enrich the ecological diversity of Ethereum. Optimistic Rollup schemes may be launched quickly at the initial stage. It improves the previous lack of data availability in Plasma, but its security is not entirely based on cryptography. In the long term, ZK Rollup is a more complete solution that uses zero-knowledge proof technology to ensure that scaling does not compromise safety, yet requires significant resources for early engineering implementation. Therefore, we are firmly optimistic about the long-term value of ZK Rollup to the Ethereum ecosystem, which may eventually lead to a diversified expansion ecosystem with ZK Rollup as the core solution, and other solutions as secondary measures.

The future focus of the Layer 2 field lies in: 1. Layer 2 security and composability; 2. Product interface and user experience; 3. Liquidity solutions across different Layer2 (such as Hop Protocol and Connext, etc.) 4. Education and recruitment of new users.

We expect that by the second half of 2021, some of the larger DeFi projects will gradually move onto certain Rollup expansion chains to take advantage of their high throughput and lower gas costs. It is foreseeable that in the future there will be a metric like TVL (Total Locked Size) to measure the value captured by Layer2.

🔥 Polkadot ecosystem

Polkadot and Kusama have achieved high levels of overall progress in code buildup this year, which are, after the DeFi Boom, some of the few projects in the spotlight outside of Ethereum. As heterogeneous sharding and multi-chain networks, these projects use Substrate’s open source development framework to bridge the same-origin-protocols to each other, so that end users can access the entire heterogeneous blockchain ecosystem with more ease. Polkadot’s parallel chain auction this year is also a fairer project in terms of governance. We are also seeing lots of development teams pouring their efforts into making Polkadot and Ethereum DeFi transactions compatible. We believe that Polkadot’s decentralized system can only realize its true potential when rich and powerful ecological projects can interact well with each other. Therefore, we look forward to discovering more original projects that focus on specific professional fields in the ecosystems, so as to assist its long-term collaborative construction.

Similar to the development model of Ethereum in 2017/18, Polkadot has seen a large number of projects built on-chain with the number of developers and Substrate-based projects rising rapidly. The support of the Web3 Foundation has also laid a solid foundation for developers to adopt the Polkadot ecosystem.

In 2021, we will also see more projects dedicated to tools, services, and integrations that will fuel Polkadot’s growth and accelerate its integration with other blockchain ecosystems. These infrastructure projects are critical to increasing the value of the Polkadot ecosystem and relate that to other blockchains.

We’re already seeing EVM-compatible smart contracts and asset bridges between Bitcoin, Ethereum, and Polkadot. We can expect a future in which the oracles, on-chain data query services, and API management tools will first be built on Polkadot and rolled out to user-facing applications.

Polkadot’s DeFi ecosystem is expected to flourish in the coming months, thanks to the launch of the cross-chain bridge facility and slot auctions. Given that the market capitalization of DOT+KSM is approaching US $25 billion, it is inevitable that 10% to 20% of the market capitalization of DOT+KSM will be used as locked-in slot funds, thus generating significant value as derivatives.

Among the current DeFi innovations based on Substrate and cross-chain gateways, there are projects like Mangata that use Ethereum bridges to prevent jump starts from miners. Additionally, projects like Acala and Equilibrium provide stable currency and money market protocol support for the Polkadot ecosystem. Private sub-chain environments like Phala support privacy foundations.

In the earliest days of DeFi in the Polkadot ecosystem, based on the slot auction logic, we could expect liquidity staking as core values that will lead to price explosion. Several DeFi projects, such as Stafi and Acala, are currently looking into providing liquidity staking solutions. In the coming months, we’ll see a lot of projects replicated on Polkadot with DeFi’s “Legos”. Once the basic Lego infrastructure is in place, developers will flock to create innovative financial products.

We hope to see more synthetic coin projects, commercial-oriented projects (similar to Centrifuge) and DEXes/AMM on Polkadot, no matter if it is for migration or direct development.

