Dialogue Block Ark Warren: The DAO and privacy tracks are underestimated

This article is an original piece by Chain Catcher, authored by Wang Dashu.

ArkStream Capital is a crypto investment fund under BlockArk, which has been researching DeFi since 2019. They have invested in high-return dark horses and missed early potential stocks. In this interview, Chain Catcher had an in-depth conversation with their partner Warren, who shared his frontline investment experiences, insights, and thoughts on bull market cycles, public chain development, and the metaverse, hoping to inspire you.

Chain Catcher: After experiencing two rounds of crashes on "519" and "622," the market seems overly weak. What stage do you think the current market is in?

Warren: Personally, I believe the market is still in a long bull cycle. The crypto market is definitely a process of continuous upward movement with periodic corrections. There are three reasons for this.

First is the development of technology itself. Technological development is irreversible. Once the creativity and technical strength of developer teams reach a certain level, resulting in a large number of applications landing, it is impossible for the industry to return to the rough era of its early days.

Second, large funds are continuously entering the market. As large institutions and funds enter, the attributes of Bitcoin are gradually shifting from speculative commodities to those of bulk commodities, making it as close to gold as possible and becoming one of the targets for asset allocation by investment institutions.

Third, based on the above two points, the general public is gradually accepting Bitcoin and its related mainstream cryptocurrencies, so the overall trend of market development must be upward.

Chain Catcher: In the overall upward spiral decline, the challenges for institutional investors are quite significant, especially regarding capital utilization. What are your thoughts on this?

Warren: Indeed, we have considered this, but each sector has a relatively different cycle, so we do not adopt a fixed investment strategy to ensure capital utilization. Instead, we take a more flexible approach, adapting our strategies to different sectors and investment rhythms, analyzing specific projects on a case-by-case basis.

For example, if only 10% of projects in the market are working on underlying infrastructure, given the limited number of selectable projects in that sector and the longer implementation cycles, our expectations for capital turnover will be lower. Conversely, if 90% of projects are focused on applications, with many selectable targets and shorter implementation cycles, their products and users will be quickly validated, and our considerations for their cycles will be shorter.

Chain Catcher: It seems that you are able to invest in leading projects in every sector. I'm curious about your investment research methodology.

Warren: Actually, there is a misconception here. It’s not that we only invest in leading projects; rather, we invested in these projects before they became leading ones, so we are not that magical.

To answer your question about our investment methodology, our core principles are first, to cover a wide range of sectors, and second, to discover the best possible projects based on comparative logic. If a project already has strong competitors, we will evaluate it against its competitors. If what the project is doing is completely innovative, we will look for similar products in traditional industries to compare and evaluate, thus measuring whether the project is of high quality and its potential development space.

Chain Catcher: Recently, Aave's TVL has exceeded 10 billion USD. As a member of your investment portfolio, how has its return been?

Warren: Aave is one of our more unsuccessful investments. Although we participated as early as 2017, we exited before it became a giant. Not only Aave, but we also sold off many application-layer projects during the last bear market, believing that we should focus more on the underlying infrastructure.

Chain Catcher: Missing out on quality targets is common in investing. What’s important is to summarize valuable experiences for new insights.

Warren: Yes, upon reflection, we believe that investment should be approached with a dynamic perspective. In the past, we always used a static approach, focusing on the performance of projects or industries over a period, which is too superficial. So now, we prioritize the team's iterative capabilities and maintain an open mindset.

Some projects may not perform well at birth, but that doesn’t mean the team lacks capability or iterative strength. If they are passionate about the industry, can continuously adapt to market changes, adjust their pace, and innovate, they still have the opportunity for a breakout.

Chain Catcher: You previously researched algorithmic stablecoins extensively. Since FEI, algorithmic stablecoins have received little attention. Why has this happened?

Warren: We previously researched algorithmic stablecoins quite a bit and benefited from some of them. I believe algorithmic stablecoins will see an explosion in the future. However, given the current situation, the overall market outlook is not very optimistic. Most existing algorithmic stablecoin solutions are overly focused on pegging to the US dollar, which is very unrealistic.

Chain Catcher: What are the reasons for the underdevelopment of algorithmic stablecoins?

Warren: To be frank, most algorithmic stablecoins are essentially Ponzi schemes. They require a continuously growing amount of capital and a steady influx of new users to avoid collapse. However, in reality, there are not enough good projects that can meet these two points. Even if they do, the project parties must also have risk resistance and iterative capabilities.

In summary, the development of algorithmic stablecoins requires many subjective and objective conditions. It cannot simply be implemented once a theoretical model is proposed; the road ahead is still long. So if you participate in algorithmic stablecoin investments, it’s best to approach it with a mindset of participating in social change and experimentation, rather than expecting to gain immense wealth.

Chain Catcher: I completely agree. You have also invested in projects related to the BSC and HECO ecosystems. How do you understand the challenges faced by exchange public chains?

Warren: The BSC ecosystem has performed well, while the HECO ecosystem has been somewhat disappointing. However, I believe that with the development of more public chain ecosystems and the influx of more developers, competition among exchange public chains will intensify. Yet, it seems difficult for everyone to attract quality developers at the moment.

