Paradigm founder Matt Huang: The 18-year bear market has many elements that we miss

Original Title: “Paradigm's Matt Huang on the Biggest Crypto Fund”

Translation: Dong Yiming, Chain Catcher

Funds continue to pour rapidly into the cryptocurrency space. Institutions, venture capital firms, and private investors seem to have discovered this issue last year. However, the ones who have reaped the biggest rewards are those who entered the field some time ago. One of the leading investment firms in the crypto space is Paradigm, which was founded during the crypto winter of 2018.

The company was co-founded by Fred Ehrsam, a co-founder of Coinbase, and Matt Huang, a former partner at Sequoia Capital. The firm has just announced a new $2.5 billion fund, which is the largest crypto fund to date.

Recently, Bloomberg discussed with the company's co-founder Matt Huang about Paradigm's unique structure, its vision for crypto, and what it plans to do with the funds. Below is the translation of this article by Chain Catcher:

Host Jhon: Can you start by introducing the background of Paradigm? Does it have any history or story?

Matt: I'm glad everyone is discussing Paradigm recently. The background of Paradigm is quite simple; I co-founded the company with my partner, Fred Ehrsam, who is one of the co-founders of Paradigm. Fred is one of the co-founders of Coinbase, and we have been friends for a long time. Before 2017, I was a partner at Sequoia Capital, focusing on comprehensive investments in the tech sector. Later, I began to pay attention to the cryptocurrency space, and I frequently met with Fred to discuss this new investment opportunity.

We had two realizations at that time. First, we firmly believed that what cryptocurrencies can achieve would have a tremendous impact on the entire world and that we needed to spend time focusing on it over the next decade. We have already seen Bitcoin as a digital currency asset, with its value rising from zero to hundreds of billions of dollars; we have also seen some early DeFi projects emerge from Ethereum, which gives us a strong conviction about the future.

Compared to traditional tech investments, cryptocurrencies are undervalued. Some newcomers to crypto see things like "Dogecoin" or "Catcoin" and find it hard to understand why these things exist.

But as investors, we are closely in touch with many crypto project development teams that are working on some truly hard technologies, and our perspective has shifted significantly. In some tech waves, new platforms emerge, such as mobile phones, the internet, or cryptocurrencies. It is easy to apply old things to new materials by analogy. In these waves, some companies that are native to the tech sector have been established.

Paradigm is an investment firm built on our true ideas, and for us, the most important point is our technical expertise with the teams. We hope to provide technical support and guidance to teams that want to develop cryptocurrency-related projects.

Host Tracy: I want to return to the point you just mentioned. You believe that what cryptocurrencies can achieve is worth studying over the next decade. What can cryptocurrencies do? Can you give us a brief introduction?

Matt: First, Bitcoin can serve as a digital currency. There is still much controversy about Bitcoin as a digital currency standard; people are unsure whether it has real value or if it is like the tulip bubble in the Netherlands, with a massive price bubble. When we discuss Bitcoin in developed countries, people often do not perceive it as having much value.

In contrast, if we ask people from developing countries, such as China, Russia, and some Latin American countries, where the legal system is not well-established or currency stability is not guaranteed, Bitcoin has some privileges similar to the dollar in many ways. This is the first characteristic of Bitcoin that cannot be underestimated; it can be a powerful tool to drive progress in the world.

Secondly, decentralized finance (DeFi) is a natural extension of digital currency. Besides holding or selling crypto digital assets, you can now do more complex things with them and use them in programs. DeFi has a special nature; people can write terms into its protocols that make them believe it will operate as designed even years or decades later. Just like in a country, if people have strong property rights, they feel the economy is stable and can make long-term investment decisions.

Digital commitments are another significant feature of blockchain. For example, decentralized trading protocols like Uniswap can still operate as designed decades later, and future people can improve protocols based on it. Additionally, in recent years, DeFi has made many new technological breakthroughs, and crypto protocols have expanded their areas of use. Recently, the concepts of NFTs, digital artworks, and the rise of crypto gaming have made us believe that the crypto industry will involve more physical industries in the future.

Host Jhon: Let's discuss the new fund you just established. You mentioned earlier that there are many opportunities in the crypto industry, such as DeFi and NFTs. But these are too broad; can you talk more specifically about the opportunities you are most optimistic about?

Matt : Back in 2018, when we established Paradigm, we had many beliefs about the development of the crypto industry over the next century. Initially, we were investing in some DeFi projects, but recently we have seen a term gaining popularity in the industry—Web3. People believe that blockchain and cryptocurrencies can bring more possibilities to internet construction. More and more professionals, technical developers, and entrepreneurs are entering this field.

We not only focus on the long-term potential of blockchain but also pay attention to short-term creative and high-quality projects. There is so much innovation that it is hard to really predict what will happen next, so we hope to observe market dynamics while improving our technical capabilities and spending time researching where builders are investing their time.

Host Jhon: Like many VCs, you and your team have strong technical capabilities. I'm curious why you want to understand these complex technologies yourself?

