From lending products to DEX to asset aggregation protocols, DeFi has dominated the blockchain industry this year, sparking a bull run. However, as the bubble fades away, the future trend of blockchain industry and the reflection of DeFi investment have become the main concerns of most investors.
Someone says DeFi dead, while someone says DeFi has just begun, behind these ideas are both different positions and represent different experiences. With these questions, we are honored to have an in-depth exchange with Jiang Tao, a co-founder of Shata Capital. And the following is part of this communication. Hope his long-term focus on DeFi, blockchain and his extensive experience in Internet investment over the past decade will give you a different perspective to think about.
Blockchain is on the eve of an outbreak
Host: Every industry has a cycle. In your opinion, what kind of cycle is the current blockchain in?
Jiang Tao: It’s a bit like the mobile Internet around 2009 when the iPhone was just two years old and the App Store and 3G networks were just launched. Just at that time, I also began to do investment, although many investors realize that the App Store is an opportunity, at that time, there were only small games in the App Store. At that time, many Chinese teams made such small games for 99 cents and sold them to Americans and profit several million RMB per month. However, it is finally proved that the game is only a small part in the era of mobile phones, mobile phone App is not limited to the game. From this perspective, the current blockchain looks a lot like the Internet of that era, with infrastructure just beginning and some breakthroughs in innovation, such as DeFi, but the future of blockchain is by no means limited to DeFi.
Host: According to the current data showed by Gartner, blockchain industry is in the trough period of the bubble bursting. How do you think of it?
Jiang Tao: I think the real trough period was the last year. Just like the early APPStore, everyone knew that blockchain had value but didn’t know the specific application scenario and whether it would make money in the future. But this year we see DeFi, just like the game in the APPStore, the value of DeFi products are also very clear, it is a trend coming from the bottom to the top, so in my view, now is the early stage of the outbreak, in the perception of next two years, there will be a lot of new opportunities and a high probability of a boom.
Host: So, what kind of momentum is needed for the next explosion?
Jiang Tao: In essence, we need to solve the problem of users. In addition, there are some basic driving forces needed to be figured out, such as platform, system, technology and so on. Of course, there are many voices that it is difficult to implement these layers, but I am relatively optimistic about that. Compared with these, what more difficult in the blockchain world is to acquire usage scenarios and solve user problems.
We all know blockchain is an excellent tech, but few know its actual benefit. To some extent, this shows that technology is not the biggest obstacle, and the fundamental problem is that no suitable application scenario has been found. Once the scenario is available and there are requirements, technical obstacles can be realized through various compromises.
Host: When we observe and study an industry, there will be a coordinate system or the origin of thinking. What is the coordinate system or origin for you to observe and study the blockchain?
Jiang Tao: First, what are the user needs? Second, how to solve the user needs? Third, why is your solution better? These are the basic logic behind our investment decisions. Of course, in the current blockchain industry, many people do not define user requirements, and they are more concerned about whose performance is better, whether it is pure decentralization, and whether assets can be unmanaged, but are these all the real user requirements? In fact, it is a question.
Take DEX as an example. Originally, many DEXs tried to create an unmanaged DEX based on the centralized exchange experience, but they all almost failed. Finally, Uniswap came out, which was a case of making products based on user experience. To some degree, user demand is basically related to whether the team pays attention to the essence of the problem.
Investment logic in DeFi
Host: We noticed that most of the projects Shata Capital invested in in the past were in the areas of lending and payment. Could you tell us your specific investment layout in the blockchain industry?
Jiang Tao: First of all, DeFi has always been our focus. When the fund was launched in the second half of last year, we negotiated with some overseas DeFi projects in a deeper stage, including some projects that are hot in the market at present. However, considering the epidemic situation, it is a pity that it failed to land at last. Later we also participated in the secondary market, fortunately, there are good returns.
At present, our main investment direction is still related to finance, but we are making corresponding adjustments in the process of investment. Beyond finance, we’re also looking at infrastructure that can carry more users, NFT and crypto-art, social and content aspects including games, and future mass-level traffic portals like wallets. We have also recently invested in some domestic DeFi projects, which is an extension of our original investment in finance and also the sector we will focus on next.
Host: Are there specific criteria or models for judging DeFi projects?
Jiang Tao: The primary market is still based on the three criteria I mentioned earlier: what are the user needs? How to address user needs? Why is the solution better? As for the secondary market, we are still trying to do some quantitative models. But given that each project is different, it is difficult to put together a concise methodology, but the good news is that there are already lockups, revenue, GMV and other data in the market, so there is an opportunity to come up with a reference valuation model in the future.
Host: Just as you mentioned that the main focus of Shata is a mass level of traffic entry, but from the current situation, most users are still partial to the stock, and to create a mass level of traffic entry seems to need a turning point.
