Q2 Limited Partner Update
To LINKPAD and Parkour Ventures II DeFi LPs,
The second quarter concluded in an explosive manner for the cryptocurrency market, with Bitcoin’s price stalling in the lower-$60,000 region before plummeting, creating headwinds that brought down the rest of the sector.
Altcoins were particularly impacted by this shifting trend, with tokens within the decentralized finance (DeFi) space undergoing drawdowns as severe as 90% from peak to trough over a multi-week period. Since seeing what has—so far—been the worst of this market correction, many crypto assets have recovered slightly and are now seeing range-bound trading.
At LINKPAD, capital preservation within this exciting (but otherwise volatile) market is our number one priority. LINKPAD maintains a relatively large stablecoin (that is, crypto tokens pegged to the US Dollar and, in some cases, other global currencies) allocation when compared to other top funds. This allowed our aggregate portfolio during the drawdown to far outperform both Bitcoin and the DeFi market. We’ll dive into the exact numbers later in this update.
DeFi Pulse Index reached a peak of $674 on May 12, 2021 before the correction
that reached a low of $197 on June 22, 2021. Source: CoinMarketCap
Our Thoughts on the Q2 2021 Crypto Selloff
While jarring, the recent correction is not surprising, and can even be viewed as macro-positive when considering the rampant presence of leverage that had been forming and bolstering the market’s previous run up.
Unlike traditional markets where leverage is fairly limited, the crypto market is unique in that retail traders can readily access leverage of up to 125x on crypto positions. This open access allows otherwise small traders to increase their size and influence over the market.
Naturally, this open access to leverage leads to greater volatility and more momentum when trends form in both directions. After periods of immense upside (such as those seen in Q4 2020, and Q1 of this year), the asset prices can become almost exclusively driven by leverage trading volume in lieu of spot activity.
The intensity of the recent market crash has been largely magnified by the leverage element, which explains why tokens residing within the decentralized finance (DeFi) sector were particularly impacted.
3 month performance of the top 15 DeFi tokens by Market Capitalization. Source: Messari
While leverage is typically found within centralized exchanges like Binance and ByBit, the advent of decentralized digital economies has led to the emergence of decentralized platforms that allow users to tap into leverage to magnify their positions on-chain.
Borrowing and lending is a key pillar of DeFi, and is what drives most of the yields and trading activity within the space. It has also made access to leverage extremely prevalent, as users can borrow against their crypto holdings to either buy or sell more tokens, essentially leveraging their positions. Platforms like Aave, Compound, Maker, and Rari Capital’s Fuse have made this incredibly easy, and some riskier farming strategies rely heavily on this.
As such, the unwinding of leverage via position liquidations during the drop caused a cascade of liquidations to ravage many DeFi protocols, leading to an intense correction.
So, What’s Next for the Market?
Our vision at LINKPAD spans over the next decade, with our core credo being that decentralized finance (and cryptocurrency as a whole) will absorb much of traditional finance in the coming years.
While unfortunate that DeFi was so impacted by Bitcoin’s lethargic price action, the infrastructure of this burgeoning ecosystem held up incredibly well through these events. Unlike March of 2020, when the Bitcoin crash caused multiple stablecoins to lose their pegs, all major stablecoins held up well through recent volatility. Partially collateralized tokens such as DAI, Terra’s UST, FRAX, and more all showed resilience in a panicked market, a testament to the ecosystem’s growing maturity. Furthermore, the advent of stablecoin farming allowed for surges in trading volume to be capitalized upon, with liquidity providers for popular stablecoin pairs earning heightened trading fees.
Greater infrastructure and new updates are constantly being shipped throughout the DeFi space allowing for constant growth. While it still has room to grow, the future is as bright as it has ever been.
Bitcoin, which serves as guidance to the market, is fundamentally stronger than ever; the benchmark cryptocurrency has seen adoption amongst institutions, companies, and even countries over the past several months. Notable public companies such as Tesla, Square, and MicroStrategy all currently hold Bitcoin on their balance sheets as a reserve asset, and El Salvador was recently the first country to formally label Bitcoin as legal tender while engaging in multiple activities to enhance the adoption of the cryptocurrency. There’s little reason to believe that this trend of adoption will change on account of the asset price seeing a single-quarter drawdown, and the macro outlook is better than it ever has been.
Optimism for the digital asset’s future is no longer rooted just in possibilities, hope, and “what ifs”
While Bitcoin took over a decade to reach a point of widespread adoption and legitimacy, we contend that DeFi will see a faster growth curve, with digital nativism amongst younger generations, global decentralization trends, and general acceptance of tokenization amongst institutional investors all creating a stronger tailwind for growth than Bitcoin saw in its early days.
Combine these factors with a growing hunger for yield amongst global investors, and a continued inflow of volume and capital into this sector seems inevitable.
How LINKPAD is Positioning Itself to Capture This Growth
Based on the above premise, we are taking a multi-pronged approach towards capturing this potential growth over the next decade.