Matt: First, I don't quite agree with your statement that most VCs don't understand technology. From the perspective of a startup, I would think about what kind of people I would want to invest in if I were a startup. If I could add value to the company like Paradigm does, that would be very meaningful. If you imagine that in the future, our economy increasingly operates on crypto tracks, having more people who understand technology is very important. So having a team that truly understands technology is crucial, and becoming technical experts is one of our goals at Paradigm.

Host Tracy: I heard that besides having strong technical skills, understanding memes is also one of the criteria for joining Paradigm. Is that true?

Matt: In today's society, media plays a strong guiding role, and memes drive culture, so understanding online trends is important. If you don't follow crypto Twitter, you won't be able to keep up with the real developments in the crypto world.

Just like Elon Musk has a crucial ability to gather all the rocket enthusiasts to join his team to build rockets together. Having the ability to gather talented people to work together on a long-term problem is a fantastic thing. If you look at the marketing effect of memes from this perspective, it indeed has powerful strength to guide people's direction or change their thoughts, drawing everyone's attention to a specific project.

Host Jhon: Do the different tokens you invest in create a compound network effect? How do they influence or help each other?

Matt: That's a good question. If we invest in some projects whose protocols bring significant value to the entire economic system and their users, then they will learn from each other's protocols and cooperate for mutual development, which is also what we encourage. Our responsibility is to find the most promising and passionate companies in the crypto industry, and collaborating within the same community will also benefit their development.

Host Tracy: I have a more conceptual question. We know that some cryptocurrencies have scarcity, such as Bitcoin, which has a specific issuance limit, and the total amount that can be mined is predetermined by the issuer, which increases their value. NFT is similar, with only a limited number of works. Does artificial scarcity really benefit investors? Because now there are more and more new tokens and NFTs being issued, a specific market may have scarcity, but the entire crypto market is growing exponentially.

Matt: If the market overheats, we feel that asset allocation becomes difficult, and it is hard to find projects that truly need support or are genuinely valuable. Although there are more opportunities for crypto investors and entrepreneurs now, it also means that there is more disruptive information.

So, there are many elements from the bear market of 2018 that we miss because not many people were paying attention to the market back then, and there wasn't much capital in the market, making it easier to complete project investments. Developers were also more focused on their development work to create more projects.

Host Tracy: What kind of exit strategies do you generally choose for projects?

Matt: First, we generally try not to consider this question. As you know, Paradigm has only been established for three years, and we believe that many projects or companies will continue to operate for ten years or even longer. I think of the question you mentioned earlier about whether having tokens or equity is better. Some projects, like Coinbase, are more suited to the traditional IPO route, and we would take that opportunity to exit. These companies generally make money in the same way as traditional companies, except they serve the crypto market. However, many protocols will not go public in the long term.

Host Tracy: I want to use a practical example to clarify the previous question. If you had to choose a long-term investment in Solana, would you choose to buy their tokens or invest in their equity as a company?

Matt: Solana's protocol falls under our classification of Layer 1 protocols. They want to build a public chain and establish their ecosystem with a primary currency unit. In this type of investment, their original value comes from their currency unit, like Ethereum's ETH or Solana's SOL, rather than their company structure. The company structure may have departments similar to labs, whose responsibility is to build the central protocol or other things used to construct the ecosystem, but they are not the primary source of revenue.

Host Tracy: So, the establishment of these company structures is not for making money but for building the foundation of the protocol, right?

Matt: Yes. And I believe the ecosystem is still looking for the best way to arrange all these things. On the other hand, we also invested in a company called TaxBit that develops accounting and tax software, which operates like a traditional service company, except they serve companies in the crypto market.

Host Jhon: There are some seemingly funny coins on the market, like ELON and Doge. What do you think about this phenomenon? Are they Ponzi schemes?

Matt: I think it's hard to judge them as good or bad; they are part of the entire market. Of course, I believe it would be better if people could invest more effort into new projects with long-term development potential. Although there will inevitably be some cyclical fluctuations, I believe the crypto market is much stronger than it was two or three years ago.

Host Tracy: With so many tokens and technologies on the market, what do you think is the best way for them to expand themselves and make their networks more efficient?

Matt: Blockchain has immutability, and transactions usually need to be recorded repeatedly by many machines to reach consensus, which wastes resources and makes the network much less efficient compared to traditional network services. I believe there are many ways to solve this problem, one of which is to batch process many transactions and prove them together. For example, Ethereum's Optimistic Rollups will "optimistically" assume that these transactions are valid, allowing its network operators to publish any data they want (including potentially fraudulent/incorrect information). This is a scalable solution.

Another method is to enhance hardware. We are currently exploring these possible solutions, and more scalable Layer 1s like Solana have emerged. Although scalability will still be a problem we need to solve in the coming years, we have become clearer about the methods to address these issues in the future.

Host Tracy: What are you most looking forward to or most passionate about?

Matt: The acceptance of digital gaming on the blockchain is very appealing to me. Giving value to digital tools and trading them is something people have wanted to do for a long time, and gaming seems inherently suitable for development on the chain because blockchain gives us true ownership of digital assets. Entering a digital world is like entering a whole new country, and you need to accept their rules.