Bitcoin made possible the first true digital store of value, but the immense value of derivatives, equity, and credit relationships are still relying on centralized infrastructure and a cumbersome legal system. With ethereum smart-contracts, we can completely transform financial markets and make them reliable, transparent, and inclusive for everyone.
Today we stand at the inflection point of this parallel financial system. In preparation for its takeoff, we’ve selected five protocols for our portfolio which we believe will be crucial in this new world.
1. Maker. The center of the DeFi ecosystem with Dai as a stable medium of exchange and credit creation facility.
2. UMA. The protocol for the huge untapped market of decentralized derivatives (synthetic tokens) and a new design for oracle.
3. Ethereum. The collateral for “money legos” in DeFi (e.g. collateral for Dai) and new equity standard as ERC20 for token sales.
4. Compound. The decentralized platform for debt and credit relationships.
5. Melon. The platform for transparent money management without juridical bureaucracy.
This selection of protocols is just a starting point and will probably be expanded as more suitable projects will come to life. Read more about them in our investment deck.
While the opportunity to build a parallel financial system may unleash the value bigger than the internet itself, it brings immense risks if handled recklessly and we’ve seen that many times.
Following the history of financial evolution, newborn financial systems were quite often exploited at inception.
It happened in the 18th century in England with the proliferation of equity and debt markets, an event known as the South Sea Bubble. The same exploitation happened with the first digital derivatives based on toxic debt when we got the Housing market bubble. And it happens in communist states during the transition to capitalism when they drown themselves in humongous nation-wide Ponzi schemes.
To reiterate, when people explore new protocols to communicate value (money, equity, debt, etc.), the first thing that happens is that opportunistic players come in and create pyramid-like schemes.
Why does it happen? The greed of insiders who can exploit obscure financial mechanisms to attract investments from fools who believe in making money with no effort and easily fall for “new paradigm mentality”? The answer is a strong “Yes”. But also people often got entangled in incentive structures of systems they can’t fully comprehend.
To understand why we need to talk about what money is. Fundamentally money and money-like instruments have an enormously strong property to concentrate in the hands of a few. Money’s Power Law Distribution is so pronounced because dollars are a proxy for energy in our legal system. It makes sense to expect a derivative of value to inherit the same property to exponentially concentrate in one place. And the best instrument for money to concentrate even faster in one place is debt.
The debt was just recently Introduced through Maker DAO and Dai stable coin, which was the first step for the whole DeFi ecosystem to flourish. And that is where we believe crypto is about to tap the most powerful positive feedback loop money can find — a vicious cycle of growing the money pot through the creation of more debt and reinjecting it into the system, while obscuring the whole relation between the two behind the complexity of derivative instruments.
Whether history would repeat itself or not, we still believe that DeFi will outperform any other crypto market in the next 5 years. And if it will, we’ll observe the same as in 2017 crypto boom — very few projects will stay valuable, while others will prove to be a flop. Some investors will manage to profit generously when others will lose 95% of the gains and even some initial investments.
To help people who want exposure to DeFi get better performance and understanding of the market and risks, we started WZRD. WZRD is a crypto asset management fund, built on smart contracts — fully transparent and easy to invest in.
We are currently in a closed Beta — managing our own money and putting out strategies and portfolios. Once we have enough public records of performance we will feel comfortable accepting more money for management.
If you would like to discuss our approach, or just want to say hi to the new boys on the block — feel free to chat with us on twitter @wzrdfund.