News Archives

MARKET PULSE #2 – A Benefit Beyond Borders: The European Venture Sentiment Index

09/12/2023/in Market Pulse, News /by Venionaire

In the world of venture capital, every decision counts. In this landscape of calculated risks and high stakes, having access to reliable insights is essential. Enter the European Venture Sentiment Index (EVSI), a transformative report that is reshaping how VC investors perceive and navigate the European start-up ecosystem.

A Trusted History: The EVSI’s Origins

The EVSI embarked on its journey in the first quarter of 2020. A period fraught with uncertainty due to the COVID-19 pandemic. It was during these tumultuous times that Venionaire Capital recognized the imperative need for a comprehensive barometer to gauge the health of Europe’s dynamic start-up ecosystem. Since its inception, the EVSI has served as an indispensable resource. It is providing a clear and informed view of the state of innovation and investment in Europe.

To be more precise, here are 7 things you need to know about the EVSI explained by Amanda Intelli, our Educational Video Expert:

Validity and Expertise: Beyond the Numbers

The EVSI report is the product of a rigorous methodology and profound expertise. Over 4,000 seasoned investors, including business angels, venture fund managers, and family offices, actively participate in the European Venture Sentiment Surveys. Furthermore, the surveys, conducted by Venionaire Capital, employ personal interviews within a focus group and a smaller control group.

The collected data undergoes meticulous scrutiny, resulting in the creation of indices for current sentiment and projected outlook. These indices weigh critical factors, such as investor willingness to invest, perceptions of startup valuations, the quality of deal flow, the level of competition, and other related factors. The outcome is not just data. It’s a robust and actionable dataset that can indicate current and upcoming preferences and behaviours of investors with regards to their investment decisions.

Your Contribution Holds Significance

You may wonder why your participation in the European Venture Sentiment Survey is vital. The answer is clear: your insights are invaluable. As VC investors or Business Angels, your perspectives and experiences within the start-up ecosystem carry substantial weight. By actively participating in the survey, you directly influence the accuracy and relevance of the EVSI, shaping the trajectory of European venture capital.

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A Benefit Beyond Borders

The influence of the EVSI transcends individual contributions, benefiting the entire European ecosystem:

Investors Gain Precision: The EVSI aligns your perspectives with market sentiments, enabling you to benchmark your outlook against peers across regions and industries. This empowerment leads to more informed investment decisions and enhanced risk management.

Start-ups Flourish: For start-ups, the EVSI is an invaluable compass in the turbulent seas of entrepreneurship. It offers insights crucial for international expansion, fundraising readiness, and strategic decision-making in challenging economic climates.

Industry-Wide Insights: While other indices may have a regional or investor group focus, the EVSI provides a comprehensive view of the European venture landscape. It encompasses diverse economic regions and various start-up sectors, making it a go-to resource for industry-wide insights.

Unlocking the Future of European Venture Capital

In the data-driven world of VC investing, the European Venture Sentiment Index is more than just numbers. It’s a strategic guide and an essential resource for the VC community. By actively contributing to the EVSI, you become part of a movement that is driving innovation and growth within Europe’s start-up ecosystem.

In a Europe-wide, quarterly survey, we assess the current sentiment of venture capital investors and business angels. Furthermore, we assess their current outlook for the coming quarter. Unregulated private investors (such as family offices, high-net-worth individuals, and top-managers), as well as regulated (institutional) investors have a strong impact on the speed of development and disruptiveness of European innovation. On the other hand, European and regional governments have implemented a range of mechanisms, designed to support and foster innovation in specific fields and encourage private co-investments. It is a rather untransparent market, where dynamics of valuations, the climate to raise funds, and only very active investors sense the quality of deal flow in all kinds of stages, regions, and industries.

Join the conversation, share your insights, and embrace the power of informed decisions with the European Venture Sentiment Index.

MARKET PULSE #1 – The Significance of Achieving Product-Market Fit

09/07/2023/in Market Pulse, News /by Venionaire

In the world of startups, securing Series A funding is a crucial milestone on the path to growth and success. Less than 15% of all startups who received seed capital will take this hurdle and get a chance to accelerate growth, or get on a soonicorn track. However, before professional venture capital funds are willing to invest into your venture, they need to see evidence of a strong product-market fit. In this article, we will explore what product-market fit entails, why it is vital for series A funding, and how you can prove it through suitable metrics.