Jiang Tao: Yes, but I think in a way DeFi is an opportunity for that. In this DeFi boom, we’ve found that there’s not a lot of traditional money going into DeFi, otherwise, stablecoin wouldn’t be on such a scale.
With so many crypto assets, it is unlikely that DeFi will be able to grow 10 times its original size, so it is safe to say that some of its previous liquidity has been funded from outside. It’s just that there’s a difference in external funding, some from individuals, some from institutions, some from individuals to institutions, and so long as the DeFi product really solves the problem, it doesn’t get in the way of new funding.
Host: In your opinion, what issues does DeFi need to address to attract a lot of new funds?
Jiang Tao: For example, maintaining a reasonable, low risk and high return in a long period of time; or convenience entry, including wallets that are easier to use. Actually, I think DeFi liquidity mining will later be concentrated to form a similar fund, whether centralized or decentralized, as long as it can solve the problem of user benefits, it will attract the mass flow rate. The current domestic situation is more complex, as many overseas projects do pretty well in this respect, to their view, DeFi is a high-yield deposit, which is based on the blockchain and can be implemented just with a license, and this is the compliance of the business in the United States.
About UniSwap and Maker
Host: Some in the industry are also questioning the value of DeFi. For example, the liquidity mining model for activating the DeFi market is essentially a series of collateral and unlimited arbitrage between various stimulus assets, and whom it attracts are mostly speculators, etc. How do you think of it?
Jiang Tao: In fact, the essence of liquidity mining is some form of subsidy, with which the project side can attract users to participate in. Similar to the Internet company, except that the Internet subsidizes the money, DeFi’s subsidy is the stock, which is more about giving the participants the idea that the stock can be cashed at any time and as the price goes up, the user may sell it directly or not.
To look back, some companies failed, while some companies succeeded with subsidies, so no one can completely ignore the value of liquidity mining. For example, how many subsidies have been given by ele. me and Meituan, but in the end with no subsidies or reduced ones, users will still use them to order takeout, because it solves the needs of users. The only difference may be just the order quantity would be less.
So, like Internet subsidies, the key to long-term development lies in the core competitiveness of products, that is, user value.
Of course, different projects have different values. Lending has its own value, and the transaction has too. From Compound to Uniswap and YFI, each project has a different value, and the effects of subsidies are different, so it’s not easy to judge.
Host: Yes. It comes to mind that you’ve lamented before that a team as minimalist as Uniswap faces a lot of skepticism. Not long ago, Uniswap finally released the governance token UNI after facing the challenge from Sushiswap. What do you think about the market performance of UNI?
Jiang Tao: The issue of governance token UNI is a positive thing. It shows that the competitiveness of Uniswap has become stronger, and it also gives the community more motivation and opportunities to participate in it. In fact, throughout Uniswap process from birth to prosperity, it all deals with problems from the perspective of user needs, this is also the reason why I like it. As for the market performance of its token, I didn’t think too much about it. This is a question of the market, no one can tell clearly, as I believe most people would admit that tesla is a good company, but how much value the good company has been very controversial, so as Uniswap and its governance tokens, UNI.
Host: when comes to good companies and good project, then here is another question. As you said before, Maker is the most mature product among DeFi mechanism, especially its MKR mechanism design. But now it is considered the contradiction, the reason is that the Maker not only yields lower but also need holders to dilute out together, which is very unfriendly to the user. Do you agree with this statement?
Jiang Tao: I don’t agree. The yield is not directly related to the maturity of MKR mechanism. It’s totally different. First of all, the stable rate of zero is jointly decided by the community vote, not by individuals, and it is decided to promote the generation of DAI. Second, the fact that the rate is now zero doesn’t mean it’s always zero, and we can’t say that the stable rate has shrunk to zero means Maker is worthless, maybe the rate will become 10% next month.
The key lies in the need to figure out doing a lager scale or profit first when the yield rate adjusts. DAI’s circulation in recent months has been rapid growth, recently DAI’s stable rate has been adjusted to 4%. Therefore, in my opinion, the above questions are only aimed at short-term market behaviors. There is no problem with the mechanism of MKR, and I still accept its rationality and maturity.
Host: Yes, and what do you think will be the next hype after DeFi?
Jiang Tao: we currently have tended to favor in crypto art, but as for DeFi, it is still an important sector for us to pay attention for a long time, like the game to the APPStore, which is still an important part of mobile phones on the ecological. DeFi to blockchain is also like this, although the bubbles will disappear, the core value will always stay, and so we will also pay long-term attention to DeFi innovation, at the same time investing in DeFi projects. Frankly speaking, the sooner the bubble bursts, the better it will be for the entrepreneurs who do products in a down-to-earth way. Only by doing solid work can they make real achievements in solving user problems.
Article from Wang Dashu (Chainbs) / Translated by Yang(Milian Tech)