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Consensus and Non-Consensus: Counter-Cyclical Direction in Bear Markets.

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When there is no answer within the circle, one should look beyond it.

Original Title: "Consensus and Non-Consensus: Counter-Cyclical Direction in Bear Markets"

Source: Jims Young

The primary market has been quiet for too long, and it has been a long time since we have seen anything new. However, in theory, for VC, the bear market is the time to enter the market against the cycle. Based on this judgment, I went to Singapore in June to discuss the direction in the bear market with many old and new friends, and discovered many existing consensuses and non-consensuses in the industry, as well as some thoughts. After sharing internally, I wrote this article for discussion and also welcome project parties and VC friends to communicate more. Due to length limitations (meaning that there is too much to write about :P), this article focuses on the framework, and there may be more observations and judgments on specific sub-sectors in the future if time permits.

1. Consensus: What Everyone Generally Agrees On

1.1 Two main investment strategies:

1) The essence of the return-to-basics strategy in the financial industry.

2) Huge opportunities in the application layer.

Currently, there are two mainstream investment strategies. One is to return to the original attributes of blockchain - finance, investing in RWA, insurance, payment channels, banking projects, derivatives, stablecoins, and so on. In fact, this trend has emerged since the Wanchain Conference in Hong Kong, but it has become more and more frequent recently. There are two angles to this investment. One is that innovation within the industry is limited, while finance-related investments have already been verified and are stable with cash flow. The other is that the possibility of mass adoption brought by compliance narrative is increasing, essentially betting on the expected income from future large capital flows.

Another approach is to focus on the application layer. Recently, more and more funds have started to pay attention to the application layer, and even funds that previously focused on infrastructure have undergone a paradigm shift. There are many reasons for this, but I believe the main reason is that there are no major technical barriers in the crypto industry. When one company's technology comes out, other competitors can quickly pivot. The core competitiveness of the chain lies in the ecosystem rather than technology, and traffic is still the core driver of the industry. After the infrastructure becomes increasingly perfect, the real applications that attract users will eventually emerge, and the real value will also be deposited in this layer. Ultimately, super applications will choose infrastructure and have the final dominant power, as happened on Dydx. (Opportunities in the application layer will be further discussed in future articles.)

1.2 Industry development speed is slowing down, and actions under tightened liquidity are questions that all VCs need to answer

Water release is the driving force behind the development of soft technology, and bubbles are the engine that drives the rise of new industries. Although the statement may be a bit absolute, it is undeniable that the rapid development of the technology industry in the past few decades has largely benefited from the capital surplus after World War II. For a small market like Crypto, the most intuitive example is that the emergence of Defi Summer is due to the Fed's water release. And in the current moment of liquidity tightening, both traditional VCs and Crypto VCs must answer the question of what to do when the waves are gone and the tide is out.

1) Regarding investment: the strategy of most funds may be to invest less, not invest if not clear, invest if desired, and invest more if necessary. In a bear market, it is advisable to stock up on supplies (so entrepreneurs, keep going, we still have liquidity). In addition, the crypto industry has begun to pay attention to other industries such as AI, chips, and even biomedicine.

2) For post-investment: when the pre-investment work decreases, the post-investment work can actually be increased. And for the crypto industry, which has close first and second level relationships, fine-grained operation of projects and assets has become increasingly important for more and more funds.

2. Non-consensus: Huge differences are also huge opportunities

2.1 Crypto investment returns to traditional USD logic

As a new technology industry, the investment logic of Crypto used to be Tech Driven, where investors would invest based on a deep understanding of the technology and its superior efficiency. However, as the industry becomes more mature and gradually enters the logic of application investment, the general investment strategy of dollar funds may become more effective, which means investing in people and business models. While technology will remain an important factor, it will not be the only determining factor. Instead, the focus will be on new business models brought about by technological breakthroughs.

2.2 L2 and High-Performance L1

This may be the largest non-consensus at present. While L2 is becoming politically correct, there are still many new public chains eyeing it, and new chains are still receiving new financing disclosures. Indeed, Long Ethereum seems to be the safest choice through Long L2, because the old-fashioned developers, communities, and funds are all concentrated on Ethereum, and Ethereum is currently the most suitable decentralized existence... only on the premise that external conditions remain unchanged. Once new funds and new developers enter, the story may also take another direction.

