Chain Venturer: Arthur Cheong of DeFiance Capital

Why crypto assets are liquid venture bets

Marco Manoppo
September 09, 2023

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Happy Weekend 🙋🏻‍♂️,

Welcome to Chain Venturer, a series of intriguing conversations with crypto investors. For this week’s issue, we have Arthur Cheong from DeFiance Capital.

Arthur is the Founder, CEO, and CIO of DeFiance Capital, a leading crypto investment firm that has made notable investments in the DeFi and gaming sectors globally.

As a fund, DeFiance is an extremely notable name in the crypto markets, until it got tangled alongside the 3AC case. You can read the latest official statement and update on DeFiance’s dispute with 3AC, here.

Nevertheless, DeFiance is rebounding back stronger than ever. In March of 2023, DeFiance completed its first close of a $100M liquid token fund.

-Marco

P.S. If you would like to participate in a future episode, DM me here.

We’re going to be at Token 2049 Singapore.

Reply to this email if you would like to meet!

Enjoy your weekend and don’t get liquidated!

Ah yes Binance Executive Emperor Akihito
— Frank Chaparro (@fintechfrank)
2:56 PM • Sep 7, 2023

Arthur Cheong, Founder of DeFiance Capital

Arthur Cheong is an early and nearly ground-zero participant in the world of DeFi, both as a user and an investor. His engagement with DeFi dates back to early 2019. He initiated his DeFi journey with Synthetix and was an early adopter of Uniswap and Maker.

Arthur's background prior to crypto was rooted in the oil trading sector, with his career commencing at British Petroleum (BP). In 2019, he started his crypto career as a Trading Strategist at JST Capital, a financial services firm specializing in the digital asset market. He then worked for a blockchain protocol, Zilliqa, as a VP of Growth & Strategy.

In 2020, he set out on his own and founded DeFiance Capital, a prominent crypto investment firm known for its significant investments in the DeFi sector. Arthur serves as the CEO and CIO of the company.

Here’s my conversation with Arthur Cheong.

Quick takeaways:

“For most capital constrained investor, approaching crypto investing via liquid venture approach will yield the best risk-adjusted returns now given the dynamic nature of the space.” — Arthur
Unlike traditional markets, the crypto industry allows for universal participation, breaking down geographical and financial barriers.
With traditional finance boasting high-interest rates, DeFi's yield-driven nature prompts inquiries into its competitiveness.
The crypto space is notoriously bad in effectively self-policing and the regulations provided by regulators are terribly crafted.
Bitcoin might potentially grow to a multi-trillion-dollar market cap asset, but probably won’t exceed $10 trillion.

The following paragraphs are not verbatim quotes. These are paraphrases of our conversations optimized for written media format. Some context and nuances might have not been conveyed properly in the process.

The author of this issue is not responsible for any misconstrued statements made in the issue.

All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.

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Launchy

What type of content do you want to see more?

Chain Catalyst (by Launchy) is planning a bunch of new series and products for the rest of 2023.

What’s one defining moment that made you decide to jump into crypto?

In 2017, the crypto market experienced meteoric gains that ignited conversations worldwide. While many were drawn to the allure of quick financial gains, Arthur found himself captivated by something more profound: the untapped potential and boundless opportunities within the burgeoning crypto industry.

Arthur emphasized that the global scope of the crypto landscape is its most compelling feature. Unlike traditional markets, the crypto industry allows for universal participation, breaking down geographical and financial barriers. This international reach was the catalyst that propelled Arthur into the crypto sphere.

What are the advantages of being situated in an Emerging Market for crypto founders?

As an investor and entrepreneur, Arthur contends that operating from an emerging market offers unique advantages. Despite potential challenges related to language and culture, the benefits can be substantial.

Arthur points out that businesses in developing markets can access global funding streams, particularly from U.S.-based venture capitalists, while also marketing to a U.S. audience at a fraction of the cost. This dual advantage allows startups to operate with the cost structure of a developing market while tapping into the capital and revenue streams of developed economies.

Case in Point: The Success of Coingecko and Etherscan

To illustrate this principle, Arthur cites the examples of Coingecko and Etherscan, both of which are headquartered in Malaysia. These companies operate with cost structures aligned with the Malaysian economy but serve a global user base, presumably transacting in U.S. dollars.

Extending the Principle to Decentralized Enterprises

Arthur believes this model is not just applicable to centralized companies but also extends to decentralized protocols. By assembling a talented team of engineers based in Asia and targeting a global market, companies can potentially reduce operational costs by up to 70% compared to their counterparts in the U.S. or Europe, all while accessing the same lucrative markets.

Do you think crypto still mostly trades like commodities?

Arthur draws intriguing comparisons between crypto and commodities trading, while also noting similarities to growth assets. He argues that crypto is a unique hybrid, combining elements of both asset classes.

Unlike commodities, where prices often correlate with production costs and exhibit mean reversion, crypto assets derive their value from growth potential. Arthur observes that while many crypto display growth asset behavior, Bitcoin's journey over 12 years has transitioned from a growth-expectation-based asset to one where pricing is linked to its flow due to maturity.

As Bitcoin approaches a trillion-dollar market cap, Arthur speculates on its potential size. While he sees room for growth into the multi-trillion-dollar range, he does not foresee it exceeding $10 trillion.

What do you think is the most important differentiator of a project or protocol?

