- Digital-asset VC firm KR1 was an early investor in Ethereum, whose token hit record highs this week.
- The founders are now making a big bet on crypto protocol Polkadot and shared their investment case.
- They also broke down their outlook for DeFi, as well as two projects and key trends to watch.
- See more stories on Insider’s business page.
KR1 is one of Europe’s leading blockchain and digital-asset venture-capital firms. The firm listed on the Aquis Stock Exchange in 2016 and has since invested in crypto projects such as Ethereum, Polkadot, and SatoshiPay.
Since its listing, the company’s share price has surged over 28,000%. It provides investors with indirect exposure to the world of crypto.
The founders of KR1, George McDonaugh and Keld van Schreven, recently spoke with Insider about their five-part crypto-investment strategy.
A specialization within the strategy is decentralized finance. KR1 was an early backer of Ethereum, which is a blockchain that powers a number of applications through its smart-contract functionality and has frequently been leveraged by the decentralized-finance movement.
Some of Ethereum’s other crypto-related uses are nonfungible tokens backed by celebrity artists and musicians, metaverses, and even digital racehorses.
Ethereum’s native currency, ether, reached record highs this week. But despite its investment in Ethereum, KR1 has also invested big in protocols such as Polkadot and Cosmos that could challenge crypto’s rising star.
“We’ve done a lot of DeFi investing, probably one of the most active in the space,” van Schreven said.
What is DeFi?
Decentralized finance has surged in popularity in the past year alongside the cryptocurrency boom. The movement seeks to replace a variety of centralized and regulated banking institutions with decentralized systems and products.
The products aim to remove the middleman and instead use blockchain technology to enable complex financial use cases directly between parties.
A common way of assessing decentralized-finance adoption is through “value locked.” This represents the quantity of ether and other coins posted within the smart contracts that make up a particular DeFi service.
Bank of America highlighted the surge in “value locked” in a recent research note.
Bank of America
KR1’s DeFi outlook
McDonaugh believes scarcity is at the core of the DeFi movement, he said.
“What blockchains allow to happen is bring that sense of ownership into the digital realm,” McDonaugh said.
Scarcity started with the creation of digital assets, which have limited supply, and the ability to trade them, McDonaugh said. Decentralized finance is an extension of that, as it provides an ecosystem for those digital assets.
“Deep down, I think it speaks to a human’s desire to exchange with each other, and I think the less barriers to exchange, the more prosperous we will all be as a society,” McDonaugh said.
In the short term, van Schreven expects the momentum of the DeFi experimentation phase to continue, but at some point, the centralized and decentralized worlds will have to mesh, he said. For example, he asked, how will national and regulated stablecoins link into the decentralized world?
Investors will need to be cognizant of regulatory hurdles on the horizon, van Schreven said.
DeFi Trends
The team at KR1 is watching two key DeFi trends right now.
1) Uncollateralized lending
Within the DeFi space, many protocols are overcollateralized, because if someone defaults, then it’s a way to protect yourself.
Traditional credit markets rely on identity for uncollateralized lending. This isn’t possible within DeFi because people can be anonymous.
Several projects are trying to solve this problem. If done correctly with the right metrics, the solution could spur growth, McDonaugh said.
The team is invested in Union Finance, which is a project that hopes to solve the problem by using group social connections to offer credit lending to people.
2) Fixed rate and derivatives products
“At the moment, a lot of DeFi are all variable rates, and people are looking at how to create longer-term products with fixed rates,” McDonaugh said.
KR1 is focused on projects solving the fixed-rate problem, as well as those focused on the space of financial derivatives and synthetics, McDonaugh said. One project he’s excited about is Vega, a protocol for creating and trading derivatives on a decentralized network.
“It’s all about offering people the freedom to exchange value and also allocate capital to these markets in a far freer way,” McDonaugh said.
Investing big in Polkadot
The team is also invested in Polkadot, a protocol that enables public blockchains to connect.
While Polkadot is not a DeFi application, it could enable DeFi projects to communicate with one and other. The team at KR1 believes a need may arise for bespoke blockchains that perform specific functions, and those would need to communicate with one and other.
“You can design a blockchain to be an atomic-trading or derivatives-trading platform, and then you can connect that sovereign blockchain to a wider network,” McDonaugh said.
Part of the reason the team invested in Polkadot was that it was built by Gavin Wood, who wrote the first version of Ethereum.
Polkadot “basically fixes a lot of the problems with Ethereum,” van Schreven said, adding: “Once you frame who created it and why, then that becomes important.”
The native token for Polkadot is dot, which serves as a way to carry out key functions on the platform, similar to ether for Ethereum.
Dot’s price performance is roughly on a par with that of ether over the past year, with a gain of about 320%. But at just $38, it’s worth a fraction of Ethereum’s native token. Ether was up 3% on the day at $3,440 on Wednesday.
Polkadot can do many things that Ethereum can’t, van Schreven said. It is cheaper and faster, contains on-chain voting, and people don’t need to fork for an upgrade, he added.
It is “going through the Ethereum emergence cycle of infrastructure on it,” van Schreven said.
One of the strong underlying narratives for moving to Polkadot as a developer is that it provides the tools and flexibility to create an infrastructure with an eye to the future where blockchains might want to talk to each other because of the benefits of shared
liquidity
, McDonaugh said.
“We’re seeing talent move on to Polkadot that was going to build on Ethereum. That’s very exciting,” van Schreven said.
He added: “And I think it’s going to be one of the winners in the next few years, and then it’s going to last for maybe 100 years.”