Understanding Product-Market Fit

Product-market fit can be defined as the sweet spot where your product or service perfectly aligns with the needs and desires of your target market. It is the point where your offering resonates so strongly with customers that they are willing to pay for it, and you have a sustainable competitive advantage.

Why Product-Market Fit is crucial for Series A Funding

Validation: Demonstrating product-market fit validates that your startup has a clear understanding of its target audience and their pain points. Investors are more likely to support ventures that have a proven demand for their product or service.
Scalability: Achieving product-market fit signifies that your startup has identified a scalable business model. Companies that can rapidly grow and penetrate a large market are highly interesting for investors.
Reduced Risk: Startups that have achieved product-market fit are perceived as less risky investments. Evidence of a strong product-market fit suggests that you have reduced the risk of failure or market rejection.

How to proof Product-Market Fit

While product-market fit is often qualitative, there are several metrics that can help you quantify and prove this alignment. Here are a few metrics to consider:

Customer Acquisition Cost (CAC): A low CAC shows that you have found a cost-effective way to acquire customers, implying that your product meets their needs. This is indeed a positive sign for investors.
Customer Retention Rate: A high customer retention rate suggests that your product is delivering long-term value and meeting customer expectations. This demonstrates the stickiness of your offering in the market.
Net Promoter Score (NPS): NPS measures customer satisfaction and loyalty. A high NPS indicates that your product is meeting or exceeding customer expectations, leading to positive word-of-mouth referrals.
Revenue Growth: Consistent and significant revenue growth is a strong indicator of product-market fit. Investors want to see a track record of increasing revenues, signaling a growing customer base and demand.
Market Demand: Conducting customer surveys, focus groups, and analyzing market trends can provide insights into the demand for your product. This data can help validate your product-market fit.

To sum up, achieving product-market fit is a critical step towards qualifying for series A funding. It shows that your startup has identified a target market and developed a product that meets their needs. By utilizing suitable metrics to quantify and prove this alignment, you can instill confidence in investors and increase your chances of securing funding. Remember, product-market fit is an ongoing journey, and continuous feedback from customers will help you adapt and refine your offering to stay ahead in the competitive startup landscape.

If you have any questions or need further guidance on achieving product-market fit, feel free to reach out. We’re here to support you on your entrepreneurial journey!

CRYPTO INSIGHTS #1 – THORChain’s Streaming Swaps: A Revolution in Decentralized Finance

08/25/2023/in Crypto, Insights, News /by Venionaire

Step into the captivating world of “Crypto Insights,” an illuminating blog series brought to you by Venionaire’s pioneering Tigris Web3 team. Venture into the frontiers of the Web3 landscape and decentralized finance (DeFi). We unveil the freshest blockchain innovations and unveil the hidden treasures nestled within the heart of the Tigris Web3 fund portfolio.

THORChain’s Streaming Swaps: A DeFi Revolution

Welcome to another enlightening edition of “Crypto Insights,” an illuminating series brought to you by Venionaire’s Tigris Web3 team. In this edition, we’ll delve into the thrilling realm of the Web3 space, shedding light on the groundbreaking blockchain innovations that are shaping the future of finance. Today, we’re excited to unravel the captivating stories of two prominent players in our Tigris Web3 fund portfolio: THORChain and THORSwap. These dynamic entities have ignited the crypto realm with surging trading volumes, propelling their native tokens to remarkable heights. As these projects continue to garner attention with soaring trading volumes and noteworthy price movements, let’s journey into their worlds and unveil the reasons behind their success.

Tackling DeFi Challenges

Decentralized Finance (DeFi) in general offers many advantages over Centralized Finance (CeFi). However, one of its major problems since its inception has been operational and technical risks. Those risks relate to a variety of wrappers, bridges, and smart contracts necessary. These are needed due to a lack of native cross-chain interoperability and multiple inefficiencies. These inefficiencies arise due to high trading fees, transactional costs, and high slippage because of shallow liquidity. As a result, larger traders and funds like us rely more on Centralized Exchanges, Brokers, and OTC trades than we as DeFi and Web3 “natives” would prefer.

