Interview: Arain, ChainCatcher
Guest: Eraser, Founding Partner of Seven X
整理: Scof、Arain，ChainCatcher
During the Devcon in Bangkok, the Web3 asset data platform RootData, in collaboration with ChainCatcher, held the annual summit 'DeInsight 2024', officially releasing (RootData: 2024 Web3 Industry Development Research Report and Annual List) (click the link to view the full report and list).
This list is the second annual selection launched by RootData after its first release in 2023. This year's RootData List 2024 covers five lists, specifically: Top 50 Projects (completed TGE), Top 50 Projects (not yet conducted TGE), Crypto VC Top 50 Investment Institutions, Top 10 Angel Investors, and Top 20 Best CEOs.
ChainCatcher will release a series of articles, interviewing the institutions on the RootData List 2024, looking for builders who can survive the bull and bear markets and tracking the latest trends in Web3.
SevenX has successfully been selected as Crypto VC Top50 and recently visited RootData Space to share its path to success.
SevenX was founded in 2020, launching its first fund in August of that year with a scale of $5 million, achieving an exit return rate of 700%. The dark horse projects include asset issuance platform DAOMaker and Web3 application Mask Network. SevenX Ventures currently has three main funds and one FoF, with assets under management of several hundred million dollars. A notable aspect is that SevenX Ventures practices boutique investment rather than being a track-focused player, thus proposing the 'three drafts' theory + 'CIVIC' model + industrial chain layout.
In this interview, Eraser, Founding Partner of Seven X, shared the process of forming a Web3 investment system from the perspective of IT industry investment, pointing out that the current market has two main investment lines: the improvement of infrastructure and consumption-driven development, predicting an explosion of full-chain applications in the next 3-5 years.
"I personally do not have much confidence in the combination of Web3 projects and the real world." Eraser also frankly stated the areas he currently does not favor.
The following are the main contents of Space:
My computer background has allowed me to develop a systematic way of thinking about investments.
Arain: Can you briefly introduce yourself and SevenX?
Eraser: My experience can be traced back to before I entered Crypto. I worked in Africa for six years, participating in infrastructure construction and investment for the Belt and Road Initiative. During my time in Africa, I witnessed multiple instances of currency devaluation and hyperinflation, especially in Nigeria and Angola, which led me to have faith in Crypto. The economic collapse and difficulties in people's livelihoods made me deeply understand the severity of the issues.
In 2017, my partner entered Crypto a step ahead of me and urged me to learn about various industries. Subsequently, we joined one of the earliest funds in the country together. In 2020, I co-founded Seven X with two partners.
Arain: You mentioned you have a computer background, but your first job was in Africa working on the Belt and Road investment, why is that?
Eraser: Although I studied computer science at Nanjing University and pursued my graduate studies at the University of Waterloo, upon returning to China, I realized that programming was not my strong suit. Initially, I joined the strategic consulting industry and later participated in the Belt and Road project.
Although I am not a technical expert, I hope to think about projects, industries, and investment strategies from a technical perspective. My computer background makes me pay more attention to logic and architecture, which is also reflected in our investment style, demonstrating a relatively systematic way of thinking. This combination helps me find my position in the investment industry.
View Web3 development through the lens of IT industry investment: the improvement of infrastructure and consumption-driven development
Arain: SevenX Ventures focuses on boutique investments, which differs from the early investment style that generally bets on tracks. For this reason, you have created a theoretical system. How was this theoretical system formed?
Eraser: At the end of the ICO era, a large number of VC investment funds emerged. At that time, people did not value research and lacked investment logic, with many simply following the trend. As market returns were influenced by overall Beta, we realized that this approach was unsustainable, so we began to explore using a methodology and logical framework to guide investment philosophy. This framework has evolved continuously, including our theoretical papers and judgment models. Recently, I believe there are two important themes in the market: the improvement of infrastructure and the development driven by consumption. Infrastructure remains a branch of the computer industry, and we can draw on the development standards of the internet industry over the past 20-30 years to deduce the logic of the entire industry.
