Dragonfly Capital Partner: Cryptocurrency is the struggle of the younger generation

Dragonfly Capital partner Haseeb Qureshi shared his insights on the current cryptocurrency industry from seven aspects, believing that cryptocurrency presents an opportunity for this generation to strive.

Original Title: "Dragonfly Haseeb: Every Generation Has Its Own Struggle"
Author: Zhen Bencong

Laura Shin's podcast is truly a gem in the cryptocurrency industry, but unfortunately, it is not well-received in the domestic crypto community. Perhaps due to cultural reasons or the nature of podcasts being hard to disseminate. Regardless, if you are a professional in the industry, I would highly recommend checking out each episode of her content. Her latest podcast features Alex and Haseeb from Dragonfly Capital. After listening, I was deeply impressed, and I felt the need to document my feelings in writing to let everyone understand what truly qualifies an institution in the crypto space as a Crypto Fund.

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Dragonfly Capital is a Crypto Fund that gradually entered the public eye towards the end of 2019. However, they have been deeply involved in this industry for 2-3 years. In the past half year, Dragonfly has not stopped writing, producing 3-4 high-quality investment-themed papers consecutively. With resources spread across both China and the U.S., it is a top-tier Fund in the crypto space driven by investment themes.

Haseeb is now a partner at Dragonfly Capital, and his personal journey is nothing short of legendary. He has worked at Naval's MetaStable and at Earn.com (the company acquired by Coinbase, with Balaji Srinivasan also joining Coinbase). Just the aforementioned resume is enough to make many look up to him. However, what is most legendary and widely talked about is his experience as a professional Texas hold 'em poker player, reaching the top ten during the peak of his career in Texas hold 'em. Most professionals in institutions come from traditional VC backgrounds, and Haseeb's advantage lies in his diverse background from different industries, which has shaped who he is today and become his unique strength because the crypto industry is precisely a complex interdisciplinary field.

Dragonfly Capital Partners Managing Partner Haseeb Qureshi

Haseeb told Laura Shin, every generation has its own struggle. For him, who was 16 years old over a decade ago, Texas hold 'em poker was the defining pursuit of his generation. Young people of that era, if they were not content with mediocrity and wanted to take an unconventional path, it would definitely be Texas hold 'em. Just like young cryptocurrency traders today seeking financial freedom through speculation. Each generation encounters its opportunities during its golden age, perhaps five years later it will be another fascinating sport or something else, but for now, it seems to be cryptocurrency trading.

Back then, everything was boring to him as a young person; compared to dry academics, he wanted to do something challenging. He did not want to follow the ordinary path. At that time, he was still in college, majoring in philosophy, and there seemed to be nothing more attractive than making money from playing Texas hold 'em. Many years later, when he entered the cryptocurrency industry, the experience of playing Texas hold 'em more or less helped him understand the speculative frenzy behind the cryptocurrency industry.

Texas hold 'em taught him to think about risk, psychology, game theory, competitive dynamics among multiple parties, not just between two individuals. In the cryptocurrency industry, this translates to thinking about the relationships between protocols. All of these are very valuable for evaluating crypto projects and becoming a good investor. That is also why you can see many people in the cryptocurrency industry were previously poker players.

There seems to be a consensus in the cryptocurrency world that the most advanced cryptography technology and developers building Layer1 protocols are from the West. Dragonfly Capital has invested heavily in Western Layer1 protocol tokens, DeFi products, and the most forward-thinking technologies.

In the East, the focus is on user adoption, with investments mainly in exchanges, trading companies, trading platforms, and wallets, many of which are from China.

This reminds me of an observation from Dongge: true innovation in the underlying blockchain technology requires masters. These are the souls of a chain, something that China truly lacks.

What are masters? It's not about how skilled one is in coding or how amazing the performance designs are, but about individuals who can make breakthroughs and innovations in theory and algorithms. For example, the Turing machine, Von Neumann architecture, Internet TCP/IP protocol, zero-knowledge proofs, and more. Without masters to set the direction and lay the foundation, no matter how many engineers there are, they are just a group of lost ants not knowing where to go. China has excellent engineers but lacks masters. Therefore, it is difficult for China to achieve world-class competitiveness in the field of foundational chains.

Laura Shin asked Haseeb if Dragonfly, like traditional venture capital, only invests in one company in each subcategory of the crypto sphere.

