thumb up

Blockchain industry teeming with positive investment signs

Look beyond the recent market shocks, and there are plenty of positive developments in blockchain-related industries, the leader of a global investment firm believes.

Roderik van der Graaf founded Lemniscap, a global investment firm specializing in emerging technologies. He’s been providing strategic advice to early-stage blockchain companies since 2014. While there’s no denying events like the FTX debacle hurt the industry, they will also help it down the road.

Blockchain’s quick rebound: Is more in store?

Whenever a prominent industry force like FTX implodes, it will bring scrutiny and questions. Some of those queries came from the more traditional investors who bought into the exchange in later stages. That raised issues about the entire concept of blockchain, DeFi, and cryptocurrency.

Van de Graaf’s surprised by how fast markets have bounced back; the fallout could easily have lasted longer. Part of that is that markets overall are rebounding, but van Der Graaf wonders if there’s more in store.

“In our opinion, not everything has played out,” he said. “There might be some secondary effects and fallout we don’t yet know about.”

Five months out from FTX, some memories appear to be short. The markets have possibly absorbed the shocks too easily. This one never reached similar depths of pain and doubt compared to the previous bear.

Watch the coming months, van Der Graaf advised. More negative events a la FTX coinciding with a weak environment could bring markets down. But if those markets maintain their current posture, the fundamentals solidify.

See also:

More caution is good

Given the pace at which investors piled into crypto and blockchain projects during the boom, van Der Graaf said the resulting prudence isn’t bad. It’s good that they’re taking longer to scrutinize investments, and it’s good valuations have reset (though they could use a little more).

It’s still not abnormally hard for new startups, he noted. There’s still plenty of capital, too much for the climate to go dry. Several significant funds are looking for opportunities.

This is what a healthy climate looks like. Some projects don’t get funded. Due diligence is happening. Good ideas with good teams will still find dance partners.

Roderik van der Graaf headshot
Lemniscap’s Roderik van der Graaf said there are plenty of developments in blockchain to get excited about.

Investing is quite competitive for Series A rounds but harder for pre-seeds and seeds. Those in for a shock are the ones who raised early rounds at peak frenzy and now find different levels of willingness.

“What you have now is people coming to market (where) the first round was done at very high, irrational valuations. Of course, they will struggle,” van Der Graaf said. “There’s always an expectation when you go from seed and pre-seed to the next round of a markup. But some of the early rounds in the bull market were done at too high of a level. And people come back to the market, and that’s working against them. People are not willing to give them a valuation that gives a markup. In some cases, it’s even a down round.”

Blockchain fundamentals remain strong

Perhaps the most important message to take away is that the fundamentals of blockchain and cryptocurrency haven’t changed. The setbacks are not because the technology has failed, van der Graaf said. Clear out the fraudsters, add appropriate scrutiny, and the market improves.

Progress continued on several fronts even during the swoon, van Der Graff added. His biggest concern is that regulators overreach and crimp innovation.

“It’s good to have clarity,” he said. “Some sectors would benefit from knowing what the rules are. DeFi, in particular, is kind of in the middle. What can you not do? Are things securities? Can you be a decentralized protocol in the first place and have tokens?

“We suspect that all of that will be regulated, but if you look at it with hindsight, we were saying regulation was welcome five years ago. Regulators were a bit slow in catching up, understanding what’s happening, and proposing good regulation.”

Not all exchanges are FTX, either. Some seek a level of regulation. Anchorage Digital is a bank, van de Graaf said. And if you’re a bank, regulations should be strong.

The importance of global coordination

He added that some sort of global regulatory framework would be welcome, too. Every country is doing its own thing. Hong Kong has a licensing regime for exchanges. The EU makes it very hard.

“A crypto exchange? I don’t think we can do it right (in the EU),” van Der Graaf admitted. “It’s a negative bias on regulations. There doesn’t seem to be a way where it’s okay, and you become licensed. All you see is negative statements coming from regulators but no path.”

Modular blockchains, Layer 2s, scalability, and more growth

Modular blockchains will also drive adoption, van Der Graaf said. Developers are unbundling the individual components and developing them separately. Those designing new blockchains can pick the pieces they want regardless of the developer, similar to how robotic process automation companies allow clients to select the elements they need for their businesses.

“I’m not sure it will take over everything,” van Der Graaf cautioned. “But it’s an interesting approach to the challenges.”

Van der Graaf is encouraged by developments in Layer 2 protocols, scalability, and judges of optimism. Overlaps with Layer 2s, zero knowledge for scalability, and privacy innovations are also booming. ZK cryptographers, in particular, are very busy transitioning from research paper to action.

That reminds us how far the industry has to go before it has a widely-accepted core, van Der Graaf said. Those deterred by setbacks forget technology never advances upwards in a straight line.

Even the talent level entering the industry post-correction is an encouraging sign, van Der Graaf said. In a subdued market, those coming in are likely doing so because they believe in the possibilities, not because there’s a buck to be made by riding the wave.

“There’s a lot of people coming in, accomplished engineers with great experience from specific verticals coming into crypto. We love it when someone with 15 years of experience, a top engineer with a massive salary, resigns to go into crypto. That’s a strong signal.”

  • Tony Zerucha

    Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.