Currently, DeFi asset locks will become the norm in the Ethereum ecosystem. Polkadot can implement card slot auctions and low-cost copying contracts, and leverage its scalability to attract many DeFi migrations in the short term. In the long run, we believe that the true value of Polkadot lies in decentralized application processing and data services. Polka’s system is already threatening Ethereum 2.0 in development schedule and ecological richness, and it is likely to gain support within its ecosystem if dApps regain their momentum within 2–3 years. Hence games, app development, data services, and native smart contracts (!Ink) related projects are also worth paying attention to.

As parallel chain auctions draw to a close, more and more projects are seeking DOT Whales, funding, and community support to raise capital by collaborating DOT for parallel chain slots. The price of each parallel chain is highly controversial, ranging from 200,000 DOT per year to 1.6 million DOT per year. Most mature projects are well prepared for the parallel chain integration and auction process, and this will be an exciting time for the Polkadot, prompting developers to work on the ecosystem.

TLDR：IOSG Investment Keywords

Investment is endowed with features of science and art, by which I mean it attests to our knowledge, profession, and sense of judgment, as well as determination, aesthetics, and values. Based on the long-hold guiding principle, IOSG investment logic and strategy have keywords as follows:

Unity of knowing and doing: Generally speaking, after in-depth research, what’s hard is not to figure out the primary valuation of a project, but to make a big bet on your own judgment and stick to it no matter what the market sentiment is. Thus, self-confidence and unity of knowing and doing are given top priority in IOSG investment. In 2017, IOSG started to dive into DeFi and build its portfolio. On one hand, there were obscure developer teams who eventually succeeded in the DeFi arena such as 1inch and Synthetix; on the other hand, there were also popular teams who made an innovation, such as Matcha(0X) and UMA (work with Yam/Badger). During this, IOSG always spares no efforts to help them grow.

Long-term Principle: At first, we tend to insist on the original judgment and seek long-term opportunities and reform in the next decade and above, free from short-sighted turbulence and PNL. Secondly, we ought to be strategists on a long-term basis and do our best quietly instead of propaganda to the outside world. Thirdly, persistent value-making is preferred and even rooted in IOSG philosophy. In the crypto industry, the long-term principle is attached with great importance where we choose remarkable teams, incubate the projects, and impart them with time and patience. For instance, IOSG led the consecutive two rounds of investment in Polkadot and fully supported its Hackathon; we held Founder Meetup for NEAR community as post-investment management in four cities in China. Both Polkadot and NEAR are believers in long-term interest.

Determination in doing the right things: Future blockchain ecosystem needs diligent and professional investors. They are steadfast preachers who persist in working in the crypto industry and bringing more users and capital. What they have done is not only intensive study but also contributions to space and the epoch. It’s miscellaneous and tough to filter voluminous information, communicate with counterparts and draw a roadmap. However, IOSG is courageous enough to take up the responsibility. In the noisy capital market, only a few who keep independent thinking can establish mature decision-making and investing construction and end up being winners with long-term profits.

IOSG 2021 Bullish Prediction

• CeFi +DeFi

Throughout a gradual change in finance, DeFi will eventually cover up all the derivatives and applications. Nevertheless, on account of regulation, crypto assets cannot be utilized as payment. DeFi infrastructure is not intact for outsiders who would like to approach token transactions. Thus, the synergy of DeFi+CeFi will still be the mainstream model in the short- and mid-term. DeFi will make its debut in cooperation with conventional financial departments for developing regions that are short in traditional financial services in order to fill the gap that CeFi cannot accomplish.

Unmet worldwide financial need means the potential market caps of 5.2 trillion dollars. Targeting these profitable opportunities, Centrifuge and Persistence(in IOSG portfolio) aim to immerse global users into the DeFi economy and obtain instant profits. In connection with fin-tech, they collect idle capital and grant it to those in need. This is one of the most exciting directions in the long run because it exhibits the capability of technology and free capital to create tangible value for the mass.

• Flashloan mass adoption

Due to the composability of on-chain applications, flashloan may be exclusive in DeFi. As the decentralized financial products, flashloan allows anyone with a programming background to be whales who are accessible to transactions worth millions of dollars within a block.

Owing to decent rewards, we predict that more talents will flood into this space and boost the practice. In addition to incentives for geek developers, flashloan makes DeFi an extremely efficient market full of arbitrage chances.

