Dialogue Mable: Reviewing Multicoin Capital's Investment Methodology and Observations on DeFi

This article is an original piece by Chain Catcher, authored by Wang Dashu.
From the DeFi-triggered bull market to the current institutional bull market, the blockchain industry experienced two explosions in 2020, marked by the massive emergence of DeFi applications and the continuous accumulation of mainstream crypto assets by overseas institutions. Various signs indicate that the industry has moved out of the wilderness stage and entered a critical development phase.
Multicoin Capital, a research-driven crypto fund established three years ago, has solid logic in laying out infrastructure and discovering potential projects. This time, Chain Catcher engaged in an in-depth conversation with Mable Jiang, the Executive Director of Multicoin Capital, with a series of questions, hoping to inspire you.

1. Industry Cycles and Innovation

Chain Catcher: Every industry has cycles. After the significant changes in the industry recently, what cycle do you think the blockchain industry is currently in?

Mable: The industry cycle has reached a very critical turning point, reflected in two aspects.

On one hand, there is a change in the market's perception of Bitcoin. The most obvious example is that several overseas institutions have announced their holdings of Bitcoin in recent months. Although these holdings currently account for only a small portion of their asset allocation, everyone knows that Bitcoin was born against the backdrop of the 2008 U.S. financial crisis. Its genesis block also contains a challenge to the existing financial system of capitalism, including the bailouts of large institutions and quantitative easing.

Therefore, under the upcoming trend of economic quantitative easing, the situation of institutional holdings should increase, and their allocation may also rise.

On the other hand, there is a shift in the industry's understanding of blockchain itself. People are now increasingly aware of the risks of centralized platforms, and more companies are choosing to learn and understand decentralization. However, a company and a decentralized network are inherently contradictory.

So in the long run, I believe that corporate systems will face challenges from decentralized organizational systems. After all, it is difficult for internet giants to be revolutionized in the short term unless they revolutionize themselves.

Chain Catcher: Currently, the blockchain industry seems to be experiencing a state of innovation fatigue, with many projects using innovation as a guise to harvest value. As an investment institution, how do you view innovation?

Mable: Innovation does not happen overnight. Looking back at the nearly thirty years of internet development, innovation has always been a spiral process. The infrastructure of the previous stage nurtures the next stage's apps, and the apps of this stage will become the foundational setup for the new stage, potentially giving rise to other new applications. So it is a gradual upward process.

Returning to your question, I believe resources will always have a Matthew effect; not everyone can innovate, and we cannot expect innovation to be constant, especially for underlying public chains. It is unlikely that every chain will emerge successfully; in the end, only 2-3 chains may remain. However, many applications or middleware may emerge based on them, but these applications are also products of existing infrastructure rather than innovations existing completely outside an independent ecosystem. As mentioned earlier, it is a spiral upward process.

Chain Catcher: Currently, Ethereum 2.0 is receiving a lot of attention. How do you understand the future development of ETH 2.0?

Mable: I personally hold a rather cautious attitude. First, PoW is already good enough; the actual energy consumption is not as high as many people claim.

Secondly, the PoS system is very unfriendly to the guardians of existing value networks. There are many miners globally maintaining this value network, and PoW is a more decentralized guarantee. Lowering the threshold with PoS will make centralization easier.

Finally, Ethereum 2.0 requires a lot of work compared to 1.0, but the performance improvement is not significant. So purely solving Ethereum's performance issues, 1.0 combined with Roll-up might suffice for a while (assuming Roll-up is not delayed too long).

2. Trends and Issues in DeFi

Chain Catcher: Previously, I translated one of your research reports, which analyzed three major risks and eight solutions in the DeFi market from a technical stack perspective, prompting many readers to rethink DeFi. Returning to practical operations, what standards do you use to judge value capture?

Mable: There are actually two standards. The first is that if a project needs to interact with many external protocols, in this case, if the team's security and engineering capabilities are not strong, we will treat it more cautiously. The second is similarly assuming that a project relies on many external protocols to obtain liquidity, and if this external liquidity could disappear due to the withdrawal of external protocols, we would also question that project.

Essentially, projects obtaining liquidity through external protocols are a double-edged sword. On one hand, external protocols can help you do various things; on the other hand, over-reliance on external protocols carries high risks and does not help build core competitiveness, which is very detrimental to value capture.

Chain Catcher: Uniswap can be said to be the most popular DeFi product this year, but it seems to be at a crossroads regarding whether to continue providing liquidity mining. Public opinion generally believes that Uniswap is at a crossroads. What issues do you think are hidden behind this label?

Mable: Liquidity mining is a great token distribution mechanism, especially for Uniswap's shareholders, who need this decentralized distribution mechanism. However, UNI's distribution is relatively concentrated; it is not like Sushi, where the majority is produced through mining. Essentially, Uniswap or Compound needs to distribute tokens through liquidity mining; otherwise, the tokens would become a single-player game for large holders.

Of course, the "fairness" of liquidity mining activities in community projects is more of a rhetoric. Ultimately, the real issue is that retail investors who only participate in liquidity mining have little decision-making power; their individual vote is worthless, but when aggregated, it becomes valuable.

This is also a question I have been pondering frequently lately—how should governance tokens of DeFi protocols capture value? It is not a binary question; it is not just about whether governance rights (voting power) have value, but rather that governance rights (votes) must reach a certain threshold before they can change outcomes. A single governance vote is nearly worthless for an individual holder.

Chain Catcher: Yes, the issues behind governance tokens are more about governance itself. I believe there will be more discussions on this topic in the future. However, from the current perspective, what important directions and viewpoints do you think are being overlooked in the DeFi space?

