A venture fund executive with a focus on cryptocurrencies suggests that venture capitalists struggling with the challenges of conducting adequate due diligence on crypto companies should consider going back to the fundamentals and “trust the chain.”
FTX rocked the “trust in this industry,” according to John Lo, head of digital assets at Recharge Capital, a $6 billion fund with crypto and decentralised finance (DeFi) companies on its portfolio.
There would be a lot of introspection, he said. Even outside of crypto, according to Lo, due diligence has always been an issue in the investment arena.
He claimed that the course of action chosen by crypto venture capitalists in the wake of the FTX crash would be a key determining factor in whether the industry would actually recover or experience a worsening of the crisis.
Lo, however, contends that the crypto sector offers the world a step in the direction of a solution, a public and immutable record, and makes the following claims:
“Particularly, crypto venture capitalists must return to the chain-trusting tenets of cryptography. More companies will start operating on-chain, and VCs will use on-chain data to conduct more in-depth due diligence.”
Better tools will be developed to distil and track on-chain data; in fact, entire on-chain firms may be packaged into NFTs and sold, streamlining laborious M&A procedures, he continued.
According to Cointelegraph Research’s VC Database, the total amount of financing raised in the cryptocurrency venture capital sector last year exceeded 2021, with $30.3 billion secured by crypto businesses.
According to a tweet from Alex Thorn, head of research at Galaxy Digital, the last quarter of 2022 witnessed the lowest capital inflow to the industry in two years with only $2.8 billion allocated over 371 agreements.
Although the industry experienced a downturn as a result of FTX’s meltdown, Lo noted that the funding reduction also reflected the macroeconomic situation.
“Risk-taking sectors do not fare well in high-interest environments. We can see markdowns because venture typically delays,” said Lo. He thought that as 2023 progressed and the macroeconomic environment stabilised, the industry will also restore stability.
“It’s probably for the best that bad actors and unethical behaviour are exposed sooner rather than later.”Lo anticipated that as the year went on, the industry will witness more capital outflows than inflows, with a focus on on-chain goods and services rather than tokens.
The focus will likely also be on a number of issues that emerged during the bull market, such as user experience, wallets, user onboarding, and compliance.
Blockchain scalability, liquid staking, real-world assets, decentralised exchanges, and platforms are some of the key narratives that are developing, according to Lo.
“These adjustments after a frenetic time of testing will be important to growth,” he said, adding: “As always, there are teams working in stealth on innovative products yet to be seen.”
Crypto is still functional.