I believe the three fundamental pillars of the computer industry are computing, storage, and networking. Looking at the development of the IT industry over the past few decades, the sequence of development of these three is clear. First, the evolution of computing speed and paradigms is fundamental. Initially, single-core computers, like Ethereum, had limited processing power; later, multi-core, multi-threading, and parallel computing gradually became mainstream, and current infrastructure projects are emphasizing this. In the process of computing development, general computation gradually evolved into specialized computation, leading to the division of different computing tasks. For example, the central processing unit initially handled all computations, and later, graphical computations were handed over to GPUs. In the future, we may see more changes in hardware architecture to accommodate the needs of different application scenarios. Storage has also evolved from small-capacity hard drives to large-capacity storage, giving rise to new concepts such as databases, data warehouses, and data markets.
In the past decade, the industry has still mainly developed around computing, but it may evolve towards storage and data-related protocols in the future. Regarding networking, I think the Web3 industry can be roughly divided into two categories: one is cross-chain and single-chain connection protocols; the other is truly decentralized physical network connections. This involves many depin projects that achieve globalization through hardware connections. In general, the process of technological evolution can refer to the history of the IT industry, but we need to be cautious about the pace, avoiding moving too fast or too slow. For example, investing in decentralized databases in 2017 may have been too far from actual market demand.
The changes in the IT industry over the past 30 years are evident, from the rise of SaaS to Web 1.0, Web 2.0, and the shift from fixed internet to mobile internet, all due to the continuous increase in application scenarios, which has also prompted upgrades and transformations in infrastructure. Before the popularization of smartphones, people could not imagine how reliant they would be on their phones in the future. Today, we also find it difficult to foresee how the entire internet industry may be based on blockchain or Web3 in the next ten or twenty years. Although I am not fond of the term 'Web3', such a possibility does exist. Currently, discussions about application scenarios are very heated. The biggest pain point facing Web3 is the oversupply of infrastructure, especially in the past year, as several venture capital firms collapsed, leading people to realize that they should pay more attention to the consumer end. However, so far, the Web3 field has not yet produced particularly successful projects, and the industry's heat seems to be refocusing on the issuance of new assets.
We have conducted much thinking on consumer logic. However, to date, we have not formed a complete investment model that ensures the success of application investments. The success of applications often has randomness; it does not simply rely on a single idea or a new way of user interaction. We participated early in Web3 social investments, including from Mask Network to CyberConnect, as well as the recently invested Blue Sky, which is a project incubated by the former Twitter team. Throughout this process, we realized that current users are not focused on improving their experience or lowering costs through blockchain technology or Web3 services. Looking back, the emergence of the internet indeed helped people save many costs, such as in communication of information, which was very expensive at that time.
I believe the core of blockchain is not to reduce the cost of the internet, but to introduce trust and immutability. These features lead to higher costs, such as redundant storage and consensus mechanisms. Therefore, the transaction costs of blockchain are destined to be higher than the standards of Web 2. So what does Web 3 really bring to users? I believe there are two key points. The first is cross-border payments and settlements, especially with the emergence of stablecoins, which greatly reduce the complexity and cost of cross-border payments and currency exchanges. The second is that the threshold for asset issuance has been significantly lowered. In a traditional environment, only listed companies or government-backed institutions are qualified to issue stocks or bonds. However, on the blockchain, individuals and small groups can easily issue NFTs, tokens, or publish their works, such as music, comics, or articles, through content platforms. Blockchain significantly lowers the threshold for asset issuance, allowing anyone to publish and trade their assets at very low costs. Therefore, the cost that blockchain truly reduces is mainly on the supply side, rather than the consumer side. It makes some assets or transactions that were originally difficult to achieve convenient, and even allows for asset issuance without permission.
Currently, the problem we see is that the demand on the consumer side has not significantly expanded, but assets continue to be issued in large quantities. Whether it is new token projects or NFTs, the supply of assets is rapidly increasing, and costs are decreasing, while demand grows slowly, resulting in a situation of 'oversupply'. This has led to capital misallocation, with more supply than demand, causing disappointment in the industry and making it difficult for prices to rise.