Of course, from an investment perspective, for these exchange public chains that are not strongly innovative and focus more on resource strategies, we prefer to participate only when these ecosystems have truly developed products with verifiable data, rather than entering at the very early stages. Even if a potential stock becomes a leader and attracts a lot of capital, it’s not too late to get involved.

Chain Catcher: Whether it's BSC, Heco, or Polkadot, they all fall under the category of infrastructure. Now that the Polkadot testnet Kusama auctions have begun, there has been a lot of confusion surrounding it. As an institution focused on the Polkadot ecosystem, what are your expectations for its future development?

Warren: We indeed invested in Polkadot and its ecosystem from the beginning, but we are very cautious in selecting targets. The reason is as mentioned earlier: everything related to Polkadot cannot be verified in the short term.

The external concerns about Polkadot mainly stem from fears that it will replicate the path of EOS, hastily ending after a round of parachain auctions. However, I personally believe that these misunderstandings will soon be validated. About a month later, after the Kusama auction ends, we will be able to see whether its technology is mature, whether more new developers are willing to get involved, and whether assets are willing to cross-chain.

Once we collectively establish the first wave of the ecosystem, and these aspects are clarified, we will know whether the applications within the Polkadot ecosystem are usable, and there will be no need for expectations, as it will be directly validated.

Chain Catcher: What do you think are the currently undervalued sectors or targets in the market?

Warren: I personally believe that both the DAO and privacy protection sectors are undervalued. Regarding the DAO sector, a somewhat metaphysical viewpoint is that I think the outbreak of this bull market is related to the rise of global individual consciousness. Due to the excessive issuance of national currencies, individuals are increasingly focusing on their asset growth and losing trust in centralized organizations. The organizational form of DAOs may be widely demanded and applied.

As for the privacy protection sector, a more practical viewpoint is that I have noticed that since the DeFi explosion, people are increasingly aware of the importance of privacy protection. Many individuals do not like their asset data on their addresses being publicly viewed. Based on various related needs, the market will definitely require privacy protection products.

Chain Catcher: Speaking of privacy protection, projects like Dfinity, PlatON, and Oasis seem to be in this sector, but we have yet to see relevant application scenarios. So, is privacy computing a pseudo-issue?

Warren: I personally do not think it is a pseudo-issue. The projects you mentioned are all public chains, and each chain has its own focused area. Although they have launched tokens, the infrastructure has not been well established, so naturally, we do not see applications.

However, tokens like anonymous coins and mixing coins are essentially early application scenarios of privacy computing. There are indeed application scenarios; it’s just that privacy computing is not a single application module but a combination of multiple modules, not existing independently.

Imagine that when the Web3 era arrives, data islands achieve interconnectivity, and people increasingly value data privacy. They will need to display information that requires verification while hiding information that does not need verification, which will definitely require privacy computing technology. Moreover, as there are more data and asset-related applications in the market, the applications of privacy computing will become more widespread.

Chain Catcher: The metaverse has been quite popular recently and may also be one of the major application scenarios in the future. Related concept projects are emerging one after another. What is your view on the relationship between blockchain and the metaverse?

Warren: I personally tend to reject the idea of discussing the metaverse alongside other NFT projects or blockchain games.

On one hand, the metaverse is more akin to the existence of IoT + blockchain from earlier years. It will undoubtedly become an indispensable part of the entire internet's development and will experience an explosion, while blockchain is just one part of it. If you are investing in related fields, you must distinguish between proportions and priorities.

On the other hand, while I am optimistic about the metaverse and blockchain, the metaverse may not necessarily be driven by people in the blockchain industry. Therefore, I am not very optimistic about blockchain projects that hype themselves under the name of the metaverse.

Chain Catcher: Some veterans in the crypto space share similar views to yours, but among them, some believe that decentralized derivatives exchanges are a pseudo-demand. The reason is that the main market for derivatives trading is mainstream assets rather than long-tail assets, which means they cannot fully enjoy the benefits brought by permissionless and AMM, while also facing the core issue of user activity. Do you agree with this statement?

Warren: I do not quite agree with this statement. First of all, the benefits brought by AMM are not just the liquidity of long-tail assets. If you look at the top trading pairs on Uniswap, you will find that trading volume is still mainly concentrated on mainstream assets, not to mention the essential need for stablecoin swaps like Curve. Therefore, the core demand for decentralized trading still lies in security and privacy.

Centralized derivatives trading has long been criticized. Some centralized exchanges directly act as counterparties to users, and the consequences are predictable. This is an urgent need for decentralized exchanges to improve. Secondly, although the current trading volume of decentralized derivatives trading is not large, it is not due to a lack of demand but rather because the products are not good enough and are limited by underlying infrastructure. Once better infrastructure and product solutions emerge, there will definitely be an exponential increase.

Chain Catcher: Recently, SBF wrote an article titled "Why Don't We Start Over?" He described himself as a beneficiary of crypto capitalism and defined himself as an outsider. I'm curious about how you define your position.

Warren: I define my position as a participant and witness in the industry. I am fortunate to witness the rise of an emerging industry that is about to have a huge impact on the world. A few years ago, many people could not have imagined the robust development of the cryptocurrency market today, and we have experienced and witnessed all of this, which is very exciting for a young person.