At Venionaire, we’re dedicated to harnessing the potential of DeFi, and in our quest for optimal swap paths, we’ve immersed ourselves in a myriad of Decentralized Exchanges. Among these, THORChain and THORSwap stand tall, embodying the innovation and efficiency we believe in. In the vast expanse of the Web3 universe, THORChain and THORSwap have emerged as shining stars. These dynamic technologies have gained significant momentum within our Tigris Web3 fund portfolio. That makes them more than just investments – they’re a testament to our foresight and believe in this revolutionary landscape.

THORChain’s Galactic Rise

THORChain, a pivotal component of our portfolio, has captured the attention of many as it introduces a decentralized paradigm shift to finance (DeFi). Besides the capital efficiency of THORChain due to its Continuous Liquidity Pool model and its strong tokenomics, which creates natural demand for RUNE, THORChains native token, we were equally bullish on the planned development Roadmap. One of these planned features recently hit the ground running, secretly revolutionizing Decentralized Finance. Addiitonally, it led to a small (but at this stage probably temporary) bull run for both RUNE and THOR tokens.

Powered by cutting-edge blockchain technology, THORChain disrupts traditional financial models by enabling and facilitating direct peer-to-peer interactions. Its decentralization empowers users to transact autonomously, bypassing intermediaries and fostering transparency. In simple terms, it enables users to engage in financial activities without relying on intermediaries like banks. This DeFi approach unlocks unprecedented opportunities for users to take control of their financial autonomy and foster transparency. Our investment in THORChain aligns seamlessly with our ideals of autonomy and transparency, amplifying our enthusiasm for its growth. As of now, THORChain stands at a remarkable +55%. While we are acutely aware of the pronounced volatility inherent in the crypto sector, we are fortunate to have seasoned experts within our team adept at navigating these fluctuations.

THORSwap’s Ascension in the Crypto Realm

In the symphony of DeFi and complementing THORChain’s ascendancy, we find THORSwap. This is an essential and harmonious counterpart in our Tigris Web3 fund portfolio. THORSwap contributes to the DeFi ecosystem by providing a platform for seamless asset swapping. Unlike before, where a single swap had to meet all liquidity needs at once, streaming enables the distribution of liquidity needs across multiple moments. This allowes arbitrageurs to rectify prices during the swap. It leads to more precise price execution with much lower slippage. Simultaneously, it circumvents multiple in- and outbound chain gas fees from splitting into several manual transactions.

Imagine being able to trade various tokens effortlessly, all while enjoying the security and efficiency of blockchain technology. This innovative approach not only enhances convenience but also empowers users to participate in a borderless global financial landscape.

Why We’re Enthusiastic About These Technologies

Our unwavering belief in the Web3 revolution for sure drives our investment choices. THORChain and THORSwap embody our commitment to autonomy, transparency, and innovation and contribute to enabling users taking over control. With these technologies users can modify sub-swaps over time using two parameters, based on their intent of either price or time optimization:

Swap Interval: This determines the time gap between sub-swaps. It is measured in THORChain blocks, each approximately 6 seconds long. This interval allows arbitrage opportunities between sub-swaps, keeping pools continuously balanced. This prevents capital shortages during swaps.

Swap Count: Users can specify how many sub-swaps should occur within the original swap amount. More sub-swaps result in smaller swap sizes for each leg, minimizing slippage in each sub-swap.

This approach enhances THORChain’s capital efficiency without altering Total Value Locked (TVL). For instance, a Streaming Swap with a count of 10 makes the sub-swap/pool ratio ten times better than a single large swap, effectively enlarging the pool’s appearance. Similarly, a Streaming Swap with a count of 100 makes the pool seem a hundred times larger.

