Updated: May 3
Web3 represents the new sectors of the economy. It will revolutionize the internet again by not just institutions but also everyone to earn and control the things they do online. This belief sets the foundation of Newman Capital's Web3 investment thesis. Although Web3 will inevitably disrupt a breadth of industries, the space is still primarily in its early stage. We believe there will be only a handful of areas that will generate value. This situation is somewhat similar to what we have seen in the crypto space. As an early investor in crypto, Newman is happy to see the emergence of the Web3 landscape. Our long history in blockchain and crypto investment allowed us to develop this investment thesis and use it as our guiding principle to capture under-tapped use cases that will likely lead to the next wave of user adoption and growth.
Our investment thesis consists of seven key segments:
Figure 1: Overview of Newman Capital’s Web3 investment thesis
1. Decentralized Futures/Options
Crypto derivatives trading is fairly well-developed in the CEX space; however, decentralized derivatives remained in the "infancy of product scope" compared with centralized venues and traditional finance such as equities or foreign exchange. We've seen more innovative projects in this area with improved capital efficiency, which potentially can tackle the problems limiting the growth of decentralized derivatives trading, such as liquidity fragmentation and high rollover cost across expiries. We believe this will be one of the most exciting areas in DeFi in the near future. We think that those advanced decentralized futures and options trading platforms will significantly improve user experience.
2. Finance Infrastructure
The broader DeFi space is more vibrant than ever. While Ethereum remained the most important DeFi ecosystem, the rapid growth of this space has been one of the reasons why we see faster and scalable options have been expanding even more quickly. Names such as Polygon, Terra, Near, and upcoming ones like Oasis have been some of the most popular platforms for developers and end-users. We strongly believe that any next-generation DeFi project's success lies in its adaptability in regulation, ability to support institutional and retail users, and, more importantly, leverage on an infrastructure that allows the project to scale efficiently. Perhaps that's also the reason why these faster and scalable options that we mentioned can stand out from the crowd in this highly competitive market in a relatively short period. In the next newsletter, we will dive deeper into our insight into which DeFi ecosystem we are bullish on.
This is an area that is getting more interesting. We have seen real use cases in the undercollateralized lending space specifically targeting NFTs as collateral and real-world asset loans. Although this space is relatively nascent, with projects experimenting and validating different approaches and token economy, undercollateralized lending could make decentralized credit markets accessible for millions of users to embrace digital assets.
DeFi insurance is still at its early stage and has remained an under-discussed area. Report shows that only 2% of all DeFi value being insured, we see immense potential in this space. Insurance is the most effective way to hedge the swarming cyber security risk in DeFi. Protocols will need to design and build a better way to tackle existing problems such as KYC, lack of capacity, and high cost to provide reliable, robust, and affordable insurance service to DeFi users.
5. Identity and On-chain KYC
Something we have been looking for in the market for a while now is a robust and decentralized KYC protocol, which we believe is the game-changer for DeFi innovations. We all know that the current compliance model does not fit the decentralized world. The next project that can establish a new standard for on-chain KYC and identification, reduce friction with onboarding, and strike a balance between compliance and private considerations will hold the key to disrupting the web3 space.
6. Blockchain Analytics
We see blockchain analytics as the ultimate tool to understand the unique dynamic behind crypto. The projects in this field have created a new kind of anti-money laundering (AML) and compliance technology to support businesses and institutions by analyzing an infinite amount of blockchain data points to detect and prevent their customers and business from being the target of crypto asset-linked financial crime. Furthermore, with crypto being a maturing asset class, rapid demand is expected for enterprise-grade compliance and transaction monitoring tools.
7. PermissionedRegulated DeFi
Over the past year, we have seen some early examples of regulated DeFi with protocols such as Aave and Compound offering regulatory compliant versions of their platform. However, being regulated is an inevitable step to allow DeFi to truly go mainstream. Global regulatory bodies have been keeping a close eye on DeFi, and we expect to see more DeFi projects will need to receive approval from regulators. One possible trend is that DeFi projects will release KYC-enabled and permissioned versions of their protocols to onboard institutional capital. Another possibility is that large centralized exchanges will offer their investors access to DeFi applications through a regulated gateway.
In Newman, we hope to contribute to the decentralized world and create opportunities for growth and collaboration in the Web3 space. If you are a founder, investor, mentor, advisor engaged in the Web3 community, please feel free to reach out to us at firstname.lastname@example.org and subscribe to our newsletter.