Mable: One is brand effect, and the other is the security and interactivity of the protocol itself. The brand effect is easy to understand, and it is complemented by the community. Frankly speaking, an early community needs holders who benefit from it to nurture the brand together, which can then lead to a strong consensus and incentivize the token price.

The security and interactivity of the protocol relate to the formation of a super protocol matrix. For example, a typical AMM service provider like Curve can be done by anyone, but users still prefer it. The reason is that it has completed integration with various protocols; the more integrated it is, the harder it is to replace.

Chain Catcher: The concept of a super matrix has not been widely mentioned, but it seems this logic is subtly influencing the industry. For instance, the series of M&A (merger & acquisition) activities recently released by YFI project founder AC somewhat resembles this logic.

Mable: Initially, I was unsure how to capture the value of their series of M&A. To this end, I communicated with AC, who explained that this series of "mergers" aims to coordinate the developer teams of each protocol, reduce friction during the combination process, and improve development efficiency.

For example, if one smart contract and another smart contract need specific adaptation work, in the case of a merger, everyone's interests would be more aligned to directly advance the matter. Everyone's time is limited; it is not feasible for a DeFi protocol to specifically adapt to another protocol with no mutual benefits. However, with a super matrix, point-to-point collaboration would definitely be more efficient.

I still agree with his statement because when I invested in dForce earlier, my understanding of DeFi was that when all on-chain lending protocols like Compound and AAVE reach their endgame, fees would be infinitely compressed. The reason is that anyone can provide lending services; from a single mining perspective, liquidity will go to whoever offers higher returns.

Moreover, the code is open-source. As long as developers have the ability to attract liquidity to their protocols, they can engage in lending business, making it difficult for lending protocols to charge high fees. Even if everyone only recognizes Compound and AAVE today, once they charge high fees or too much money is pooled in one place, liquidity will flow to places with better returns. Therefore, DeFi ultimately needs to capture the value circulating within the ecosystem through a protocol matrix, which is also the direction for the long-term development of DeFi.

3. Investment Review and Predictions

Chain Catcher: Previously, I learned from public information that Multicoin Capital's investments over the past three years mainly involved public chains, distributed storage, open finance, and other sectors. Could you review your investment logic over the past year?

Mable: Overall, our investment logic is still based on the basic laws of development. We start investing from the bottom up; only by building a solid foundational infrastructure can we invest in the upper structure. The distributed storage and public chains we invested in earlier belong to Web 3.0, and we basically invest upward according to the technology stack.

The themes of 2018 and 2019 were definitely infrastructure, and the basic idea was how to make Ethereum better. After laying out public chains, we began to consider middleware like The Graph. Two years ago, we thought that any on-chain application would need data indexing, so when DeFi took off this year, The Graph also rose.

This year, the most invested direction is DeFi protocols. We saw early on projects like dYdX and Compound, but at that time, we did not participate in equity investments because we believed that token issuance was a necessary part of value capture. However, by the second half of last year and this year, the market timing began to mature, and we invested in many basic applications related to trading and lending. These layouts are also at the lower layer of the DeFi stack, while the upper layer includes derivatives and so on.

Chain Catcher: However, even with a technology stack approach to investing, you still need to face the industry's huge noise. I'm curious how you filter signals from it.

Mable: One way is to refer to traditional investment logic. I believe the growth patterns of internet products are still applicable in the blockchain industry. You may be limited in your perspective by the growth of leading products, but the premise of investing is still to think about how far this track has developed, what the competitive landscape looks like, and whether there will be a new wave of trends.

For example, FTX entered the market when competition among exchanges was already very fierce, but why was it likely to outperform these older exchanges? At this point, leveraging traditional investment thinking—a track will undergo two to three iterations of product forms before forming a true giant landscape, which may penetrate the essence better.

Another way is to keep learning, continuously developing one's reach, maintaining an open mindset towards new things, and constantly breaking past biases to acknowledge mistakes and iterate understanding.

Chain Catcher: Ultimately, it is about building a systematic cognitive framework through continuous learning. Could you share how you construct your cognitive system?

Mable: This varies from person to person. For example, as an investment institution, you first need to clarify what you are good at and which types of investments are more profitable, which requires continuous review to discover. Some people have a strong sense of macro judgment and may make profits by trading Bitcoin, while others may have a particularly good grasp of early project characteristics, enabling them to sift out the best projects from many options.

Returning to Multicoin Capital, our core lies in timely reviews after various decisions, but the premise of review is to ensure that all previous investment decision processes and corresponding thoughts are retained, so we can clarify whether we are making long-term investments or trend trades.

Chain Catcher: In the past two years, the industry has focused more on primary market investments, but in the past year, good projects have become increasingly scarce. Now everyone is basically investing in the secondary market. How do you discover quality projects in such a situation?

Mable: One way is through conventional business development, mainly relying on interpersonal networks; the other is through writing and content output to reach thoughtful entrepreneurs. For example, the DeFi stack article you translated earlier inspired many people to want to reach out to us for discussions. This process can generate many interesting ideas, which is very helpful for discovering good projects.

Chain Catcher: At the end of the year, everyone is making predictions. In your view, what will be the trend in 2021?

Mable: I think the application side will continue to explode. For example, in the DeFi field, the derivatives track is still in the exploratory stage for many projects, similar to Compound in mid-2019, which had some achievements but still has a lot of room for development.

Additionally, the ecosystem of various AMMs itself, as high-performance public chains like Solana will support Serum, so there may also be many on-chain order book transactions.

To think a bit more divergently, I believe there are many opportunities in synthetic assets, which include not only native on-chain assets but also stocks that can be purchased on decentralized derivatives exchanges. Furthermore, there are some phenomenal opportunities, such as existing internet companies issuing tokens.