Unlocking High-Volume Trades and Cost Savings

Streaming Swaps facilitate larger trades on THORChain and allow substantial traders to pay as low as 5 basis points in liquidity fees. That makes THORChain more appealing for sizable on-chain trades. This change aims to attract a broader user base, particularly those trading over $100k. Trades with $1m plus in value were completed within 2 hours, with lower transaction costs compared to major Centralized Exchanges. As fund managers, we’re thrilled to attest that this groundbreaking feature seamlessly enhances our operations on-chain. It liberates us from reliance on external intermediaries, and concurrently unlocking substantial cost savings.

As passionate advocates of the Web3 revolution, it’s no surprise that we’re invested in these groundbreaking technologies. THORChain and THORSwap mirror the ideals we hold dear – autonomy, transparency, and innovation. By investing in projects that align with these values, we contribute to the transformation of traditional finance into a more accessible, efficient, and decentralized system. As these projects flourish, they reinforce our dedication to transforming traditional finance into a more accessible, efficient, and decentralized entity.

Increased Volume proving early product-market fit

We are not the only ones happy to use Streaming Swaps. Presently, fees surpass block rewards, highlighting THORChain’s increased activity. Introducing Streaming Swaps strategically attracts users who typically trade larger amounts, securing THORChain’s position as a leading swap route. The main direct DEX and User Interface built on THORChain, THORSwap saw a massive increase in Trading Volume as well as revenue generated. THORSwap’s native token THOR was able to capitalize on that with a price increase of roughly 300% since the introduction of the Streaming Swap feature. With an innovative lending product lurking around the corner, we stay bullish, and we stay invested in both THORChain (RUNE) and THORSwap (THOR).

Embracing the Future

Our journey exemplifies the commitment to exploring, understanding, and investing in the future of finance. These technologies are more than just financial assets. They embody a movement that challenges the status quo and embraces the potential of decentralized systems. Our involvement with these projects reflects our dedication to pushing the boundaries of what’s possible in the ever-evolving Web3 landscape.

Our Tigris Web3 fund portfolio stands as a testament to our unwavering dedication to progress, innovation, and transformative change. Join “Crypto Insights” again for more exciting revelations from the world of Web3, where possibilities are endless, and the future is now. If you are interested in learning more about our other portfolio investments, our strategy, and the Tigris Web3 Fund in general, contact us at tw3@venionaire.com.

A Decade of Innovation & Digital Transformation: A Look at the Buzzwords and Developments

08/10/2023/in Insights, News, Tech /by Venionaire

Over the past 10 years, the world has witnessed a rapid and transformative period of innovation and digital transformation. From groundbreaking technologies to disruptive business models, the last decade has brought forth a multitude of buzzwords and developments that have shaped industries across the globe. In this article, we will delve into some of the most significant advancements and highlight the key buzzwords that have emerged during this transformative period.

Artificial Intelligence (AI) and Machine Learning

No discussion on digital transformation is complete without mentioning AI and machine learning. These technologies have revolutionized various industries, enabling computers to mimic human intelligence and learn from data. From chatbots and virtual assistants to predictive analytics and autonomous vehicles, AI and machine learning have become essential tools for businesses seeking to gain a competitive edge.

Internet of Things (IoT)

The IoT refers to the network of physical devices, vehicles, appliances, and other objects embedded with sensors and software that enable them to connect and exchange data. Not only has this interconnectedness paved the way for smart homes, smart cities, and industrial automation. IoT has also played a crucial role in data collection, enabling businesses to gather valuable insights and optimize their operations.

Cloud Computing

Cloud computing has transformed the way businesses operate and store data. With the ability to access and store data remotely, companies can reduce costs and enhance scalability. Moreover, Cloud-based services offer flexibility, security, and collaboration opportunities, allowing businesses to streamline their operations and focus on their core competencies.

Big Data and Analytics

The exponential growth of data has given rise to the need for advanced analytics tools and techniques. Big data analytics leverages large datasets to uncover patterns, correlations, and trends, enabling businesses to make data-driven decisions. This has paved the way for personalized marketing, predictive maintenance, and enhanced customer experiences.

Blockchain Technology

Blockchain technology burst onto the scene with the advent of cryptocurrencies like Bitcoin. However, its potential goes far beyond digital currencies. Blockchain offers a decentralized and transparent approach to record-keeping, enabling secure transactions, supply chain traceability, and smart contracts. Its impact spans industries such as finance, logistics, and healthcare.

