Dear Bankless Nation (cryptocurrency community): There has been a lot of funding activity around DeFi this year. dYdX recently raised $65 million in a Series C round led by a16z and Polychain. Balancer Labs raised $24.5 million through a funding round led by Blockchain Capital Set Protocol also closed a new $12 million round of investment at the end of May.
And this was all done in the last few weeks, which is indeed a lot of funding activity, but there is a problem: retail investors are not allowed to participate in it. These investment opportunities are only available to qualified investors, individual investors with connections, and top tier investment funds. But we can’t blame the DeFi protocol either, because they are just following the rules, but clearly the current rules need to be changed. Cryptocurrency is a financial service that allows anyone to participate – and early-stage investing should be one of them. So what are the current opportunities for the average person?
That’s what the members of Dove Mountain Data are looking at in this article. They’re building a comprehensive database for cryptocurrency investment rounds, so they have all the background information you need on the status of DeFi fundraising. The following is a specific way for retail investors to participate in early-stage investment rounds and receive similar investment returns as a16z, Paradigm, etc.
Side note: Ledger has newly launched their Paraswap integration – allowing you to exchange any token at the best price directly from the Ledger Live app. No Paraswap tokens are available yet, so this may be more valuable ……
DeFi Funding: How it works, exclusivity, and ways to get involved
Cryptocurrencies have gone through plenty of boom and bust cycles over the years, and the fundraising market is no exception. Many funds established during the 2017-2018 hype cycle failed to survive the subsequent bear market and were replaced by smaller funds focused on DeFi. As DeFi has gained notoriety over the past two years, well-known venture funds such as a16z and USV have begun participating in DeFi funding rounds (see Uniswap, MakerDAO and Compound).
This article will provide background information on how fundraising works in DeFi, why it is difficult for retail investors to participate, and potential access solutions. We will start with three aspects: a. How DeFi fundraising works
b. Why it is difficult for retail investors to participate in early rounds
c. The best way to make a DeFi investment Let’s get started!
Photo credit: Logan Craig
DeFi financing: different from traditional financing
To understand what makes DeFi financing different, let’s look at its key players: funds, investment DAOs, angel investors and labs. Because DeFi’s birth is relatively new, many of the investors involved in the funding rounds are different from those seen in traditional funding.
The distinction between hedge funds and venture capital funds is blurred. Funds can utilize different strategies with variables such as having a time horizon, risk tolerance, providing liquidity, and yield. Some are called “DeFi Natives” (Mechanism Capital, CMS Holdings, Spartan Group, etc.), while others can be categorized as “DeFi Comfort” or “DeFi Curious”.
Interestingly, more and more Tier 1 funds with significant assets under management are gradually focusing on DeFi following the support of successful CeFi companies such as Coinbase.
Angel investors also play a key role in this space. Successful DeFi builders, DeFi fund heads, or cryptocurrency executives can (and often do) write checks to back promising DeFi deals. These people can make deals because they bring clear value to the founders.
Before we delve into other types of investors, let’s look at the distribution of investors by country. From a capital perspective, the US clearly dominates, holding nearly half of the funds and actively investing among DeFi. Singapore and China are the two fast-emerging DeFi fundraising hubs, with Europe following close behind.
However, in terms of the geographic location of DeFi’s core team, the U.S. has a smaller share of about 30%. Interestingly, despite the smaller share of capital, Europe seems to be a popular place for DeFi builders.
DAOs represent another class of investors. MetaCartel Ventures is the most prominent investor in the DeFi industry, but other investment houses such as DuckDAO and The LAO are also very active. While they can be considered chain committees, being part of an investment in a DAO can require some connections, and one that is not as easy as one might think. So, Syndicate Protocol’s mission is to democratize investing by launching investment DAOs.
Finally, labs and gas pedals are hands-on investors and can gain an advantage in the operational expertise they provide in the protocol. They can also operate as funds through direct investments. To date, Zokyo and Ellipti have invested in a number of successful DeFi protocols.
As with most capital ecosystems, an investor’s reputation is their strongest asset. Investment rounds are competitive and founders have a great deal of autonomy in selecting investors. Founders typically look at an investor’s network and their past investments when deciding to involve them in an investment round.
Pre-seed, seed, and private roundsprivate…… are common terms that DeFi professional investors hear every day. Eighty percent of publicly announced funding falls into one of these categories. Even though the space has matured with the growth of protocols like dYdX, which raised $65 million in Series C funding led by Paradigm, less than 15% of the funding actually falls into Series A or B.
The most common DeFi funding path starts with an angel round, followed by a pre-seed round, a seed round and a so-called private placement round, which have different deal terms and valuations. Early-stage funding with a focus on seed rounds – DeFi funds are often “overcrowded”.
There are many reasons why community funding may not make sense in the first funding process: as Kerman Kohliput says, founders need to put the right legal structure in place and avoid creating a stressful environment.
DeFi funding is also different because of its strong reliance on market volatility. When the market is hot, valuations can range from $50 million to $100 million, even for projects that don’t have any products. Such high valuations can have an impact on lock-in and vesting schedules. the recent hype around DeFi has caused project valuations to soar, excluding potential angel investors looking to enter the DeFi investment space by writing small checks.