Haseeb's response was that in the cryptocurrency field, it's difficult to define categories. Is Layer1 a category? If so, then Bitcoin might be the only worthwhile investment, and you wouldn't even touch Ethereum. Is middleware a category? If so, according to Placeholder's middleware theory, middleware will extract a large portion of the underlying public chain's value, meaning bottom-layer public chains like Ethereum wouldn't need to be developed. However, Placeholder itself holds Ethereum.

If you can't predict where the market is heading, it's really hard to distinguish boundaries. Therefore, the most challenging aspect for cryptocurrency investors is to keep an open mind and be willing to change their perspectives quickly. Alex also expressed a similar sentiment, mentioning how many traditional venture capitalists missed out on investing in Ethereum due to their inherent bias against tokens. In fact, venture capitalists had early exposure to Ethereum but chose to ignore it.

Haseeb and his team still believe that Bitcoin won't be the only successful entity in this space. There will be investments in the future that are on par with Bitcoin and Ethereum but are likely to be entirely different from what Bitcoin and Ethereum are today. It's too early to make judgments, so they try to maintain an agnostic mindset, allowing their ideas to evolve year by year without being tied to a specific paradigm.

If you're stuck in the era of 2016-2017, you'll find it challenging to adapt to the current environment and investments because the industry has evolved significantly compared to 2-3 years ago. Looking ahead 2-3 years from now, we'll still encounter significant paradigm shifts. The field is evolving rapidly.

The cryptocurrency industry is filled with maximalism and tribalism, but they strive to maintain an agnostic and open attitude. They listen to various opinions, gather the essence of different perspectives, and discard the rest. They don't try to convince anyone because it's pointless. Time will reveal all the answers.

As a Crypto Fund, their responsibility is to provide LPs with the maximum exposure to value. Therefore, they have been contemplating the issue of value capture. Value capture essentially boils down to two scenarios: companies building on Bitcoin, Ethereum, or Tezos capturing value, or the underlying assets of these public chains capturing value.

Where value will be captured is still not entirely clear. For example, 1confirmation has invested in both Cosmos tokens and Tendermint company equity. Similarly, Polychain has not only invested in Polkadot tokens but also in the Web3 Foundation's equity. This shows that Crypto Funds are not entirely certain about where value will be captured. Therefore, for projects they are bullish on, they usually choose to invest in both equity and tokens.

It must be acknowledged that most protocols still seem like venture bets. While on the surface, this seems okay with no issues as long as the token prices appreciate significantly, these seem more like binary option-style bets. Either these projects succeed in becoming what they aim to be, such as digital gold, a world computer, or an interconnected network, or they fail and are eventually discarded into the trash heap of history.

So, buying Bitcoin is more like buying a call option on Bitcoin becoming digital gold, while buying Ethereum is like a call option on Ethereum becoming the world's smart contract platform.

All these things still have asymmetric return distributions, so they often ask themselves, based on the current state of affairs, what the best investment is. Sometimes they choose equity investments, and sometimes they choose to invest in tokens of underlying protocols. It depends on the specific circumstances.

Regarding Bitcoin, you need to ask yourself two questions: first, is the current value of Bitcoin overvalued or undervalued? Second, what is the current state of Bitcoin's ecosystem? Lightning Network, Liquid, and other businesses built on top of Bitcoin. To date, it's challenging to see any successful ones.

Bitcoin is the prime example of Joel Monegro's famous Fat Protocols thesis. Bitcoin has absorbed all the value on top of it, and every other attempt to capture value has failed. So the question becomes: should we only invest in Bitcoin, or should we invest in companies building on top of it? Their answer is that they are very bullish on Bitcoin itself.

The public chain war began six months ago, with new public chains like Tezos, Algorand, and Hashgraph coming online. Haseeb believes that we are halfway through this battle, and so far, every soldier who has reached the front lines has been beheaded. He believes we now understand better than we did six months ago why Ethereum is still far ahead. We also know how difficult it is to defeat Ethereum.

However, six months ago, Haseeb thought Ethereum could indeed be defeated. They had too much technical debt and a long roadmap. People didn't have the patience to wait until ETH2.0 in 2020. The pent-up demand for using smart contracts during this window meant that whoever could first offer a high-performance decentralized blockchain would win.

But Ethereum has strengthened its roadmap. The path to achieving their roadmap is clearer. This means that while the timeline won't accelerate significantly, the longer we wait, the closer we get to the truth and the standard. And with each passing day that Ethereum hasn't been defeated, it becomes more likely that Ethereum will emerge victorious. Anything that can't be defeated will make you stronger.