According to Arthur, the key to a project's success lies in its holistic approach. He cites examples like Tron and BNB, which have thrived due to strong adoption rates rather than groundbreaking technology.

To thrive, a project must embody all-encompassing elements. Relying solely on increasing block size, as witnessed in some L1 projects, proves insufficient in the long run. Instead, a solid foundation, adept business development, niche sector dominance, and impactful partnerships are essential components for success.

Background about DeFiance: Current investment theses or what kind of sectors are you interested in looking at right now?

DeFiance operates two investment funds. The first is a fund that invests in both public and private markets. The second, a newer fund, focuses exclusively on public market opportunities.

In terms of sectors, DeFiance adopts a neutral stance but notes an overinvestment in infrastructure relative to its future utility. Consumer-facing projects, on the other hand, are more volatile and susceptible to rapid valuation declines due to lack of adoption.

When considering opportunities, numerous pressing issues emerge that are currently challenging to address. These require the expertise of a well-versed team to effectively tackle. However, the significant challenge lies in locating an established team that is proficient in both the intricacies of the crypto-native domain, while also being adept at navigating a business.

Post FTX, are there any significant shifts from LPs and GPs in managing counterparty risks?

Counterparty risk remains a significant concern for investors. The prevailing strategy is risk minimization, leading to a cautious approach where uncollateralized lending has become rare.

Among Limited Partners (LPs), there's a divide. The loss experienced by Temasek in its FTX investment has led many to withdraw from the crypto sector, causing a crisis of confidence. However, a subset of savvy LPs remains committed, enhancing their oversight through stricter reporting and due diligence.

You somewhat called the bottom on July 14th. How do you see the next 3 or 4 years play out?

14 July 2023 marks the official end of 2022-2023 bear market imo.
1. Worst of macro tightening is over, CPI falling and real interest rate is positive now. More likely we see rates cut next year than not.
2. Continued institutional acceptance of crypto as an asset class… twitter.com/i/web/status/1…
— Arthur (@Arthur_0x)
4:45 AM • Jul 14, 2023

While the worst may be over, Arthur believes that the market needs time to recover.

The 2021 bull market was fueled by low interest rates and U.S. fiscal stimulus. However, the easing of adverse macro conditions in 2022 has alleviated downward pressure on crypto assets. Arthur also cited recent positive developments such as the Ripple case as a starting sign that we’re slowly getting out of the bear market.

Arthur also notes that the market is continually expanding in terms of fundamental use. He believes that the price is gradually aligning with the industry's fair value and that a new breakthrough product, coupled with a favorable macroeconomic environment, could trigger another bull market.

What is your liquid fund strategy? What kind of assets are you looking at and how are you assessing them?

DeFiance aims to invest in assets that offer both liquidity and undervaluation, along with significant growth potential.

Managing a liquid fund, however, presents a unique set of challenges, including complex risk management and the need for secure token custody—factors less critical in traditional venture capital.

DeFiance employs a dual approach, melding top-down and bottom-up methodologies. The firm surveys the entire crypto landscape, commencing with sectors it holds a bullish outlook on. Timing plays a pivotal role in their investment decisions. While some sectors may hold promise, early-stage investments are withheld until the sector matures further. For instance, DeFiance exercises caution with sectors like lending and borrowing on new blockchains.

Certain sectors also grapple with existential uncertainties, and DeFiance prioritizes clarity before committing a substantial portion of its capital. Take DeFi, for instance. The growth projection for the next months to years remains a big question. With traditional finance boasting high interest rates, DeFi's yield-driven nature prompts inquiries into its competitiveness. On the other hand, certain pockets of DeFi such as the decentralized derivatives market will probably have a better chance of expanding its market share amidst the regulatory crackdown on centralized exchanges.

DeFiance is also bullish on staking within the DeFi sector, citing its alignment with market demands for both yield and participation. Approximately 60-70% of the firm's investments are guided by a fundamental analysis of the asset in question.

Can you see a bigger role for Singapore or Southeast Asia in the future of crypto?

Coindesk recently released a Crypto Hubs Index, which evaluates the optimal locations for residing and operating effectively within the realms of Web3 and blockchain. Remarkably, Singapore retains its second-place ranking in this index.

In assessing the significance of crypto hubs, the perspective is often centered on identifying the most viable options rather than outright superiority. Singapore persists as a haven for crypto-related endeavors due to its favorable business environment and rational regulatory framework.

Additionally, Singapore serves as a refuge for Chinese crypto entrepreneurs who may harbor apprehensions about the security of their activities in Hong Kong. Singapore's neutral international stance is particularly noteworthy, especially considering Hong Kong's affiliation with China.

Arthur's outlook underscores the substantial potential harbored within the Southeast Asian region for the crypto industry. Beyond Singapore, he envisions considerable promise, especially concerning consumer adoption, in other countries like Thailand and Vietnam.

Rapid Fire Questions

What’s one book that any aspiring investment professional should read?
- -
What’s your biggest investment mistake?
- Passing on Solana.
What’s the most underrated use case of crypto?
- The accessibility of anyone with an internet connection to tap into a global marketplace for innovation.
What’s your most contrarian view in crypto right now?
- There’s too much venture capital in the space.
What’s the biggest risk that the crypto space is facing?
- The crypto space is notoriously bad in effectively self-policing and the regulations provided by regulators are terribly crafted.

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.