2.3 AI+Web3？

Regarding AI, there is a tricky point that the industry, which appeared in the 1960s, has already experienced several waves of popularity. If I remember correctly, whether the AI track is feasible or not was still a topic of discussion in the middle of last year. The investment circle in Silicon Valley was discussing whether they should first invest in enterprise cloud computing and Vertical data, then move on to ML, and finally AI. However, after the emergence of GPT3.5 this year, all doubts were immediately dispelled, and it has become a collective arms race for all funds. :P

And more than half a year later, whether AI is a track or a bubble is still a mystery. Echoing @Laobai's Threads, in addition to the noisy big models and application layer judgments, the traditional direction has begun to discuss that AGI occurs at the level of embodied intelligence (that is, AI + robots, you see Web2 is also good at creating concepts). But no matter what, it is visible that this AI boom has brought significant experience improvements for C-end users, whether it is New Bing, Claude, PoeAI, all have this good direct experience improvement (at least for me). As for the combination of AI and Web3, I still believe that there is potential space in the utilization of long-tail resources. Regarding this point, a separate article can be written later.

3. Thinking: Non-consensus Opportunities Revealed in Consensus

3.1 Infra as an「APP」？

Infra is often compared to traditional infrastructure such as water, coal, and electricity, and there is concern that it may become a true infrastructure that cannot capture high profits as it becomes increasingly perfect. However, returning to first principles, if what we are betting on is the ultimate business model, Infra, or blockchain as a tool, still has the potential to independently generate application scenarios, such as AI chains, payment chains, and so on. In fact, it would be great if one chain could do one thing well. Although it may be far from us today, there is still a great possibility of it happening.

3.2 What is the main contradiction in the industry?

My own answer is two.

1) There are not enough high-quality assets on the chain.

If we bet that there will be a large amount of funds entering the market in the future, the premise is that there are interest-bearing assets on the chain that exceed the return on US bonds and can attract large amounts of money. The main contradiction at present is that the liquidity of assets is completely insufficient, and there are not enough excess return assets. For the long tail money, if suitable geographically arbitrage assets can be found and implemented in the appropriate areas of centralized and decentralized asset ownership, RWA is indeed a direction.

2) There is almost no consumption on the chain.

Essentially, the vast majority of users in the cryptocurrency industry are small B-side players, with almost no C-side players. The initial intention of cryptocurrency users is definitely to make money, and most NFT holders also hold a bullish attitude, with only a few NFT enthusiasts willing to hold small pictures for the long term regardless of high or low prices, becoming the ultimate consumers. In this case, without real consumption, there will only be perpetual Ponzi schemes.

3.3 Is the upgrade of Web3 enough?

Leapingfrog theory: Due to the characteristics of technological change, developing countries have a latecomer advantage, and the technological level of advanced countries may be locked in a small range of changes due to technological inertia. In this case, the backward countries may surpass the original advanced countries, which is the "leapingfrog" process.

Recently, I have talked to many friends in traditional industries, and their feelings about the industry upgrade brought by Web3 are: it's interesting, but not significant. Yes, this is similar to promoting QR code payment in countries where everyone has a credit card. When the benefits brought by paradigm shift are not enough to offset the conversion costs, technological innovation becomes difficult. Similar to technological innovation in the past few cycles, developing countries have easily surpassed the conversion costs due to their outdated technology, thus creating technological breakthroughs. From this logic, when the innovation of Web3 is limited, the possibility of disrupting the systems of developed countries is much smaller, and there may be greater opportunities in developing countries.

3.4 Making Industry Oracles, Think out of the box

The development of the blockchain industry today, due to the inherent properties of Infra, has been able to establish more or less connections with various fields including IOT, finance, and even daily life. The solution to many problems may lie outside the industry. For example, as discussed with @siyuan, the problem of Ethereum state explosion may be solved by reducing the cost of storing this physical entity. Ultimately, it may be Moore's Law that solves the software problem, rather than technology from Crypto Native.

When there is no answer within the industry, one should look beyond it. Be a industry prophet, take a step back, gain a higher perspective, and seek alpha in this era where Beta is invisible.