Why are retail investors excluded from early stage financing?
There are a number of reasons why it is often difficult to secure early stage investment.
Investment size: Founding teams typically require large minimums (typically $10,000-$25,000), which excludes potential retail investors.
Knowledge: As an experienced investor, you can leverage close relationships with other investors and trade share strategies. If you are not in these circles, you will usually hear about it for the first time when a round is announced (and therefore after that round has closed).
Reach out: Building your brand and reputation has become a prerequisite for getting into the most promising early-stage programs. Everyone knows Paradigm. of course, this is not the case for the average DeFi market participant.
Adding value: Founders are asking investors more and more frequently for operational support in token design, business development and security audits. Running a fund and owning an existing portfolio company will obviously make this easier.
How to get involved
While early-stage funding rounds are still exclusive, there are more and more ways you can get involved.
Initial DEX (decentralized exchange) products (IDO)
IDOs are projects that launch their tokens through a decentralized exchange (DEX). Over the past year, IDOs have become the most common funding model for DeFi projects. IDOs represent an improvement in funding because they allow DeFi startups to raise funds more fairly and transparently compared to previous iterations of blockchain-based funding.
The first IDO was created in June 2019 by the Raven protocol, which developed a decentralized network of distributed computing nodes for artificial intelligence and machine learning. It lasted 24 hours and allocated a total of 3% of the token supply.
Unfortunately, in many cases, retail investors were excluded from the IDO distribution because advanced bots ran them ahead of them (see UMA’s IDO for details).
As a result of these bots, more sophisticated IDO launch platforms have emerged that offer more protection for investors. Launch platforms are designed to help fundraise for projects, so there is a curated aspect to ensure that scams are filtered out and provide more security for retail investors.
To qualify for an allocation, users typically need to pledge tokens from the launch platform and participate in its community. For example, PolkaStarter offers two mining pools: one open to everyone and one for POLS holders only, where competition is less intense.
This provides a more inclusive process for smaller players: they are no longer outflanked by venture capitalists and leading bots, they can enjoy further transparency through access to on-chain information, and the advantage of being able to take advantage of instant liquidity.
Another emerging trend is the creation of several launch platforms in different ecosystems: TrustSwap and DuckStarter on Ether, Avalaunch on Avalanche, Polkastarter on Polkadot, Solstarter on Solana, BSCPad and KickPad, and MoonEdge on Polygon.
Image credit: CoinMarketCap
Projects building launch platforms have been attractive to investors recently. Impossible Finance, BSCLaunch, Scaleswap, Launch X, and Launchpool have all announced the completion of early-stage funding, with Hashed, Alameda Research, Lemniscap, and Rarestone Capital and other Tier 1 funds are participating.
Recently, the projects decided to launch their IDOs on multiple platforms to attract a wider range of investors. And, in the last 5 months, DeFi projects raising funds through IDOs have used 1.4 different platforms, for example LossLess used 4 different platforms to raise funds, and this trend is growing.
While the average allocated investment per participant tends to be relatively low, often a few hundred dollars, the returns can be staggering. For example, the average return on Polkastarter IDO in March was 2,700%.
Yield Farming and Borrowing/Lending agreements are the most common categories of projects that raise public funds through the IDO process.
Liquidity mining is a well-established token distribution mechanism where participants offer assets into a liquidity pool and are rewarded with the protocol’s native tokens. Liquidity mining is not 100% perfect (in the case of a failed YFI offering), but it represents an additional opportunity to participate.
Whether you decide to invest by offering liquidity on Uniswap, Balancer, Bancor or another platform, be sure to do your own research because.
Any mistakes on the part of the investor can lead to losses
Most of the projects you will invest in are in the testing phase and use is at your own risk
DeFi’s native composability makes this investment method very interesting, as the profits earned can be reinvested directly in income yield.
Balancer Liquidity Bootstrap Pool (LBP)
Balancer LBP is a token released on Balancer in which the team seeds the Balancer pool with a high rate (and therefore high price) of their own tokens and slowly reduces that rate over time (similar to a Dutch-style auction).
Due to Balancer’s flexibility, LBP ensures smooth price discovery and discourages whales from using any trading strategy that would lead to high price volatility and mislead retail investors.
The Balancer Liquidity Guidance Pool is now one of the most popular alternative fundraising solutions, featuring
Achieves low slippage
Requires lower initial capital requirements due to the smaller share of the DAI
Maintains price stability over time
A growing number of projects raised from top tier funds have launched through LBP. maple first raised a $1.3 million seed round, then distributed MPL governance tokens to over 1,000 new holders and raised over $10 million through its LBP.
Similarly, Radicle closed a $12 million funding round and then raised nearly $25 million through record LBP sales.
DeFi programs have more funding options than ever before. Slowly, more of these companies are allowing retail investors to participate. There are many options – IDOs, Token Launch Platforms, Liquidity Mining Programs, and Balancer Liquidity Boot Pools (LBPs) can all be viable alternatives to traditional investment rounds.
However, this is still a high-risk asset class (as we are on the cutting edge), so we recommend that you always do your own research before making any decisions.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/how-to-understand-defi-financing-scientifically/
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