Banking

A crypto VC who made successful early gambles on Chainlink and Synthetix shares his next big under-the-radar bet — and breaks down 2 trends shaping DeFi

  • Michael Anderson co-founded VC firm Framework Ventures in 2019, which makes big bets on decentralized finance. 
  • The firm recently raised $100 million for a second fund following the success of some early DeFi bets.
  • Anderson shares his outlook for DeFi, predictions and a project that is flying under investors’ radars.
  • See more stories on Insider’s business page.

For most people, bitcoin is their gateway drug into the crypto world. But for Michael Anderson, it was reading the ethereum white paper in 2014.

Anderson recognized the potential of cryptocurrency through the ability to program business logic into blockchain smart contracts.

Smart contracts are pieces of code that are self-executing. They outline the conditions under which an asset or currency moves two parties. They underpin decentralized finance (DeFi), which is geared at removing financial intermediaries and enabling direct transactions between two parties.

Alongside his roommate Vance Spencer, Anderson launched and sold decentralized digital collectible platform Hashletes.

Selling the platform helped the pair take a leap into DeFi venture investing, launching Framework Ventures in 2019 and raising a $15 million fund.

The decision paid off.

Anderson and Spencer made early bets on Chainlink (LINK), a protocol that allows blockchains to securely talk to external data feeds, and Synthetix (SNX), a derivatives

liquidity
protocol. Both of which are up 264% and 137% respectively over the course of the year.

They also recently raised a $100 million second fund, making it the largest VC firm to invest in DeFi solutions.

A ‘technology first’ approach

Their investing thesis is unique. Running side-by-side the VC firm is Framework Labs, a development team that builds proprietary software and explores ways to bootstrap engagement and growth for the venture portfolio.

“That’s our best source of alpha going forward,” Anderson said.

Framework’s development capabilities means it’s become one of the largest liquidity providers for DeFi projects.

DeFi outlook

Anderson is known for his bold predictions in the DeFi industry.

He predicts that 25% of global GDP will flow through decentralized autonomous organizations (DAOs) as opposed to companies in the next 30 years.

DAOs are the primary governance medium in the crypto industry. 

Anderson says it’s all about examining the human capital working on DeFi protocols.

“It’s just a much preferable way to work and in a much more flexible way,” Anderson said. “And for the protocols themselves, they can get access to better human capital than they would otherwise.”

He also expects two trends to shape the outlook for DeFi.

1) Institutional adoption

The recent launch of interest rate protocol Compound‘s Treasury product demonstrates the desire from more institutions to get involved in accessing the DeFi landscape and the yields available. 

“Getting institutions on board brings in more value, which ultimately brings in higher valuations for these tokens and DeFi,” Anderson said.

2) Building out the UX

There are also major user experience changes taking place particularly with the ethereum EIP-1559 upgrade, Anderson said.

The upgrade should make it easier to understand how to use ethereum gas fees, as well as cheaper.

Several new so-called layer 2 solutions have launched, or are launching, which will also help cut fees. Layer 2 solutions are third-party applications built on the ethereum blockchain and help improve its performance.

“I think if you reduce the transaction cost by 100 times, you actually see more than 100 times demand in transaction block space, because there’s a lot of people who’ve been priced out with high gas fees on ethereum,” Anderson said. 

Anderson expects a resurgence of fintech applications being built on the blockchain following the fee reduction.

Despite the emergence of a number of new blockchains, such as Solana and Binance Smart Chain, there’s no real reason for developers to move yet, especially as layer 2 solutions and the ethereum upgrade are likely to resolve many of the key issues.

“Developers of ethereum applications are willing to wait a couple more months for that to happen, versus porting everything over to a new blockchain that’s largely untested, and frankly, not nearly as used,” Anderson said.

An under-the-radar DeFi project

Anderson is really excited about the Tokemak project in his portfolio, which is a decentralized market maker.

Tokemak is an automated market maker that helps provide liquidity in a sustainable way for new DeFi projects getting off the ground. It runs the TOKE token.  

“It becomes a much more sustainable and productive way of using the token, as opposed to staking the token just to earn more tokens, which becomes recursive in nature,” Anderson said. “I think the Tokemak model will be the first of its kind, it’s a new primitive that’s getting put out and really excited about it.”

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