Arthur, founder of DeFiance Capital: The secret to betting on DeFi projects
The founder of Asia's largest DeFi fund DeFiance Capital, Arthur Cheong (Arthur0x), shares his secret to turning a six-figure portfolio into a nine-figure one in just three years.Author: Bankless
Compiled by: The Reading Ape
Arthur Cheong (Arthur0x), the founder of DeFiance Capital, the largest DeFi-focused fund in Asia, shared on the Bankless podcast how he turned a six-figure portfolio into a nine-figure one in just three years.
He explained the fundamental elements he focuses on in protocols, the metrics he uses for valuation, and which tokens he believes are currently undervalued. Which Ethereum killer would Arthur bet on?
Here are the key points from The Reading Ape's summary of the podcast:
1: Who is Arthur0x?
Founder and fund manager of DeFiance Capital (one of the largest DeFi-focused funds in Asia), he is one of the most successful DeFi investors in the cryptocurrency space, turning a six-figure asset into a nine-figure one in three years. DeFiance Capital's investment style is fundamentally driven, rather than narrative or sentiment-based.
Arthur0x's crypto journey began in the spring of 2018 when he wanted to run a cryptocurrency research startup but couldn't find product-market fit, so he decided to focus on investing during the bear market of 2018 and bought many tokens that were overlooked at the time.
2: The Secrets to Arthur0x's Success
Do your homework and research, focusing not on the present but on ongoing trends.
Perseverance, especially during bear markets when people often give up.
Believe that we are building something grander, not just speculation.
"I believe cryptocurrency is a fair competitive field, open to individuals from different backgrounds. I didn't come from a very wealthy family; I arrived in Singapore ten years ago. For anyone willing to put in the effort, cryptocurrency truly offers them opportunities." - Arthur Cheong
Enter the cryptocurrency space, look around, form an opinion about what is happening, and then translate that into a fund or something else; it is achievable.
Spend time in the community, communicate with the protocol teams, and provide support. By doing so, you may influence the protocol's operation in the future.
3: Token Value Accumulation
In a bear market, tokens may drop 90% and then another 80%, so prices must have a floor, as there are still users of the product.
Since there are users, the token must have some value accumulation, so it shouldn't go to zero.
This should give token holders more confidence during downturns.
Points to note:
Does the token have a good design, and is it well-integrated into the platform?
Does the token have strong value accumulation?
Can the token act as a catalyst for protocol growth?
How does the project plan to allocate tokens?
Example: Synthetix
Loved Synthetix's tokenomics from the start.
They were the first to use token inflation to incentivize the community and early adopters.
The inflation rate was very high initially, then gradually decreased to reward early users who believed in the protocol and took on initial risks.
By taking on the risks of the Synthetix protocol, token holders can earn returns from the fees generated by the protocol, including the original tokens and additional fee income generated when people trade on the protocol.
Example: Bancor
Went through many iterations to arrive at a reasonable tokenomics model.
Bancor created maximum value for token holders—40% to 60% of fees belong to Bancor token holders, not in the form of revenue but as burns.
Also supports new liquidity pools.
The mechanism is still very complex, and not many people understand it, so it hasn't received high praise.
Example: Aave and Compound
The value accumulation between the two is very similar.
A small portion of the interest earned by depositors is allocated to the Treasury.
In the future, token holders can vote on how to use the accumulated reserves in the Treasury, either returning it to token holders or further investing in the protocol.
4: How to Build Confidence and Have Belief?
- When you continuously do something and receive validation from your actions, your confidence grows.
"Confidence is the memory of victory. And I believe it should be the same for everyone. For example, when you are doing something, and you continuously receive some form of validation from your actions, your confidence will keep increasing." - Arthur Cheong
The first coin Arthur heavily invested in was Synthetix during the bear market.
He spent a month and a half writing a very comprehensive report on Synthetix, which received very positive feedback after publication.
A few months later, the market began to respond, and confidence was built.
By continuously repeating this method, despite Bitcoin's dominance, his operations successfully outperformed Bitcoin, giving him the confidence and signal to start DeFiance Capital.
5: Advantages of DeFiance Capital
One of the top native crypto funds that can directly invest in DAOs.
Has worked in this field for a long time and is very familiar with this structure.
The DAO structure also provides some protection for investors, as most people can influence decisions.
6: Fundamentals
Team quality, such as the track record established by the team.
Valuation of the protocol.
Technical architecture.
Community engagement.
Token value accumulation.
Recent catalytic factors.
On Decentralization
Decentralization can only prevent protocol hacks.
It does not help prevent correlated risks, as all assets may drop at the same time (bear market).
However, in a bull market, some protocols will perform better than others based on fundamentals.
On MEME investments overshadowing fundamental investments
Similar to traditional stock investments, before Benjamin Graham published his book "Security Analysis," no one had a way to properly value stocks.
Similarly, we are in a similar phase in cryptocurrency, so retail investors need to be educated in each market cycle.
On DEX Valuation Metrics
Trading volume.
Fees charged relative to the protocol's market cap; for non-stablecoin protocols, 0.05% of trading volume is taken as fees, while for stablecoin protocols, it is slightly lower (e.g., Curve is 0.04%).
Similar to the Price-to-Earnings Ratio (PE) in TradFi
Total Value Locked (TVL)—indicates how much capital is secured by this protocol.
Capital efficiency—varies by protocol.
User and user growth—e.g., Uniswap has no cash flow because there is currently no value capture, but it has a huge user base and performs the best in user growth in the industry, so its valuation is very high.