Augmented Reality (AR) and Virtual Reality (VR)

AR and VR have transformed the way we interact with digital content and the physical world. AR overlays digital information onto the real world, enhancing experiences in fields like gaming, retail, and education. VR, on the other hand, immerses users in a virtual environment, revolutionizing areas such as training, entertainment, and healthcare.

The past decade has been a whirlwind of innovation and digital transformation, reshaping industries and revolutionizing the way we live and work. From AI and machine learning to IoT and blockchain, these developments have ushered in a new era of possibilities. As we reflect on the incredible journey of the last 10 years, it’s clear that these buzzwords and advancements will continue to mold the future, presenting both challenges and opportunities for businesses worldwide. Embracing and harnessing these technologies will be crucial for organizations aiming to thrive in an increasingly digital world.

Join Us at the World Venture Forum 2024 in Kitzbühel

To celebrate this remarkable decade of progress, exploration, and transformation, we invite you to join us at the 10-year anniversary of the World Venture Forum in 2024, set against the breathtaking backdrop of Kitzbühel. At this prestigious event, thought leaders, innovators, and visionaries from around the globe will gather to dive deeper into these groundbreaking topics, explore emerging trends, and chart the course for the next wave of innovation. Stay tuned for an unforgettable experience that will shape the future of business and technology. See you in Kitzbühel!

Crypto Markets prepare for movements as SEC Ripple judgement comes closer

05/04/2023/in Crypto, Insights, News /by Venionaire

The ongoing legal battle between Ripple and the U.S. Securities and Exchange Commission (SEC) has been closely monitored by the cryptocurrency industry and our Tigris Web3 team. This lawsuit is significant because it could determine whether XRP is a security or not, which could have implications for other cryptocurrencies and the markets in general. In the latest development, Ripple has claimed that the SEC suffered a setback in the lawsuit. That could potentially lead to a favorable outcome for Ripple.

Dispute over XRP’s Security Status

Ripple has denied the SEC’s allegations that XRP is a security and has argued that it is a digital currency like Bitcoin and Ethereum. However, the SEC claims that Ripple raised $1.3 billion through unregistered sales of XRP, which is a significant amount. The outcome of this case could have far-reaching consequences for the cryptocurrency industry.

Potential Favorable Outcome for Ripple

Ripple’s claims that the SEC failed to convince the court to obtain internal documents from Ripple regarding XRP’s security status could be significant. The documents in question could provide evidence that Ripple acted in good faith and did not intentionally violate securities laws. This could potentially lead to a favorable outcome for Ripple in the lawsuit. Additionally, Ripple predicted that the summary judgment in the case would be delivered in 2023, which provides some clarity on the timeline for the legal battle. Some experts and advisors of our fund even see a judgment before July very realistic.

Implications for the Cryptocurrency Industry

If the judge rules in favor of Ripple in the summary judgment, it would establish legal precedent that XRP is not a security. This would be a significant win for the cryptocurrency industry as a whole, as it would provide greater clarity on the regulatory status of cryptocurrencies. It could also lead to increased adoption of XRP.

Uncertainty Remains

However, it is important to note that the outcome of the case is still uncertain. The judge could rule in favor of the SEC in the summary judgment, or the case could proceed to trial. Additionally, even if the judge rules in favor of Ripple, the SEC could still appeal the decision. It is likely that the legal battle between Ripple and the SEC will continue for some time. We cannot yet determine the ultimate outcome.

In conclusion, the legal battle between Ripple and the SEC is a significant development in the cryptocurrency industry. The outcome of this case could have implications for the global crypto industry and market. While Ripple’s latest claims could potentially have increased the chances for a more favourable outcome for the company, the situation remains completely uncertain as there are no official statements published yet. The industry – incl. our Tigris Web3 crypto fund management team – will be closely monitoring the case as it unfolds.

