- X-To-Earn models might be the next new thing, but it needs to have the right value add and business use case.
- Tokenomics is important, but it should not be the only thing you premise your judgement upon.
- Information is always out there, a good investor has to craft her own thesis before investing.
The rapid pace crypto operates in is not built for everyone. It is dubbed to be a “ruthless and meritocratic” place where the need to consistently improve is necessary for survival.
With something new coming up every other day, those who are consistent in learning and growing will reap the benefits of leading the pack in the space.
“The fact that you have to be on your toes (in the space), makes me feel alive.”
We talked to Derek Lim, Head of Research at Spartan Labs, who started his journey as a junior college lecturer to now, someone pushing boundaries in the web3 space as the head of Investments of Spartan Labs.
How it all started
Being an education officer teaching GP in Anglo Chinese Junor College and Nanyang Junior College in 2018, the move towards dabbling in the web3 space may come as a shock to many.
While the routine nature of teaching may get an individual into a comfortable rhythm, Derek wanted to venture into a nascent space where innovation leads to the forefront of technology, something rather uncomfortable and different.
While many started either with Bitcoin or Ethereum, alt-coins such as Solana and Matic stole his attention. With amazing returns over the previous bull runs, it kickstarted the opportunity for Derek to delve deeper into the space, to take it more seriously.
Coupled with a strong interest in the space, he took a step into web3 by becoming a technical writer, a position where he was able to explore the intricacies of the blockchain and how it solves problems in the real world.
“It (Web3) was a whole new dimension for me to escape to.”
Present day in Spartan Labs
The way Spartan labs differ from other incubators. They use their in-house capacity to develop their own protocol landscape and ecosystem mapping before figuring out what values certain verticles need.
They do so by building the product out from 0 to 10 and then getting operators to scale the product from 10 to 100.
Another verticle within Spartans is its thought leadership fund which includes research reports ranging from the general sentiment of the market to deep dives into verticles in web3.
Check out the recent on they did on DeFi in collaboration with CoinMarketCap.
Bullish on the tech, but which?
Change is the only constant. Evidently, though, it is moving at an accelerated pace, faster than any other advancement of the current day. While the narrative you hear today may not be relevant tomorrow, it constitutes the beauty of the space.
This dynamic aspect of crypto forces investors to personal investment thesis in the space. “Back then I was looking for gaps within the space, now I am still doing the same but I’m identifying very different gaps now.”
With adequate levels of infrastructure, any improvements in tech right now, unless super large, will be marginal at best in terms of ROI.
“Right now, the value will accrue to the application layer… I’m focusing on that layer right now.”
If you are wondering what falls under this umbrella, it includes X-to-Earn models among many others.
“Web3 are not the pioneers to this, there were many iterations before, but it is about figuring the true value add of web3 above and beyond what is already out there.“
X – TO – EARN
“There will be a new wave of these models… but we need to hit all the right business use cases and value add first.”
Firstly, the right product market fit. The protocol has to know who they are catering to and its user base. To understand the pain points and, most importantly, the likely behaviour that these users will exhibit.
This may be Axie’s downfall. Even with an interesting model, targeting a group of users that use the application as a form of livelihood might see certain problems arising.
Individuals will either do one of two things, hoard or cash out. With little to no reinvestment back to the game by these active participants, who also happen to form the bulk of the user base, the minting of $SLP tokens without any economic activity will lead to inflation.
These should be aspects of protocols that should be privy to, especially if they want to see success in their venture.
Secondly, should be value capture. The current day protocol may be inward-looking, not with the intention, but solely based on how they are formed.
The current internal cycle will look something like this, the individual gets X tokens and then reinvests them back into the game to potentially earn more X tokens in the future.
“I am very careful with the word ‘Ponzi’, it has many negative connotations that I don’t agree some of these projects should be labelled.”
Protocols however need an external form of value accrual. This could be in the form of certain real-world utility it provides.
For this to be a success, strong partnerships have to happen. As seen with Sweat coin, they have strong commercial partners that could incentivise users to spend tokens on the NFT in getting value.
The external value capture is essential, otherwise, “if it is inward-looking, it would be very fragile tokenomics and game theory which fall in the slightest fall in price action.”
This conversation cannot be polarizing though, “it can’t be this or that., I doubt web3 can entirely replace web2,” what is most important is the conversation and collaboration between the two. Perhaps one day web3 will take over, but till then, mini steps have to be taken in conjunction with web2.
Metrics we can all use
While information is always out there, to be a good investor you need to craft your very own thesis. The journey then begins in either proving your thesis or solidifying its foundations of it. “Without your thesis as a north star, any metrics that you look at might just be redundant… you need your own opinion.”
The basic metrics you use will differ across various verticles in the space. For base layers, in particular, looking at the “market-cap, TVL and Daily active users growth rate over a period” could be a good starting point.
To verify the contract of the token, Honeypot and Token Sniffer are good resources to check for potential scams, for in-depth tokenomics analysis, Nansen provides a good start in tracking smart money along with its ‘Token God Mode.’
Let’s talk tokenomics
“There is no doubt tokenomics should be important, but it should not be the only thing you premise your judgement upon… it should be the business value.”
Especially in DeFi, its main focus premise around tokenomics. While all these may boil down to game theory, as humans get irrational, a strong business use case would instead be robust regardless of the price environment.
[Editor’s Note: This article does not represent financial advice. Please do your own research before investing.]
Featured Image Credit: Chain Debrief