• Under-collateralized loans

To safeguard decentralized systems, the DeFi lending protocol needs over-collateralization which smooths autonomous operation in the system. As in traditional finance, it’s inefficient.

By now, protocols(e.g. AAVE of IOSG portfolio) introduce intermediaries who endorse unqualified borrowers to get under-collateralized loans. Under the framework, the risk is transferred to the third party instead of the whole system. However, it’s difficult to scale due to a lack of mutual trust.

Under-collateralized loan without intermediary is going to be a huge step for DeFi progress, so we believe it to be one of 2021 theses. Besides, there will be more escrow wallets protocols to manage assets for users.

• LP tokens as collateral for lending/borrowing platforms

AMM protocol provides a good opportunity to use assets and gain passive profits. Liquidity provider is of vital importance for AMM protocol. For these protocols, more liquidity means more volumes. There are two main reasons. First, more liquidity is a better price, and more orders sent to AMM. Second, more TVL means an arbitrage robot of AMM protocol price efficiency creates more volume. A great deal of liquidity locked in AMM protocols makes it possible for building DeFi lego.

We expect that LP token applications will be widespread in the next few months and unlock capital from the AMM pool(e.g. LP token as collateral of fiat market or Synthetic assets protocols).

• ETH2.0 and Rollup opportunities

The first phase of ETH2.0 beacon chain, which started at the end of 2020, has utilized Proof of Stake(PoS) and upgraded Proof of Work(PoW) in ETH1.0. Since the number of ETH2.0 active pledgers is far ahead, the initial launch of the beacon chain aroused the attraction of the market. However, there has been a long-existing controversy between ETH1.0 and ETH2.0. At present, Ethereum is jammed and the average transaction fee goes beyond 10 dollars, which blocks off retail investors and long-tail assets, so the introduction to Layer 2 is poised to get started. On the other hand, ETH1.0 is thought to be the Earth that we live in, while ETH2.0 is the Mars that the majority hope to move to. That’s to say, ETH2.0 may be the ultimate solution to come, but we must focus on the present before the future comes.

Either ETH2.0 or Layer1-something is aimed to get rid of low TPS. The initial launch of the beacon chain is a good start for ETH2.0. Sustaining the running of PoS will draw potential pledgers and personal nodes to join Ethereum. The adjustment of ETH2.0 Roadmap relieves liquidity risk that hesitates onlookers. We believe that the launch is preferable for not only ETH long-run development but also the DeFi ecosystem, which brings good anticipation for Ethereum’s scalability.

• Rising NFT and Gaming Industry

The past two years have witnessed the growth of NFT space. From the underlying protocol, public chain and development platforms, application, and exchange. NFT has covered various layers. The reason why we are bullish on NFT+DeFi is that the projects have gained ground-breaking development. The experiment isn’t new because several years ago people have tried to combine NFT with blockchain where it provides permanent saving and adds value to virtual assets in-game. However, it didn’t boom at that time. The reason why we think it’s an appropriate time now is as follows: 1) Community has gained recognition towards emerging NFT projects because the DeFi craze educated them all about crypto which in some way shortens the timeline of newcomers to get used to it. 2) This space is getting mature. The strategy of acquiring users is realistic where whether it’s going to succeed depends on the quality of the NFT game itself. 3) The infrastructure is improving including the underlying protocol, layer 2, and exchange. It removes obstacles of technology and liquidity before the mass utilization of game, social, and entertainment applications based on NFT.

In our investment, we will mainly focus on infrastructure, game, and finance( credit and warrant). NFT combines games and collections due to its non-fungibility, It’s just one dimension. If we dive further, there is still a niche market in NFT+DeFi and NFT+social token. By now NFT transaction volume has exceeded 180 million dollars. It’s estimated that the capacity of NFT will go beyond 1 billion dollars.

