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- Leading digital asset VC firm, KR1 were early investors in Ethereum, whose ether token hit record highs this week.
- The founders are now making a big bet on crypto protocol Polkadot and share their investment case.
- They also break down their outlook for DeFi, as well as two projects and key trends to watch.
- See more stories on Insider’s business page.
KR1 is one of Europe’s leading blockchain and digital assets venture capital firms. The firm listed on the Aquis stock exchange in 2016 and has since invested in crypto projects such as Ethereum, Polkadot and SatoshiPay.
Since listing, the company’s share price has surged over 28,000% as it provides investors with indirect exposure to the world of crypto.
The founders of KR1, George McDonaugh and Keld Van Schreven, recently spoke to Insider about their 5-part crypto investment strategy.
A specialization within the strategy is decentralized finance. KR1 were early backers of Ethereum, which is a blockchain that powers a number of applications through its smart contract functionality and has frequently been leveraged by the decentralized finance movement.
Some of Ethereum’s other crypto-related uses are non-fungible tokens backed by celebrity artists and musicians, metaverses and even digital racehorses.
Ethereum’s native currency ether reached all-time highs this week. But despite investing in Ethereum, the firm has also invested big in protocols, such as Polkadot and Cosmos, that could challenge crypto’s rising star.
“We’ve done a lot of DeFi investing, probably one of the most active in the space,” Schreven said.
What is DeFi?
Decentralized finance has surged in popularity in the last year alongside the cryptocurrency boom. The movement seeks to replace a variety of centralized and regulated banking institutions with decentralized systems and products.
The products aim to remove the middleman, instead using blockchain technology to enable complex financial use cases directly between parties.
A common way of assessing decentralized finance adoption is through “value locked”. This represents the quantity of ether and other coins posted within the smart contracts that make up a particular DeFi service.
Bank of America highlighted the surge in “value locked’ in a recent research note.
Bank of America
KR1’s DeFi outlook
McDonaugh believes scarcity is at the core of the DeFi movement.
“What blockchains allow to happen is bring that sense of ownership into the digital realm,” McDonaugh said.
Scarcity started with the creation of digital assets, which have limited supply, and the ability to trade them, McDonaugh said. Decentralized finance is an extension of that as it provides ecosystem for those digital assets.
“Deep down, I think it speaks to a human’s desire to exchange with each other and I think the less barriers to exchange, the more prosperous we will all be as a society,” McDonaugh said.
In the short-term, Schreven expects the momentum of the DeFi experimentation phase to continue, but at some point the centralized and decentralized worlds will have to mesh. For example, he asks, how will national and regulated stablecoins link into the decentralized world?
Investors will need to be cognizant of regulatory hurdles on the horizon. Schreven said.
DeFi Trends
The team at KR1 are watching two key DeFi trends right now.
1) Uncollateralized lending
Currently within the DeFi space, many protocols are over collateralized, because if someone defaults then it’s a way to protect yourself.
In traditional credit markets, they rely on identity for uncollateralized lending. This isn’t possible within DeFi because identities can be anonymous.
Several projects are trying to solve this problem. If done correctly with the right metrics, it could spur growth, McDonaugh said.
The team is invested in Union Finance, which is a project that hopes to solve the problem by using group social connections to offer credit lending to individuals.
2) Fixed rate and derivatives products
“At the moment, a lot of DeFi [products] are all variable rates and people are looking at how to create longer term products with fixed rates,” McDonaugh said.
KR1 is focused on projects solving the fixed rate problem, as well as those focused on the space of financial derivatives and synthetics, McDonaugh said. One project he’s excited about is Vega, a protocol for creating and trading derivatives on a decentralized network.
“It’s all about offering people the freedom to exchange value and also allocate capital to these markets in a far freer way,” McDonaugh said.
Investing big in Polkadot
The team is also invested in Polkadot, a protocol that enables public blockchains to connect.
Although Polkadot is not a DeFi application, it could enable DeFi projects to communicate with one and other. The team at KR1 believe in the future there might be a need for bespoke blockchains that perform specific functions and will need to communicate with one and other.
“You can design a blockchain to be an atomic trading or derivatives trading platform and then you can connect that sovereign blockchain to a wider network,” McDonaugh said.
Part of the reason the team invested in Polkadot was because it was built by Gavin Wood, who wrote the first version of Ethereum.
“[Polkadot] basically fixes a lot of the problems with Ethereum,” Schreven said. “Once you frame who created it and why, then that becomes important.”
The native token for Polkadot is DOT, which serves as a way to carry out key functions on the platform, similar to ETH for Ethereum.
DOT’s price performance is roughly on a par with that of ether over the last year, with a gain of around 320%. But at just $38, it’s worth a fraction of Ethereum’s native token. Ether was up 3% on the day at $3,440 on Wednesday.
Polkadot can do many things that Ethereum can’t, Schreven said. It’s cheaper, faster, contains on chain voting and individuals don’t need to fork for an upgrade, he added.
“[Polkadot’s] going through the Ethereum emergence cycle of infrastructure on [to] it,” Schreven said.
One of the strong underlying narratives for moving to Polkadot as a developer is that it provides the tools and flexibility to create an infrastructure with an eye to the future where blockchains might want to talk to each other because of the benefits of shared
liquidity
, McDonaugh said.
“We’re seeing talent move on to Polkadot that was going to build on Ethereum. That’s very exciting,” Schreven said. ” … And I think it’s going to be one of the winners in the next few years, and then it’s going to last for maybe 100 years.”
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