How to use Multiples for Startup Valuation

05/02/2023/in Corporate Startup Engagement, Market Pulse, News /by Venionaire

Startup valuations have become an increasingly difficult, as the crisis put pressure on the market. The most critical aspect for the entrepreneurial ecosystem is to back up valuations as solid as possible. A startup’s valuation is the pre-money valuation of equity (including cash on accounts, but without debt) before an investment. It determines how much of the company’s shares will be sold to investors, or how much equity will be given to employees, against dilution. Startup valuations are determined by various factors such as the company’s founders or management team quality, product, technology, scalability, and obviously financial and operational performance, industry trends, as well as competition.

One of the most important factors that determines the value of a startup is the multiple – compare Venture Method, or First Chicago Method. A multiple is a metric that investors use to evaluate a company’s performance and potential for future growth in comparison to peers. Investors usually use multiples to calculate the value of a company based on its revenue or earnings. Typically, the higher the multiple, the more valuable the startup or the higher the price of shares for investors. The larger a company gets the more multiples expand, in order to reflect market and brand power.

There are several sources for startup multiples, including publicly-traded companies in the same industry, investment advisors, and private market data sources.

Publicly-Traded Companies

Publicly-traded companies in the same industry are an excellent source of multiples. They have readily available financial statements, which can provide insight into how much similar companies are worth. Additionally, these companies’ P/E ratios can be used as a benchmark to measure whether a startup is overvalued or undervalued.

Investment Advisors

Experienced investment advisors – just like Venionaire Capital – are another excellent source of multiples. They have access to private market data, proprietary transactional data, industry trends, and information on recent deals. Investment advisors often use an adapted discounted cash flow (DCF) method with a terminal value called “First Chicago Method” to determine startup valuations. This approach factors in the startup’s expected cash flows and uses a (mostly very high) discount rate to calculate the present value of those cash flows.

Private Market Data Sources

Private market data sources are another great source of multiples. Many data sources provide information on comparable companies, recent deals, and valuation trends. Some popular private market data sources include PitchBook, CB Insights, or Bloomberg. While these sources often require quite expensive subscriptions, they provide a lot of information. This can be helpful when determining a startup’s valuation. Our Analysts recommend to use www.dealmatrix.com to calculate startup valuations, and have the results challenged by professional advisors.

In conclusion, determining a startup’s valuation is critical for entrepreneurs, investors, and employees. Multiples are an essential component of startup valuations and provide an excellent benchmark for comparing the performance of similar companies. There are several sources for multiples, including publicly-traded companies, investment advisors, and private market data sources. Entrepreneurs and investors should consider utilizing these sources to make informed decisions about startup valuations.

EVSI REPORT Q1 2023 | OUTLOOK FOR Q2 2023 DECREASES

04/20/2023/in European Venture Sentiment Index, Know-how for Investors, Market Pulse, News /by Venionaire

Q1 2023 was expected to be the continuation of the European economy recovery, as highlighted by the International Monetary Fund report after three macroeconomic events shook European economics (WEF, 2023). The war in Ukraine, rising infl ation, and the energy crisis. Despite signs of recovery in Q4 2022, in Q1 2023 Venture investment was faced with a banking crisis as well, which aff ected several institutions, including vital Silicon Valley Bank and Credit Suisse.

New Instagram Feature Alert

04/19/2023/in Growth Service, News /by Venionaire

In this article, you’ll discover the latest new features that Instagram & Meta will launch in the next weeks.

Layers Of Decentralization

04/17/2023/in Crypto, Insights, News /by Venionaire

In todays globalized world, centralized web2 players take an ever more important part in our lives. By using the data their users give away eagerly and with consent, they are able to influence which news we read online, which content we consume, which ads trick us into buying things we don’t really need and many other business models. The vision of a decentralized web3 challenges business models of data-driven internet giants. It aims to give back data ownership to individual users. Unfortunately, decentralization in itself does not only bring benefits to users. It also comes with a whole new set of challenges, risks and attack angles.

Exploiting a concept.

Decentralization is occasionally being used as a keyword or concept to cover up projects embedded within a global grey zone of anonymous “DAOs” that are trying to evade any form of legal responsibility for damaging and self-enriching behaviour, or to straight up exploit the lack of legislation to set up and commit fraud. Rug Pulls and deliberately installed backdoors to exploit, hack and steal users assets are unfortunately not an isolated instance in the world of crypto assets.