• Decentralized derivatives

In 2020, DEX finished the layout of the spot market. Since Q1, we have seen a more profound impact of DEX on derivatives. In recent years, some projects have got down to building infrastructure for expansion from spot to derivatives and are expected to gain profits in the near future. Derivatives enjoy lots of potentials. The difference between DeFi and CeFi is capital efficiency. For CeFi, low capital efficiency means more collaterals that ensure trustworthy behavior rather than create more synthetic assets and derivatives. For DeFi, although every loan needs collateral, we can figure out a way to tokenize capital. Key directions of community governance and derivatives: trust mechanism, synthetic assets and derivatives, and lowering the bar of collateral.

2021 is going to be the year we see entirely new DeFi products constructed on top of the financial infrastructure laid down in Ethereum in 2020. 2019 saw liquidity provision mature and 2020 saw incentivized liquidity mechanisms lead to yield farming and other new innovations. Following this trajectory and observing crypto assets get packaged into more and more complex forms as new dApps keep adding more and more functionality, we can forecast that complex derivative product will start to flourish in the next twelve months.

We are already seeing a trickle of dApps offer swaps, futures, forwards, and options and Ethereum’s hyper-composable nature is going to make it even easier to build the next generation of these dApps. Armed with an influx of new developers and advancements in layer 2, derivative products are going to grow and bring DeFi ever closer to the capabilities of traditional finance before they eventually surpass them due to their super-programmable nature. The future of DeFi is bright and exciting.

• Tiered loan agreements and fixed interest rate product

Nowadays, one of the most daunting problems is the unstable interest rate. Annual Percentage Yield jumps so sharply(1%-20%) that it frightens away both institutional and individual investors who seek predictable and stable payback. Based on yield sensitivity and market price volatility, the rated bond is the mainstream solution. As one of the prioritized fields since the end of 2020, Saffron and Barnbridge are the alpha in terms of the rated loan. They introduce fixed-rate derivatives that hedge risk for conservative investors and gains different profits accordingly based on the same assets.

The above-mentioned structural products play a key role in traditional finance and cover the most users. As DeFi grows, we predict that structural product and rated lending platform will be widely used. Because of composability, Saffron and Barnbridge may be integrated into DeFi Blue Chip like Aave, Uniswap, and Compound, to hedge for investors.

• Human-oriented Decentralized Governance

In 2020, liquidity mining has become an innovative incentive mechanism for many project protocols to distribute tokens to their core users, and product innovations such as Aave’s “Flash Loan” and “Credit Loan” are emerging every day. DeFi protocol development makes more and more governance values possible. Taking Maker and Compound as early representatives, we have seen increasingly DeFi projects start decentralized governance since the second half of 2020. Decision making process becomes open source and relies on the codes, and the organization’s financial records are stored on the blockchain. Decentralized autonomous organizations（DAO） and governance are undoubtedly a huge challenge to many traditional hierarchical systems and those exclusive organizational structures in the world today. It uses “group wisdom” to make better collective decisions, which is superior to traditional governance models in terms of governance democratization. DAO can maximize the participation of stakeholders in the decision-making process(decentralization), and achieve better transparency. Without decentralization, DeFi tools may not be revolutionary, but with it, DeFi platforms and projects can achieve revolutionary outcomes.

As of this writing, the value locked in the global DeFi market is about $54.31B(DeFipulse.com), and the total assets managed by DAO (AUM) are as high as $991.8M(deepdao.io). Decentralized governance creates a trustless, borderless, transparent, accessible, interoperable, and composable organization. As DAO manages more DeFi assets, and more community members participate in the governance of DeFi projects, it is foreseeable that there will be an increasing number of DeFi products that will interact with DAO in the future, and more management rules will be written in smart contracts. We believe that decentralized governance will become the key of DeFi, and more DeFi protocol management will be done with DAO in the future.

• Rising Insurance market

Since mid-2020, the DeFi insurance market has attracted more focuses, and a large number of innovative projects have emerged. Following Nexus Mutual, other insurance projects, such as Nsure, Haka, Union, as well as InsurAce have made rapid progress in development. We expect in the next two years, more projects in the insurance market will be launched and industry-leading projects of sufficient scale will emerge. The risk categories covered by insurance projects are expanding continuously, from smart contract insurance to products that include market, event, and other real-world risks. For example, investors purchase market risk insurance based on derivatives to reduce the impact of price fluctuations. In addition, the real-world risk insurance on the blockchain has also made great progress. We see that insurance projects related to aviation and agricultural risks are ready to launch. It is expected that in the next two years, with more projects being developed and launched, there will be more risk categories that can be insured to meet the various needs of users.

