In March this year, I wrote about Polychain Capital. It was the early days if you remember and right after the SEC had declined the Bitcoin ETF product.
June was the tipping point, when “someone’s” eyes popped when looking at an infographic that showed for the first time that startup funding via ICOs had surpassed startup VC funding!
July, Bernard Lunn, sent me a message wondering about the very unusual traffic for the Polychain Capital Spring post. There were close to 6,000 views in July for a post from March! An outlier.
Daily Fintech is not a VC but gets often an early look at deals and given the unique group expertise, identifies value. Some of it is shared publicly, most of it is offered as a service.
Enjoy the post in case you missed it. Consider also listening to one of the many subsequent podcasts with the founder that shows well the Polychain Capital philosophy; for example, Olaf Carlson-Wee with Ycombinator.
Polychain Capital: A hedge fund investing at the Protocol layer of Web 3.0
Today is the slowest day of the rest of our lives.
Entrepreneurs at heart move to launch new projects, new businesses as they are committed to pushing the boundaries of existing business practices. They are driven by their genuine desire to seed the unimaginable.
Brian Armstrong, founder and CEO of Coinbase, a leading app in the digital currency space, is known for his ability to form teams that create value, by hiring entrepreneurs whose CVs may not reflect their potential. Olaf Carlson-Wee, was one of his hires and part of the core team, who is now moving on to launch Polychain Capital that I am so excited to share my understanding of this endeavor with you today. I guess Brian’s intuition, while very rewarding in the first phase of building Coinbase as a scalable business, comes with the demise that Olaf had to move to something more avant-garde. Polychain Capital clearly qualifies for avant-garde currently and most probably will need 2 years to move to the next phase.
This is all the info that is on the website of the business that Andreessen Horowitz and Union Square Ventures recently funded with $10million. In this post, I explore this hedge fund, its investment strategy, and how its positioning in the ecosystem of innovation in Wealth Management. I will discuss the kind of assets Polychain will invest in, and why it has chosen to do so.
The story started in 2014 while at Coinbase, Olaf found himself exploring the potential of Protocol 2.0 ventures, like Mastercoin or Counterparty. This is different than researching companies, simply because they are entities that are not owned by shareholders but rather from birth are decentralized and therefore, the users are essentially the equity owners. The next trigger towards coming up with the Polychain Capital idea, was when Coinbase included Ethereum in the summer of 2016.
Polychain Capital wants to invest in Digital assets at the Protocol Layer, not at the App layer. They are interested in investing and creating value for their institutional investors, at the Protocol Layer.
So the kinds of ventures that they have on their watch list, are
- Ethereum – a more knowing decentralized protocol that can enable innovation to be built on it, that can attract developers, and that can enable all sorts of applications from digital IDs, file storage, messaging, wallets, supply-chain finance etc.
- IPFS ecosystem
Most of these are early in their life and the million dollar question is which of them will be the enabler for a full stack app creation, or in other words which one will power off Web 3.0. Will proof of stake and proof of work, be replaced by another combo? What is the unimaginable decentralized web going to look like?
What is clear is that Polychain Capital is NOT looking to invest in ventures at the App layer. So, for example, they are not including in their portfolio Melonport, an asset management platform built on the Ethereum protocol, or Augur, a trader’s forecasting tool also built on the Ethereum blockchain.
Polychain Capital is based on the belief that the Bitcoin Blockchain protocol will continue to lose market share (in the digital assets space it has dropped from 97% to roughly 85%). Bitcoin is actually suffering from the innovator’s dilemma and Polychain Capital doesn’t see any killer app built on the Bitcoin Blockchain (these are views of Polychain Capital from the Ether Review #59 interview with founders Olaf Carlson-Wee and Ryan Zurrer).
Therefore, Polychain Capital wants to capture the growth of other protocols that will outperform the Bitcoin protocol (stuck in Innovator’s dilemma land).
Polychain Capital is positioned as a hedge fund because not only it is suitable for institutional investors but it’s investment strategy approach has taken elements for the VC approach and combined them with active trading from the hedge fund world. The way that they will be dynamically managing the portfolio holdings isn’t clear yet (at least to me) but the principle of how they will go about capturing this next wave of compelling innovation, is laser clear.
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.