Lyrik DeFi Thesis

Paul Joe
August 30, 2023

Lyrik Ventures DeFi Thesis:

At Lyrik, we look at DeFi differently. We have spent years in the industry and have seen what has worked and failed. We have seen DeFi ecosystems formed around one core protocol, DeFi protocols get vampire attacks, and small non-vc-funded teams beat very well-funded teams. These learnings and signals helped us develop our DeFi Thesis.

The best of DeFi is yet to come. Real World Assets (RWAs), Tokenization of Non-Fungible Value, Bundled/Capital Efficient Services, and more advanced markets are all in a position to mature in the coming five years - especially as more users and Institutions migrate into the Web3 space. We intend to deploy into this sector in line with our thesis below - taking calculated bets on teams with a unique vision and value proposition to move the future of decentralized finance.

Distinct Approach to DeFi

  • No copy and paste: In the early iteration of Defi projects, there was a lot of copy-paste of open source code projects, starting with the Sushiswap vampire attack of Uniswap. Most of those copycats have yet to capture significant market share, and it's the same thing in the DeFi lending market, CDP protocols, Yield Protocols, etc. The “Copypastas” have continually failed to capture significant market shares, even with the advantage of being first on newer L1s/L2s. Usually, the tides turn when the original projects deploy on the new L1s/L2s. They quickly capture that market share and most liquidity moves there from the copypastas. When we look at DeFi projects, we like to see new innovations, ways of managing liquidity, and ways of go-to-market.

    Our portfolio company, Chaos Labs, perfectly fits into this thesis; not only are they differentiated from their competitor but they are also actively getting competitor customers to switch to their product offering.
  • Mindful of head/tailwinds on the regulatory side: The regulatory landscape for crypto projects in the US continues to remain hostile, even more so for DeFi projects. Several DeFi projects shut down proactively due to this regulatory environment. We like to see teams that are regulatory aware of current regulation and where it is going.

    The regulatory environment across Europe, Singapore, and the United Kingdom is much more transparent, especially with MiCA for the EU.

    The UK has also embraced crypto and actively pushed it. Founders that are regulatory aware set up their legal entities in Jurisdictions that are crypto-friendly and have clear regulatory guidelines, which puts them in a much better position to build without worrying about regulatory uncertainty. When we speak to teams building DeFi products, we like to understand how they think about regulations and where they plan to set up their legal entities.
  • Ecosystem awareness: Liquidity is the backbone of DeFi, and a wrong ecosystem choice can hamper project growth from day one. Protocols that build on ecosystems with all the necessary infrastructures, such as oracles, sequencers, liquidity management systems, and a healthy availability of liquidity, will have a far better chance of success than projects that need to rely upon the significant growth of the underlying ecosystem.
  • Primitive / Protocol-dependent builders/projects: We have a strict due diligence process for assessing teams. When it comes to DeFi, we go into every aspect of the designs and incentives with the team, from protocol design, token economics, liquidity provision, and management, as well as stress test the design and mechanism design to ensure every aspect of the design is stressed tested, we will work closely to combine both our traditional finance and crypto DeFi experience to ensure the DeFi protocols we work with are well thought out. One of the most critical factors determining the DeFi project's success is the founder/founding team's resilience, especially with crypto being cyclical, over the last few cycles projects with resilient founders that continue building through the bear markets come out of those cycles ahead of the competition, while new founders always come to the market during bull cycles, a majority of those teams quit during the bear, like with every project we invest in, we carry out a high-level founder's due diligence that ensures we only back founders that are believers and are here for the long-haul.

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