With the expansion of the DeFi ecosystem, the increase of DeFi users and funds in the ecosystem, the demand for insurance has achieved explosive growth in 2020, and we have seen a continuing rise of insurance users(for example, Nexus Mutual’s insurance volume has increased by 1000x during the year). We expect that in the next two years, with the growth and maturity of the DeFi ecosystem, insurance users will continue to rise, and the proportion of DeFi users who purchase insurance will also increase.

Although the DeFi insurance industry still faces many challenges, for example, the low effective leverage/fund utilization rate(which results in the short supply of insurance); lacking independent insurers; the big purchase barriers; the insurance project itself being hacked; and the reinsurance business ecosystem is missing, and so on. But we believe that insurance is an indispensable part of the blockchain, and large assets especially need extra external protection. We expect that in the next two years, with the joint efforts of the developer team, community and investors, these problems will be resolved.

• Algorithmic stablecoins and algorithmic synthetic assets

Blockchain finance integrated into traditional finance while also bringing impacts on it. Sovereign supervision will inevitably limit centralized stablecoins development, thus making the crypto economy focusing on decentralized stablecoins. The cross-border payment business using stablecoins continues to grow proves that it is more convenient and effective than traditional methods. The decentralization and censorship resistance features of algorithmic stablecoins make it almost a necessity to the mainstream in the long run. In the past year, the soaring market of ESD, BASIS, FRAX, and other algorithmic stablecoins led by AMPL has reshuffled the trading list, which has made the industry look at algorithmic stablecoins with new eyes. Since there is no need for collateral in the early stage and there is no underlying value support, the speculative component in the transaction is relatively strong. After the bubble subsides, the algorithmic stablecoin will gradually develop in a more stable and balanced manner. Some algorithmic stablecoins with collaterals represented by FRAX are more like an interesting social experiment, with the purpose to find the Schelling point between price stability, capital utilization, and anti-censorship.

• Huge SaaS data service provider market

From 2019 to 2020, Ethereum addresses increased from 84 million to 131 million, with an increase of 56%. Many companies have already started to work on data analysis. For example, Nansen marked more than 50 million addresses and activities on the Ethereum blockchain and did an analysis on the data collected, which was delayed by only 4 minutes. DeBank, which we invested in last year, sorted out the latest projects for the entire DeFi ecosystem and analyzed all their on-chain data. Since then, the community began to use the data of lock-up volume (TVL), user scale, transaction volume, etc. from DeBank as important trend-following indicators of the DeFi ecosystem. In addition, the Scout team provides a tool that users can dive deeper into Ethereum data with it and the team developed a graphical interface to lower the access barriers for users. We see DeFi will have a promising future, and Nansen, which focuses on on-chain analysis, will continue to provide professional and reliable data support for deep users.

The TVL in the DeFi market is $54.31 billion, with a market value of more than $70 billion. As of publishing this article, the market value of Ethereum reaches $201.1 billion. With Aave, Synthetix, Uniswap all rank among the top 20 in total market value in DeFi, we have reason to believe that DeFi will have a brighter future, and the platform focusing on the on-chain data analysis will continue to provide professional and reliable data support for deep users, which will bring more values.

• Innovative social protocol tokens

The emergence and rise of social money have brought great expectations to the value input of social media. A variety of token distribution models help issuers and holders obtain certain short-term and long-term value. We believe that the future of social money protocols relies on creating a complete social capital market. Anyone can exchange and issue tokens at any time for any reason, but once the issued tokens are distributed and circulated enough, the formal exchange will possibly emerge, which will enable our community, third parties, and almost every network participant to easily exchange social tokens between each other. This can be reflected in the fork exchanges of Roll and Uniswap V2.