The aspects where Web3 may reduce costs lie in the incentive mechanisms. By reshaping the incentive environment, people can obtain corresponding assets or rights based on their contributions to the project or ecosystem, rather than just traditional employment relationships.
In summary, I believe that Web3 truly reduces costs mainly in the areas of cross-border payments, asset issuance, and incentive systems, while it is difficult to reduce costs in other areas and may even increase them. Therefore, I tend to support projects that genuinely bring cost optimization in these areas and will not invest in those that increase costs on-chain.
Recently, I have observed an interesting phenomenon: the new generation of crypto consumers is blurring the boundaries between consumption and investment. In Web3, we see a reverse trend of 'investment as consumption' — when participating in meme tokens, game tokens, gambling, etc., people invest less and often incur losses, yet they remain enthusiastic. These 'investments' feel more like entertainment consumption to them, satisfying psychological needs rather than economic returns. Therefore, in the current entrepreneurship and investment landscape, we may need to rethink how to break the boundaries between consumption and investment, making the two more integrated. By simplifying the investment decision-making process, making it feel more like a consumption experience or even a form of entertainment, investment is more likely to attract public participation and achieve wider adoption. These ideas are still in the early stages but are worth further exploration.
Arain: I can hear that the industrial logic you just mentioned is basically a re-derivation of your understanding of the IT industry. You mentioned that it is still centered around computing, so what do we see as the next step?
Eraser: About two to three years ago, we began to lay out investments in the storage and data fields. For example, we are one of the largest supporters of the Arweave ecosystem and have invested in multiple projects within the Arweave ecosystem. In addition, we supported early projects like decentralized databases and decentralized data lakes, such as Space and Time. At the same time, we have also invested at the data protocol level, including RSS3 and Debank, etc. As on-chain activities and transaction volumes increase, the demand for data storage continues to rise, not only for transaction data but also for other types of information. For instance, permanent storage public chains like Arweave have already shown demand. Furthermore, early data protocol projects like Ocean Protocol, despite initially trying to promote data trading, have not made significant progress. I believe that although everyone emphasizes that data is the future and the 'oil' of AI, the application and circulation of on-chain data still face many challenges.
I believe that the data in Web3 is still not rich enough; the amount of user data and the status of on-chain storage have not reached the ideal standard. Moreover, the industry itself is still in its early stages — if computing capabilities are still not perfect, investing in databases may be premature. We should remain patient, observing industry trends from the perspective of entrepreneurs and VCs, anticipating about six months to a year ahead, rather than rushing to chase new technologies. It is also possible that the focus of the industry will shift, such as a weakening demand for data, while the combination of AI and finance becomes more important, ultimately bringing us back to the computing field. Such changes in technological evolution are also reasonable.
Maturing investment system: re-investment and heavy asset management
Arain: Can you evaluate the current market and several hotspots using your investment system?
Eraser: Here are my personal views. I do not have much confidence in the combination of Web3 projects and the real world. I believe that in the next 3 to 5 years, the relationship between this industry and the traditional world will remain parallel and difficult to merge. This is because if these projects are too radical, they will be regulated, leading to centralized control, which goes against their entrepreneurial intentions.
Currently, the only Depin project in our investments is IO.net. We do not view it as a typical Depin project, but rather as a bilateral market project aimed at solving the matching issues between supply and demand, rather than merely reducing GPU costs.
Regarding the combination of AI and Web3, I take a wait-and-see approach. AI may become a tool, but its core concepts are not consistent with Web3's problem of trust. Therefore, we are very cautious about investing in AI plus Web3 projects. As for DePin, we believe the most important thing right now is to connect everyone, so we have abandoned all DePin projects related to data sharing. We believe the era of data sharing has not yet arrived, and establishing an internet connection service that is not influenced by centralization is key. Therefore, we have not invested in similar DePin data projects.