7: Buybacks and Burns
Arthur0x believes that buybacks and burns are not the ideal solution, especially when a protocol still has significant growth potential.
In the early startup world of TradFi, no one would conduct stock buybacks or issue stable dividends.
If it still has significant growth potential, capital should be reinvested rather than directly burned.
Areas for reinvestment could include: more education, more outreach, more translations so that non-English-speaking communities can join the fray.
Distributing dividends to token holders may have tax implications, but there should still be better design methods.
8: Which DeFi protocols are undervalued, and why?
Sushiswap
Given their trading volume, the price shouldn't be where it is now.
Some believe that Uniswap V3 will kill Sushiswap because it resembles an older version of V2 design.
However, it has not been fully realized.
Uniswap V3 is more suited for active liquidity providers (LPs), meaning professional market makers, making it difficult for retail players to become passive LPs in V3.
Some tests (though with a small sample size) show that V3's performance is not necessarily better than V2.
At the current price, Sushiswap's price reflects zero growth, which is unlikely to happen.
Aave and Compound
Lending is the easiest to establish a moat in DeFi.
New lending protocols using similar designs on Ethereum will not be able to disrupt Aave and Compound within a year.
Why? Building trust takes a long time; these two protocols have been running for over a year without security incidents (note: Compound did experience an oracle attack incident).
It also takes a long time to establish network effects because you need sufficient deposits on the platform for people to borrow.
Finally, due to the higher value of the tokens, the liquidity incentives they provide are also more effective.
9: Will there only be one Automated Market Maker (AMM) in the future?
Arthur0x does not believe in the power law (that there will only be one AMM to dominate the market).
Why? Liquidity is interchangeable, with no loyalty.
If a new AMM has an excellent design, liquidity will flow to it, and it will dominate for a period.
When in a balanced state, there may be several dominant AMMs, and their market shares will not change significantly.
Additionally, once orders reach a certain scale, people will also start using aggregators.
10: Ethereum Killers
Most competitors will not be able to dominate Ethereum; perhaps fewer than five can compete with it but cannot kill it.
Currently, over 95% of DeFi and NFTs are on Ethereum, and this number may drop to 80% in the next two years.
Reasons
Other protocols are starting from scratch, so their growth rates may be faster than Ethereum's.
Some ETH killers are using blue ocean strategies, targeting new users who have not yet joined.
Ethereum's network effects are deeply rooted.
EVM-compatible scaling solutions further help consolidate Ethereum's network effects.
Ethereum itself is also continuously improving.
Ethereum has a clear roadmap outlining how they plan to further decentralize.
More on Ethereum's Network Effects
Binance previously attempted to establish their own DEX but failed; only after grasping the essence of Ethereum's network effects did they quickly become the cryptocurrency company with the largest user base.
Switching the base layer is not an easy task, unlike switching Dapps.
"I think the best analogy is the App Store. Just like now, the two main app stores are Google and Apple. Even a tech giant like Microsoft, trying to compete in this area with its own app store, cannot succeed." - Arthur Cheong
A good analogy is that just like Google and Apple have their app stores, when a big tech company like Microsoft tries to compete in this area, they also fail.
11: Which ETH killer will Arthur bet on?
Solana is the best competitor to Ethereum.
It cannot compete in areas where Ethereum excels; it must take a completely new approach.
Solana will not be as decentralized as Ethereum, and due to higher hardware requirements, they will have significantly fewer nodes.
He would rather bet on something completely different than on another protocol that makes marginal improvements to Ethereum.
12: How do Eastern and Western views on cryptocurrency differ?
Asia can be divided into two distinct parts: English-speaking regions and non-English-speaking regions.
Historical and cultural factors will determine the speed of adoption.
English-speaking regions
Such as India and most of Southeast Asia.
Adoption is quite common.
Understanding DeFi and using it in significant ways.
Having a decent DeFi community.
Need to see more built-in checks and balances in protocols.
Chinese-speaking regions
Such as China, Hong Kong, and Taiwan.
Initially skeptical in 2018 (whether these places could become significant), but after the DeFi summer of 2020, many new users can be seen.
Less focus on the concept of cryptocurrency.
More focus on self-custody of assets, as they witnessed the OKEx incident where no one could withdraw any balances for two months.
Their trust is more in the teams behind the protocols.
Japan and South Korea
Due to language barriers, fewer people use DeFi compared to other regions.
Currently, over 95% of DeFi and NFTs are on Ethereum, and this may drop to 80% in the next two years.
By using translations and building a strong foreign language community, language barriers can be crossed.
Citing Vitalik's example of promoting Ethereum in China, there is now a large committee in China with a good atmosphere for sharing ideas.
13: The Singapore Government's View on Cryptocurrency
The highest regulatory bodies are indeed trying to understand cryptocurrency, and their level of understanding may be among the highest globally.
They know the benefits of DeFi, but whether they are fully convinced remains to be seen.
They want to wait and see if the benefits of DeFi can translate into real-world activities.
Following the FATF guidelines drafted by major countries like the U.S. and the EU.
There have been fewer prosecutions and aggressive actions.
14: Outlook on the Cryptocurrency Industry in the Second Half of 2021
After the success of Polygon and Binance Smart Chain, there are more scaling solutions.
More users will join; currently, there are 1 million users, but this could increase to 5 million to 10 million by the end of the year.
Predicting that TVL will reach 200 billion by the end of the year.
Predicting that ETH prices will reach around 5,000 to 10,000 by the end of the year.