The base layer of Roll plays the role of a community aggregator, including personal and community tokens. Cherry is a good example. It is a popular social token with a large position in the Roll platform. By issuing Cherry, initiators can effectively create their own economic market and help users to win $Cherry as incentives by encouraging user participation. Users with $Cherry can exchange for CherryBlossom, and use it in exchange for some perks, such as watching Cherry’s exclusive content, interacting with Cherry, and voting for Cherry’s upcoming activities. However, the core of Cherry is far more than this. It fundamentally safeguards the rights and interests of both consumers and artists and helps other artists earn money through Cherry and provide consumers with valuable content as well. This case is only the tip of the iceberg, different artists can do with different models, create different mechanisms and opportunities. The diversified development direction is what really excites us.

IOSG has been following the social protocol tokens closely. In the past year, the Roll has been added to our Portfolio, which represents our first step in this industry. In the only two years since its establishment, Roll has become the most popular token issuance tool in the industry and has attracted a lot of attention. In the coming new year, we will pay more attention to and explore the promising models, protocols, and tools in this industry, and seek valuable opportunities in the social token market.

• Longtail user-friendly protocols

Although DeFi’s asset scale is growing rapidly, we still see that the actual user growth of each DeFi protocol has slowed down. For some infrastructure protocols, the number of users stays almost where it is as before. We reckon this is because participating in DeFi has become more and more like a capital-intensive industry. Transaction fees are only friendly to giant whales, but for early adopters who are new to DeFi and want a trail, and those huge long-tail users in the future, the threshold is extremely high.

Although we also look forward to layer2 Rollup, sidechain, and other public blockchains to try to migrate the existing layer1 DeFi ecosystem, we also realize that such ecosystem migration will be slow and challenging. We will pay attention to those application layers and infrastructure projects that can revitalize the existing layer1 DeFi ecosystem and make it easier and low-cost for long-tail users to access and use.

Value transfer: IOSG post-investment efforts

IOSG Ventures is a research & community-driven investment institution. The team makes investment decisions by assessing various fields of blockchain and conducting plenty of research. Based on the output of the research report, the whole team can comprehend the missing parts of the current market, and also seize the opportunity to reflect from time to time. As a responsible investment institution, IOSG not only offers financial support for investment projects but also assists them with community construction, resource docking, brand promotion, and ecosystem development, which means a lot for both sides. Because within a cycle, the capital can better understand what the projects are endeavoring, capture the market trend of the industry, and figure out more contributions that can be done to facilitate the industry and social progress. We are extremely thrilled to fully participate in the ecology of the project, witness the development of the project from nothing to something, provide constructive improvement suggestions for the products, and deeply participate in the wave of industrial revolution.

Research report

During 2020, the IOSG WeChat official account (ID: IOSGVC) has delivered 80+ WeeklyBrief, covering technical knowledge sharing, industry-level insights, news tendency, funds progress, and so on. At the same time, with medium (ID: iosg ventures) as the main delivery platform of our English content, piles of articles with unique viewpoints have been released as newsletters, from discussing the underlying logic of AMM to exploring the hot product Sushiswap in the market. Industry research is the foundation of IOSG. We have always held a rigorous attitude and awe towards the industry and the market, so the output report will always be well-known in the industry. In the new year, IOSG will continue to output high-quality content to gain more industry recognition and customer support, and jointly promote the development of the blockchain industry.

Community cooperations

The team of IOSG Ventures has extended over China, the United States, Europe, and Singapore. To support the growth of projects, the team actively engages in corresponding communities and organizations, provides assistance for the project through efficient communication and cooperation, establishing a huge social network, helping the portfolio grow and completing the brand building, and increasing the influence and community scale of their products.

IOSG Ventures has joined relevant well-known organizations in the industry, such as Enterprise Ethereum Alliance (EEA), Chicago DeFi Alliance (CDA), etc., to formulate growth plans for start-ups and help them go further. At the same time, IOSG is also the main participant and promoter of the DeFi summit, a well-known event of the DeFi industry, and also an official member of Metacartel DAO. We firmly believe in the power of the community and insist on our responsibility as an investment institution to help start-ups grow. What we hope to give is not only financial help but also support regarding community and resources. We often keep close contact with project founders, teams, developers, exchanges, academic research institutions, other venture capital funds, media, and opinion leaders to facilitate establishing cooperation for projects such as NEAR and Oasis, improve the usability and development efficiency of their products, and help build communities. At the same time, we encourage more developers to participate in the crypto industry. And we sponsored seminars and hacking activities jointly organized by top universities and developer communities for Tencent and Cosmos.

