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August 6, 2020

Episode 015

Strix Leviathan, Parafi & Archax


In Conversation With 

The value of assets locked in the DeFi markets is crossing the $8 billion mark. Parafi was founded in 2018 when DeFi was at its most nascent. Nisa asked ParaFi Capital Partner Santiago R. Santos, who comes from traditional finance, how he got involved and if he ever expected all this growth to happen? 

“We’ve been investing in crypto since 2013. And if you look over the course of that period, where I think the product market fit of crypto has largely been is around transfer of the value, store of value, medium of exchange. And so for us, naturally, we look at DeFi as a continuation of that. And so certainly DeFi has picked up over the last year, year and a half in earnest, largely built on Ethereum. But i think there’s been a lot of groundwork built over the last 10 years of infrastructure. And I think we’re hitting an inflection point that is getting very, very interesting where a lot of projects have been building and it’s gotten to a point where things are ready for prime time.” 

Vitalik Buterin said a lot of people are underestimating smart contract risk, and Nisa asked Santiago if the Ethereum co-founder is right. 

“DeFi is a year old, or a year and a half old. Some of these protocols haven’t been truly battle tested….I think value in these systems keeps growing and I think that is a good sign. Just yesterday there was another hack of Open, which is an options protocol. You know things are moving fast, some will break invariably. One of the companies that we’re investors in is Nexus Mutual, which allows you to actually buy cover on smart contracts. And so I think risk management in this space, there’s a huge opportunity for people to come in here to develop more robust options platforms, credit default swaps, and to just continue to expand Nexus, to continue to grow. I think it’s just getting started. But certainly I mean, to Vitalik’s point, I wouldn’t necessarily disagree. I think these protocols are still rather young.” 

Santiago discussed how to explain DeFi to potential LPs. 

“We’ve been having conversations with  some of the largest asset managers and pension funds, university endowments and the like that are crypto curious and that have been for the last couple of years. And when they ask us about DeFi, really our response back to them is think of this as the arch of innovation of fintech. Forget for a second about crypto, forget for a second about blockchain. Know that fintech is moving in this direction. Why? Because it’s  a secular trend…I think we’re not far from a state of the world where people are interacting with defi apps without knowing it. And I think that’s the beauty of powerful technology. Noone cares about crypto. Noone cares about blockchain technology. At least that’s our pragmatic approach to investing in this space.” 
Santos believes that crypto is generally a retail phenomenon. 

Market Spotlight: Progress So Far With Tokenized Securities 

DeFi is getting all of the attention in the crypto space lately, but security tokens have been gaining momentum in their own right. Matthew Pollard, co-founder at Archax, explained: 

 “DeFi is a very hot area at the moment. It feels like security tokens really started to come to the fore in 2018. And lots of work has been going on all across the world in the security token space. There were the first movers like Tzero and then there are kind of other exchanges across other countries including Archax. And I think you’ll see if you look at the security token space’s market cap and if you look at the volumes you’ll see a trend upwards. And I think the last three, four months it’s really started to explode — the space — as people got a bit more familiar with what the technology means and how to interact with it.” 

There are several narratives surrounding a lack of demand for security tokens. Pollard addressed whether the demand side for security tokens has picked up, saying it’s definitely a nascent space and commending the efforts of projects like Tokensoft and Globacap in the US and the UK working with regulators. He added:

“We have had our ear to ground in the space over the last two years. And we have five or six companies that have pre-listed to list with us when we go  live. And the total asset size of those is in the hundreds of millions.

So there are companies that want to raise capital…so that side of the funnel is never going to go away, okay? So the leap is taking the capital markets industry and thinking, how can we make it quicker, reduce friction, reduce cost and over the lifecycle of the security existing, how can we show everybody that doing it on blockchain is better? What this space needs is more interesting assets.” 

Pollard added that he’s looking at SPACS and he wants to know what Archax can do with them in terms of listing. 

Onchain Reaction 

James Bennett, CEO of ByteTree, provided this week’s onchain reaction. 

  • Onchain transaction value hit a yearly high, averaging more than $4 billion of settlements per day over the past week. 
  • Fees continue their upward trajectory, peaking at 18% of total revenue. 
  • Miners Rolling Inventory (MRI) rises to a new yearly high of 106%.
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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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