Another clear point is that the most critical application in the cryptocurrency world is DeFi. This trend is now very apparent, although it was only emerging a year ago. The fact is that DeFi is only effective on Ethereum. DeFi has a strong network effect, making it challenging to move a DeFi ecosystem to a chain that lacks other assets, interoperability, and high-quality collateral.

If you try to build DeFi on EOS, you might have some success, as there is a small DeFi ecosystem on EOS. However, EOS lacks many stablecoins, is not as high-quality collateral as ETH, lacks sufficient liquidity, and is very volatile. The network effect keeps ETH in a high lock-in state, making it the home for DeFi. Most DeFi doesn't need scalability; if you're not creating a massive CDP, you don't need 500 TPS to do it. Finally, most startups that don't build their chains are built on Ethereum.

Many platforms are about to launch, with better designs, architectures, and more scalable products heading to the market. But the most crucial thing they need to prove is how they will win developers.

Someone might want to build a game or something that requires scalability. Is there a motivation to choose another blockchain to build on? Indeed, many chains advertise themselves as game-friendly or suitable for high-performance use cases. However, the challenge is that these things are challenging to create network effects. If a game truly needs scalability, the best platform might be EOS or Algorand. It would be a great platform for a game, but it might not attract many users. It won't draw many other assets or applications.

On the other hand, Ethereum is developing more robust layer2 solutions. Companies like Matter Labs are actively exploring technologies like ZK Rollups and Optimistic Rollups.

In 2018 and 2019, we heard too many negative voices predicting the downfall of Ethereum: delays in ETH2.0, teams selling ETH chips, the comprehensive bankruptcy of the old generation Layer2 technologies, ecosystem contributors leaving, and the booming DeFi ecosystem not boosting ETH's price. After losing its ICO functionality, Ethereum seemed like a eunuch. Everyone was unanimously bearish. But Ethereum still holds strong advantages. It makes me wonder if it's an opportunity to buy Ethereum.

Haseeb mentioned that they have also invested in many of Ethereum's competitors.

While Ethereum's leadership position is currently far ahead, he doesn't believe that Ethereum can win 100%. There is still plenty of room and games to play. This window is within the three years before Ethereum 2.0 is fully activated. If in the next 2-3 years, we see new public chain platforms entering the market and capturing developers' minds, we might witness a rapid shift: from Ethereum to another dominant platform.

It could also be a different scenario: different application types on different chains. Ethereum becoming a DeFi chain, where all financial transactions occur on Ethereum. Tezos becoming an STO chain, where all securities-related transactions happen on Tezos. Solana becoming a DEX chain, where high-performance DEXs are built on Solana. Cosmos becoming an interoperability chain, where all chain interoperability goes through Cosmos.

This vision for the future and the idea of tailored chains in Cosmos aligns with the concept of application-specific chains. Cosmos's application-specific chains hope that developers will create a DApp chain. The thought of different application types on different chains further refines the idea of application-specific chains: since history has led DeFi to choose Ethereum, Ethereum becomes the DeFi chain.

Marx once said that man is a social animal. Ultimately, people will integrate into a group. It's a natural law: things want to merge. Things want interoperability. Things want to live in the same ecosystem. If the future does indeed develop into different application types on different chains, then Cosmos and Polkadot, the two interoperability chains, are indispensable.

These Ethereum competitors' platforms are impressive. In the three-year window ahead, they have a good competitive chance. At the same time, we need to understand that they are trying to defeat an irresistible force that has become unusually strong over the past six months: Ethereum.

I am reminded of Coinbase CEO Armstrong's recent article "Predicting the Next Decade of Crypto," where he mentioned Consolidation solidifying. Over the next decade, various subcategories of the cryptocurrency industry will continue to follow the law of power law distribution, where winners take all, and the strong get stronger. We will see more Binance and Bitmain. This also suggests that in the next decade, this industry will become increasingly solidified.

This world belongs to the strong. The insights from Dragonfly Capital make me firmly believe that in this gradually solidifying and stratifying crypto sphere, there are still many variables and opportunities. Regardless of where we end up, this is ultimately the struggle of our generation.

This article is authorized for republication by ChainNews and the source is ChainNews (ID: chainnewscom).

Further Reading

• A Comprehensive Overview of Financial Technology Infrastructure Change Trends and Market Landscape

• Dragonfly: Why Didn't Exchanges Delist 51% Attacked BTG and ETC?

• The Second Decade of Cryptocurrency? Coinbase CEO: Central Bank-Backed Cryptocurrencies Are the Most Dramatic

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