In the future, what we can do for our portfolio will include but not limit to injecting funds into the project to support its establishment of community and commercial purchasing; contacting experts in the industry for guidance to carry out project incubation; introducing more strategic partners and industry experts; contacting other companies in the portfolio for business cooperation and technology development to achieve tactical coordination; participating in staking token economy to ensure it goes on smoothly; participating in community governance and put forward high-quality governance proposals; playing a role as a node verifier and etc.

Events

Activities and events are an excellent way to help projects gain exposure and access to new resources. In the past year, the most eye-catching activity of IOSG Ventures is our seventh Old Friends Reunion IOSG DeFi Summit. On October 26, 2020, Old Friends Reunion successfully came to an end at 1933 Old Square, Shanghai. Together with imToken, Debank, and AAVE, IOSG Ventures has created an unprecedented feast of thought sharing.

More than one thousand people participated in the event, bringing together well-known blockchain developers, investors, and community builders at domestic and abroad. More than 60 heavy-weight guests were invited, including Vitalik Buterin, co-founder of Ethereum, Illia Polosukhin, co-founder and CEO of Near, Stani Kulechov, co-founder and CEO of AAVE, Matt, co-founder of TBTC / keep, Emin Gün Sirer, founder of Avalanche, and Dawn Song, founder of oasis labs, etc.

“IOSG Old Friends Reunion” has become a well-known gathering in the DeFi industry, where many founders, developers, and investors exchange their ideas and insights, discuss market performance, project incubation, and cooperation. We also hope that IOSG can make “Old Friends Reunion” a top industry event at domestic and abroad, which can not only promote project incubation and community growth but also bring infinite momentum to the industry. In the coming year, IOSG will continue to endeavor in the delivery of our research content, supporting project community management, running activities well, and strengthening portfolio brand building, so as to make full preparations for the empowerment of the next invested and to be invested projects.

However, the gap between Chinese and Western languages and cultures often leads to unsatisfactory information and communication. The rapid update of the blockchain industry brings new opportunities and also forces the industry to have an increasing demand for those who understand both Chinese and Western cultures, have a good command of language communication and are full of exploration desire for the crypto world. In 2021, we will soon launch the “spring Recruitment” program to find excellent ambassadors for our portfolio and build a bridge between China and the West for the project. If you are interested, please contact us!

Final Thoughts

There are always innovative spirits existing in the blockchain and cryptocurrency space. What we need is to DISCOVER, ACCOMPANY and HELP them, and when the time comes, they will amaze the entire world.

— — IOSG Ventures team

Currently, the blockchain and cryptocurrency industry is still in the early stage of barbaric growth, so there is no lack of short-term opportunities to create value and wealth. Arbitrage opportunities and hot spot speculation opportunities caused by information asymmetry are everywhere in this industry. But we think that this kind of short-term quick money opportunity may cause investors to be lazy in finding opportunities with real long-term value, thus losing the possibility of continuous positive evolution. As Zhang Lei, CEO of Hillhouse Capital, said, “If you can’t do something, don’t do it from the beginning.”

In the past year, the word we always said was “refuse” because we don’t want to make a choice or decision just because others do the same. We will ask ourselves, is this a choice that complies with our value, or is it a choice we are forced to make under the trend? Of course, we also believe that short-term arguments will definitely become consensus. On the journey of building long-term partnerships, the founders we are looking for are those who really have the passion for the community and are enthusiastic to create products, start a business and grow up with them, and stick to the original intention of Web3.0.

For many funds, it is a challenge to build a portfolio and conduct in-depth research at the beginning of a bear market. We are fortunate to have established a core investment and research team. Through our industry research insights of every project discussion meeting and every subdivision we track, we start from the cooperation with founders to build products and communities together with developers and continue to explore a unique crypto investment paradigm. We are also looking forward to the emergence of more and more professional and respected crypto funds in the Asian market in the future, and we will continue to work hard for this expectation.