Crypto Capital as a New Investment Mechanism

Capital in crypto is growing unprecedentedly as the total value locked on Ethereum Layer-2 solutions has breached $3 billion in decentralised finance and total market cap valuation.

On top of that, 17 of the 20 largest venture capitals (VCs) in the world (In terms of their assets under management) have already invested in blockchain startups, according to Block Data.

For example, Bit2Me, a Spain-based crypto project raised as much as $30 million during Stage 1 in less than one minute early this month. While raising funds from traditional investors or venture capitalists takes months.

Initial DEX offerings (IDOs) are token crowdfunding sales taking place on decentralised platforms like Uniswap, PancakeSwap, and SushiSwap, rather than centralized fundraising or cryptocurrency exchange platforms. The earliest and most prominent DEXs were built on the Ethereum blockchain, but alternatives are gaining popularity on blockchains like Binance Smart Chain (BSC), Solano, and Polkadot. Through an IDO, a crypto project can launch its token’s public debut on a DEX, attracting interest from retail investors.

Mango Markets, a decentralized exchange (DEX), built over the Solana blockchain, raised over $70 million on August 12 through its native token. It’s one of the biggest fundraising IDOs.

Earlier, initial coin offerings (ICOs) created a buzz in 2018 but failed to sustain due to centralised fundraising and the non-transparent nature of execution. But IDO could be one of the promising ways to raise funds. Meanwhile, venture capitalists have been exploring DeFi space for autonomous investment opportunities. Venture capital firms invested more than $17 billion in the first half of 2021 into blockchain and crypto.

Emerging capital market in the crypto space

Blockchain Papers reached out to Jason Weller of MagicBean, a blockchain-based retail firm, to know more about the emerging crypto capital ecosystem in the US.

Mr. Weller believes that back to crypto disrupting the legacy fundraising VC and overall ecosystem; we see this already with how IDOs have changed from ICOs. Startups have a much harder time now as the industry has adapted its practices. Cryptocurrency is an inherently walled garden of an ecosystem, as it should be at this nascent stage even a decade and more from Satoshi’s whitepaper on Bitcoin.

“I would say that launchpads are a decentralized financial tool almost all crypto VC firms use. DeFi-backed launchpads also combine much more, growth hacking, advising, partnerships, community. Another way crypto at large is disrupting the industry and affecting the larger ecosystem are DAOs.” stated MagicBean Founder.

He has also seen a few operate under this legal designation and it is a logical solution when one wants a headless institution. In the end, its access to the capital markets and the market cap size of crypto are holding back a larger impact. There are millions to billions sitting on the sideline from outside crypto wanting to come in, and you generally need to be a bigger market to affect smaller ones. We can’t say “when” we move past 4% adoption the market cap of crypto will naturally get bigger, either. Ethereum, Solana, Algorand, Cardano as Internet Computers in a competing environment when adoption is 100%? Crypto will hit a $10 Trillion Market Cap by 2030 but figuring out the day-to-day and winners and losers are left for better men and women than me, mainly those Venture Capitalists! The amazing amount of VC funds is being poured into startups right now because of the profitability to loss ratio and lowered Bitcoin/Ether for the last few months.

VC firms to adopt DeFi as an investment vehicle

Mr. Weller believes that we can go back to Launchpads and give the IDO example as a reason VCs are already using DeFi. In an IDO there are two ways VCs work, both through DeFi. A token will have a listing using Binance or Uniswap V3 Automated Market Makers (AMM) and dropped through a DEX. The current IDO models have unbalanced pools and dutch auction mechanisms to be fair, and also usually a MIN/MAX around $1000/$5000 during early-stage investing like Series/Stage 1 and 2, Private, whitelisted, and strategic. Launchpads are numerous and are a thing these last few months.

“I mention this because the Min/Max on IDO to limit large percent has meant A16oz and other VCs have a huge influence on well-established protocols like Uniswap (the recent proposal debacle is what brought this out),” he stated.

Moving forward, VCs should just set up their worldwide DAO with their tokens, just like social influencers and every other use case is doing. Think of a VC DAO like a Berkshire Hathaway, the company Warren Buffet owns. VC injection of funds can value the VCs own company as well.

“I wouldn’t say VCs should set up their Uniswap V3 exchange but it’s possible. Otherwise, their money is just sitting on the sidelines, right? A VC-owned Launchpad realistically places the huge working capital their firms have without overvaluing a startup. It can also be used to pull legacy finance through the doors as brick and mortar businesses seek financing outside of banks and don’t want to go through Defi lending on their own. Who wouldn’t want to do this?” he concluded.

Alex Albano, founder of blockchain consultancy AcchaLabs, sees a mixed model of investing in the crypto space. Traditional investments and family offices are putting money in these as alternate asset investments. There is also a third way – grants route. When you are building on top of an ecosystem, you might get grants from the protocol or ecosystem owners, and then you do not need to launch a blockchain from scratch. That’s a minority.

That kind of changes the funding game. Demand for a very unique product is there to raise money now. Random crypto products will be able to raise money beyond a point now. So slide into an existing ecosystem to raise money. Build a good product within an existing ecosystem.

“I see VCs become accelerators so that they are on the journey from the start when the coins are issued. Traditional Capital is now moving in the same direction.” stated Alex Albano.

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