Our portfolio is currently split into three key categories: early-stage investments, stablecoin farms, and crypto token farms.
While stablecoin farms provide our books with consistent and predictable revenue generation, our early-stage investments and crypto token strategy grants exposure to the potentially parabolic growth that this sector of the market will likely see in the years ahead.
Notably, a large portion of our book is allocated to yield-generating opportunities, including our non-stablecoin crypto holdings. We use our “productive” assets to both generate capital for the fund through various yield strategies and also to secure stakes within the protocols that we’re excited about.
One example of this would be SushiSwap. The food-themed automated market maker (AMM) platform has become a powerhouse within DeFi, hosting multiple different products that allows for users to better access this space. Investors can simply buy the platform’s governance token SUSHI via the secondary market, or can lend liquidity for popular trading pairs on their exchange and earn fees in the form of SUSHI tokens.
Our early stage investment portfolio is aimed at capturing larger and longer-term gains by placing bets on projects building useful tools, platforms, and networks that provide value to the decentralized finance ecosystem.
Our Performance
The inception of LINKPAD was at the tail-end of Q1 2021, the value of LINKPAD’s total assets under management declined by 7% during Q2 (if invested during the entire quarter, each individual LP’s performance is dependent on time of entry). This decline marks a significant outperformance over the aggregated market over the same period of time.
Bitcoin, widely viewed as the benchmark digital asset for the entire market, declined by 41% over the same period. That said, a standard investor portfolio “Basket”, holding 50% Bitcoin, 30% Ethereum, and 20% DeFi Pulse Index (DPI – a benchmark DeFi index) would have declined by a total of 39% over the same period. DeFi-focused investors holding purely DPI (a basket of the top “blue chip” DeFi tokens) would have seen a decline of 34%.
3 month performance of the Net Asset Value of LINKPAD, a “Basket” of crypto assets,
DeFi Pulse Index, and Bitcoin. The “Basket” is defined as 30% ETH, 50% BTC, and 20% DPI.
3 month price fluctuations of the Net Asset Value of LINKPAD,
a “Basket” of crypto assets, DeFi Pulse Index, and Bitcoin.
The 3rd quarter is already off to a good start for LINKPAD, with many of our early stage investments beginning to launch alongside the market showing signs of a potential bottom.
We have continued to hedge our books during periods of market strength, with a goal of drastically cushioning any further downside that the market could potentially see in the months ahead. Yields for stablecoins remain reasonably high, which we will continue taking advantage of.
July statements will also reflect the growth our fund has seen due to 2 of our portfolio companies launching this month.
Our Portfolio Companies
While deal flow and project launches naturally slow during corrections, lower-quality projects and those being launched with misplaced intents are usually culled due to the lack of immense capital flowing into every new launch. This makes it significantly easier to separate the projects being led by short-term profiteers from those by honest individuals with long-term outlooks.
Since our inception at the start of this quarter, we have built an array of early stage investments that we believe will perform exceedingly well over the coming months and years.
Here’s a list of the deals we closed over the past few months. Note that there are a few others that are still in the pipeline, and should be closed and side-pocketed for Q3 2021.
*note: LPs’ exposure to the following side-pocketed investments varies based on entrance date into the fund. Details of these entry dates are disclosed in the statements.*
MCDEX
MCDEX is an exciting platform that acts as a decentralized automated market maker for perpetual swap pairs. Much like Uniswap or SushiSwap, the platform allows anyone to create and add liquidity to pairs, which can then be traded by users using leverage.
Leverage trading will undoubtedly remain a prevalent force within the cryptocurrency market, and the ongoing regulatory crackdowns against centralized leverage trading platforms will likely shift volume towards decentralized platforms like MCDEX. We are currently up 312% on our MCDEX seed investment, and optimistic in its mid-term outlook.
MonoSwap
MonoSwap is a multi-faceted DeFi protocol that is currently in its beta phase. The platform aims to create single-token liquidity pairs that trade against their native stablecoin, vUSD, rather than double-sided pairs (as is required on other AMMs like Uniswap).
Single-sided staking is always popular amongst those farming yields within the crypto market, but typically the only way to profit from doing so is by collecting rewards boosts from platforms trying to entice new users.
Through MonoSwap, users will be able to collect yields on the assets they hold without having to pair them with other assets, and without exposing themselves to the same magnitude of impermanent loss that they would otherwise face in two-sided liquidity pools.
Coin98
The team at Coin98 are building a cross-chain liquidity protocol that is intended to help bridge the gap between traditional finance and decentralized finance, making it seamless for those not well-versed in DeFi to take advantage of the numerous benefits and high yields that exist within the ecosystem.
The native token of this ecosystem (C98) recently launched on Binance Launchpad, which is one of the most revered launchpads in the crypto space. Binance only chooses a few of the most promising projects each year to launch and subsequently list, making LINKPAD’s seed allocation to this project extremely exciting.