Arain: From the data, SevenX Ventures has invested in hundreds of projects and can be said to be an active investment institution in the market. Can you talk about whether it is easy to implement this boutique investment theoretical system? What challenges and temptations have we encountered during the operation?
Eraser: This is a sharp question. As active VCs in the industry, it is difficult for us to completely ignore the noise of the industry and the generally followed schemes, but we insist on not investing in competitors within the same segment or rarely doing so.
For example, we were the first investors in YGG and did not invest in other popular competing projects afterward. Only when MerritCircle improved and transformed, no longer in the same track, did we invest. Therefore, our only steadfast principle is not to invest in directly competing projects, ensuring that our user groups do not overlap with those of competitors. However, we may consider investing in projects within similar tracks or with intersecting users.
Arain: This year, the projects we've invested in and the frequency of our investments have changed compared to previous years. Can you talk about the reasons behind these changes?
Eraser: I believe the biggest change is that we have slowed down the speed of our decision-making, but the amount of each investment has increased. Previously, we typically invested between $800,000 and $1 million, whereas now the investment amounts often reach $1.5 million or even over $2 million. This is because we have more investment opportunities, resulting in longer decision cycles; the overall number of projects has decreased, but the holding ratio for each project is higher.
The reason for this change is that we realized we had made mistakes before. First, as the fund size increased, we adopted a post-investment service-based model. If there are too many projects invested, there is actually not enough energy to manage them adequately. Second, we have gained a clearer understanding of the projects we want to invest in and those we do not, rather than randomly trying like before. In the past, the industry lacked a clear vision and theoretical framework, leading everyone to adopt an experimental investment approach. Now we have established some clear frameworks, so although the number of projects has decreased, the investment amount for each project will increase.
From an industry perspective, the total number of projects accommodated by the future market will gradually decrease. Nowadays, almost anyone can issue tokens or assets, leading to diluted attention. The future market will be layered, with a top layer consisting of a dozen competitive projects, a middle layer of some short-lived projects, and a bottom layer of low-quality projects that only have a few days of popularity.
Arain: You just mentioned that this fund naturally grows through such a process, and at this stage, it is time to do the corresponding things of this stage. By the way, can you share the future planning and layout of fund products?
Eraser: Our layout first emphasizes infrastructure in Europe and America and applications in Asia. European and American startup teams pay attention to values and concepts, such as decentralization and community, while also being strict about technological requirements, but this has led to long cycles and neglect of growth. In contrast, Asian entrepreneurs are more skilled in growth and user operations. Chinese Web2 applications outperform many European and American products in user experience, which strengthens our belief in this strategy.
At the same time, we are also exploring more community-oriented projects, rather than solely relying on traditional VC investment methods. Over the past year, opinions on VC tokens have changed, and many have begun to question the influence of VCs. Therefore, we hope to find better ways of development, such as leveraging community power or co-creation models, rather than just relying on traditional investment models. This traditional VC business model has obviously come to an end.
Investment rhythm applies the 'Pendulum Theory'
Arain: How do you control the rhythm of investment? Is there an evaluation system?
Eraser: This is a good question, as we have also made similar mistakes in our investment process. For example, in our second fund, we chased after so-called innovation points too eagerly, especially in the NFT and metaverse fields, believing that anything novel was worth investing in. As a result, many projects appeared too ahead of their time. For instance, in 2021, we invested in dynamic NFTs, possibly the first of its kind globally, but the NFT market itself was not yet mature, and dynamic NFTs struggled to gain attention, ultimately failing. Similarly, at that time, the industry was still discussing infrastructure construction, but we invested in some applications hoping to change the status quo, such as decentralized music streaming platforms. However, due to insufficient infrastructure and market conditions, this project also failed.
When investing in Web3 projects, we also faced issues of timing and cycles. For example, when technologies like AA wallets and Paymaster were not mature, we tried to invest in decentralized music streaming projects but failed due to insufficient infrastructure. In response, we proposed the 'Pendulum Theory': the blockchain industry's centralization and decentralization are always swinging, just like a pendulum clock oscillating back and forth on the train towards decentralization.