One of the most famous and blunt cases was the (claimed to be) “decentralized and trustless network” Squid Game Token. Claiming to be part of a bigger soon to be launched blockchain gaming application, it created an immense wave of hype. Even mainstream media fired it up, and eventually it ended up as a massive rug pull when user noticed there was no way to exit from the project and all of a sudden the liquidity pools were drained. But how can such a disaster happen with a “decentralized” and “DAO governed” project?

What is “Decentralization”?

The three main pillars of blockchain technology are immutability, transparency, and decentralization. Even though all of them are in the end equally important to the concept, the decentralization pillar is often misunderstood. Digital assets tend to be (if we count out certain outliers such as Tether or very early stage projects) decentralized. That simply means that a certain number of validators draw a blockchain consensus. That effectively eliminates “centralized” counterparty risk and exploitation by this centralized entity.

Despite most commonly known digital assets formally being decentralized, there are big differences in their level of decentralization. Decentralized Autonomous Organisations (DAOs) serve as a backbone for the decentralized economy. They receive a lot of attention in the sphere of decentralization and decentralized governance. Decentralized Autonomous Organisations have formed more or less naturally and gained attention as a response to very high counterparty risk in the poorly regulated and supervised digital asset ecosystem. A good example of counterparty risk that has caused a sizeable financial woe to investors is the recent case of FTX. In this case customer assets were either gambled away or seized in bankruptcy proceedings.

What the concept of DAO is trying to do differently is that it allows full transparency over the whole project. That includes treasury of foundations, staked assets, assets bonded in smart contracts, and self-custodianship over personal assets. You can interact with open and transparent protocols. You can also commit to changing and improving the product. However, the private keys remain under your control.

Centralization risk of Decentralized Autonomous Organizations

Even though DAOs are here to reduce counter-party risk and create trustless networks managed by an open and transparent governing body, sadly cases like Squid Game Token are still happening due to their close connection with the projects and the lack of decentralization at their core. Decentralized Autonomous Organizations function on a basis of vote proposals and voting to apply changes on the blockchain. The more assets an individual has staked, the more votes the individual has. As DAO functions on the Proof of Stake mechanism. One or a few stakeholders can highly centralize the voting power by making the whole protocol centralized in its core.

In case DAO governs the protocol, but de facto has highly centralized voting power on a single entity, the entity can run changes however they see fit. Liquidity pools can be drained, rewards can be locked, and tokenomics proposals can be rigged in the favor of the controlling group.

Not every ‘relatively centralized’ DAO intends to engage in fraudulent behavior

The main problem with a high level of decentralization is, besides the fragmented thus slower network, the cost to run the network. Decentralization requires a higher number of validators. They will need a financial incentive to run the hardware, as well as stake themselves or in delegated PoS attract (aka share financial incentives with) a significant sum of assets to become qualified validators. The cost is a primary reason why a lot of projects opt for a more centralized type of governance until the project gains sufficient traction and becomes self-sustaining with a larger number of validators. Once the project has sufficient traction and revenue generation, it is financially feasible to keep the high number of validators content and committed to the project.

The best alpha potential lies with early-stage projects. These projects tend to be more centralized due to limitations in sharing financial incentives with many validators. Therefore, filtering out good and harmful projects is crucial.

In the beginning of the project, high level decentralisation allows the team to fix the issues and add features far faster than it would otherwise while operating much leaner. But there is always this risk of things going in the wrong direction. The path between an “efficient” early stage, and centralization being too high of a risk can be very narrow.

The way one can reduce this specific potential risks is to perform a strict due diligence process. This process consists of deep research of numerous parts of the project. KYC of the team behind the project, genesis token supply distribution, governance functionality design, decentralization ramp up roadmap, tokenomics proposals, governance proposals, initial asset distribution plan, and many more. Anybody carrying out this type of DD could have easily avoided falling into a trap such as Squid Game Token.

Do you want to know more about our internal approach to research and how the fund operates and analyze? Hit us up!

Author: David Teufel

Becoming a chart topper with ChatGPT? We just released the very first AI song!

04/01/2023/in Corporate News, News /by Venionaire