Presently, LINKPAD’s $30,000 investment in the C98 token is worth $1,540,000, marking a 50.8x return on investment. This number will vary over the coming years as the token vesting kicks in. We’re incredibly proud and excited to be early supporters of this project, and are looking forward to all the features in the pipeline.
You can learn more about Coin98’s seed round closure and the project’s backers (including LINKPAD) in this Forbes article.
Backers of Coin98 include LINKPAD, Hashed, Parafi, Multicoin Capital, Spartan, and others
Solstarter
Solstarter is presently one of the most anticipated new projects of the year, amassing backing from the largest funds in the crypto space. LINKPAD is co-leading an investment round into Solstarter alongside Hashed, Alameda Research, Defiance, Mechanism Capital, Spartan, and others.
The platform aims to operate in a similar fashion to Silicon Valley’s Y-Combinator, acting as an accelerator and launchpad for new projects looking to build within the Solana ecosystem. For those unfamiliar with Solana, it is a burgeoning layer one protocol that allows for decentralized applications to be built upon it. While not dissimilar to Ethereum in premise, Solana aims to ease the burdens of network congestion and high transaction costs seen by the Ethereum blockchain.
We’re excited about Solstarter because Solana is a promising ecosystem, and Solstarter is a fantastic way for LINKPAD to gain diverse exposure to its future growth. We will also have access to the deal-flow pipeline created by Solstarter, which is promising.
DinoSwap
DinoSwap is a Polygon-based yield aggregator aiming to provide users with a singular place to stake liquidity provider tokens and earn yield.
Projects looking to attract liquidity on Polygon can apply to create a new “fossil farm” that rewards users for adding liquidity for their token on various AMMs, like QuickSwap or SushiSwap. Users who add liquidity can then stake their liquidity provider (LP) tokens on DinoSwap and earn yield in the form of DINO tokens.
The bull thesis for the DINO token is quite strong, as the team has built multiple mechanisms that create buy-side demand for the DINO token to counter its supply emissions from the farms, including a clever “extinction pool” concept where users can lock and permanently burn DINO tokens in exchange for a potentially higher amount of tokens from other projects (who join the extinction pool for marketing purposes.) Users can also stake their DINO tokens in a “tar pit” and lock them up for three months, allowing them to earn yield on their idle tokens.
Similar to how PancakeSwap cornered the liquidity market on Binance Smart Chain, it is our belief that DinoSwap has the potential to do something similar on Polygon, which is an Ethereum side chain that has grown in popularity over the past year, garnering public support and investments from the likes of Mark Cuban and other notable investors.
Since its launch in mid-July, DinoSwap has amassed nearly $500 million in liquidity on its platform. At the time of writing, the DINO token is currently up roughly 983% from where LINKPAD acquired its tokens in DinoSwap’s Series A fundraising round.
Integral Protocol
Integral Protocol is an AMM-based decentralized trading platform that is structured in a way where it can provide large traders with the cheapest and most efficient access to liquidity in the market.
Large traders (including institutions) who trade on-chain using DEXs often face a number of problems, including fragmentation of liquidity across multiple pools, front-running bots that take advantage of liquidity constraints to profit from slippage, and other annoyances.
Integral offers traders access to a handful of top trading pairs for assets like Bitcoin, Ethereum, and stablecoins with 50% less slippage than leading DEX aggregators like 1Inch. It also has mechanisms built in that make it nearly impossible for bots to exploit large traders and profit from their slippage. The catch is a 5 minute delay on all trades, as the platform automatically spreads transactions out over a five minute period using Uniswap’s pricing oracles.
This also helps protect liquidity providers from impermanent loss, which occurs when buy or sell-side demand for one half of the pool greatly outweighs that for the otherside of the pool.
An Explanation of Integral’s Trade Delay Mechanism
Integral is a fair-launch project, which means that anyone can farm the platform’s unlaunched governance token (ITGR) by adding liquidity to their pools. After several discussions with the Integral team prior to the platform’s launch several months ago, LINKPAD has been farming ITGR tokens since our fund’s inception, allowing us to take a sizable stake in the platform’s network. We’re excited to see the ITGR token launch in the coming months.
Closing Remarks
While Q2 of 2021 wasn’t the most positive trend the industry has seen, the promise and potential of this emerging market remains as great as it has ever been.
This is particularly true when it comes to decentralized finance, which although still remains in its infancy as a sector, has all the markings of a future traditional finance competitor. We believe that within the next decade, DeFi will attract potentially trillions of dollars worth of capital and liquidity from traditional financial markets.
Under this methodology, we are positioning ourselves to partake in this growth and capture the upside that comes along with it, all the while working to reduce volatility and downside risk by maintaining healthy exposure to stablecoins and other non-correlated assets.
I want to deeply thank all of our limited partners for being on this journey with us, and entrusting LINKPAD to help efficiently manage and deploy capital into this exciting new market.
Onwards and upwards!
Cole Petersen and the LINKPAD Team