Looking back at history, the ICO era emphasized complete decentralization, but it led to frequent project exits and a lack of regulation. Then centralized exchanges rose and determined the rules for asset issuance. With various drawbacks exposed in centralized exchanges, the 2020 DeFi Summer brought people back on-chain. However, excessive derivatives in DeFi have caused problems, with too many projects like food tokens and farm tokens losing regulation, ultimately triggering a return to centralized exchanges. Recently, interest in tokens from centralized VC investments has weakened, while there is a pursuit of meme and other on-chain assets, leaning again towards decentralization. The other end of the pendulum also involves the pursuit of use value and emptiness. At times, the application scenarios of tokens are highly praised, while at other times, purely meme coins thrive. Ethereum has also experienced a shift from single-chain dominance to multi-chain competition. I believe this industry will progress through continuous cycles and swings.
Arain: The pendulum theory can provide us with direction for the next steps. We are currently in several intertwined states, and investing in the future should be counterintuitive, right?
Eraser: The decentralization of Web3 is not only reflected in technology but also in the distrust of authority. In the past, whether it was listing tokens on Binance, Vitalik's statements, or investments from institutions like a16z, they were seen as authoritative. However, people have gradually realized that these authorities do not always bring good results, and thus, they have started to stop blindly following. Yet, long-term de-authoritization can lead to chaos, ultimately resulting in the emergence of new authorities, forming a cycle.
It is expected that there will be an explosion of full-chain applications in the next 3-5 years.
Arain: Most of the projects SevenX has invested in belong to Infra, and we have made some investments in application types, but not many. What is our current investment rhythm for Infra and applications? How do we judge the timing and take action regarding applications' future?
Eraser: In our previous discussions, I mentioned that we began to pay attention to and invest in some applications over a year ago. In fact, even earlier in our second phase, we also invested in some less successful applications. I admit that at that time we were too early, as the infrastructure of the entire industry had not yet been perfected, and many L2s had not yet launched, while L1s had not played their proper roles. Therefore, the focus at that time should have been on solving the bottleneck of computing and infrastructure rather than promoting application development.
As time goes by, in the next year or two, large-scale on-chain applications are expected to emerge. Recently, many projects have surfaced, but these applications are often not fully based on-chain; rather, they partially rely on on-chain or Web3 functionalities, and the user experience still mainly follows Web2 models. For instance, the Blue Sky project we invested in, though it cuts into Web3 social and content creation, still offers a user experience that is native to Web2, only utilizing some assets or philosophical concepts from Web3 to operate in a more decentralized manner.
I believe that in 3 to 5 years, the first batch of full-chain applications will begin to emerge. We have invested in some full-chain games, which I am personally very enthusiastic about and support their development. However, it must be pointed out that, based on current data, the number of users for full-chain games is indeed not as high as those for Web2.5 games.
Arain: You mentioned earlier that when investing in consumer-type applications, you do not support projects that claim to reduce consumer costs but actually end up increasing them. How do we judge if a project is a 'pseudo-reduction of consumer costs'?
Eraser: The reason for our failure in investing in music streaming is mainly that we only considered the needs of creators while neglecting the consumer experience. As consumers, Web2 platforms have made listening to music convenient and inexpensive, such as NetEase Cloud and Spotify, where you can listen freely with just a monthly fee. In contrast, the Web3 model requires users to pay for each song, pay on-chain gas fees, and install wallets, which is too burdensome for users.
Our original intention was to help long-tail creators through decentralized recommendations and pay-per-use, but from the consumer's perspective, this model is neither convenient nor cost-effective. The stickiness of the music industry is also insufficient, as users can switch platforms at will, with little difference in where they listen to the same song. Therefore, relying solely on changing the supply side cannot solve the problem. Unless we find ways to truly enhance the consumer experience in Web3, the Web3 transformation of the music industry is unlikely to succeed.
