Author | Terry Produced | Vernacular Blockchain (ID: hellobtc)
On May 27, Reflexer Finance, a decentralized stablecoin project that completed a $1.68 million seed round of financing led by Paradigm in August 2020, tweeted to attack Paradigm, stating that Paradigm’s previous investment of $270 million in FTX was for the crypto industry. It has brought harm, but now it says that it is no longer focused on Crypto, asking "Please Paradigm destroy all FLX positions, we no longer want to work for Paradigm."
Translation: Hey @paradigm, remember that time you gave SBF $270 million in FTX? Then FTX went to 0 and that became a scar on our entire crypto industry? Now you’re changing your name to stay away from the crypto industry? Then please burn all your FLX first. We don't want to work for you anymore.
This stems from Paradigm’s official announcement a few days ago that it would expand its focus to areas including artificial intelligence, calling itself a "research-driven technology investment company" rather than a company that specializes in investing in "disruptive encryption/Web3 companies and protocols."
So, what kind of venture capital firm is Paradigm, the VC that has been criticized for "abandoning" Crypto?
01 Paradigm, the fast-rising Crypto venture capital giant
In November 2021, an old article titled "VR is a Killer App for Blockchains" published in February 2017 was dug up again during the "Metaverse" craze.
This article, which seems to be a time-traveling article in 2021, four years later, accurately predicts the rise and integration of the current metaverse, blockchain, Crypto, and VR, and directly points out that blockchain will be the basic layer of the metaverse.
I spent a weekend talking to 10 executives working on VR at some of the biggest companies about how to better create the “metaverse.” The idea is pretty simple: if people start lying around in VR, its rules and systems will be just as important as the “real” world.
The author of the article is Fred Ehrsam, the co-founder who just resigned from Coinbase. He studied computer science and economics at Duke University and has two years of experience as a trader at Goldman Sachs. After being exposed to Bitcoin in 2011, he became a long-term angel investor in the industry and became the co-founder of Coinbase.
The article was then read by Matt Huang, who was then at Sequoia Capital. Huang holds a bachelor's degree in mathematics from MIT, is a technology and Internet entrepreneur and investor, and founded an analytics company called Hotspots (which was backed by YCombinator and acquired by Twitter).
Huang Gongyu was attracted by Fred Ehrsam's thinking and sent him an email to discuss whether a decentralized computing platform could be established to power the virtual reality metaverse. Although this idea did not come true in the end, the two later exchanged dozens of emails, brainstorming potential business ideas related to encryption, and finally decided to jointly establish a venture capital company:
In June 2018, Fred Ehrsam and Huang Gongyu co-founded Paradigm. At that time, both of them were 29 years old and in the prime of their lives (the subsequent new partner Charles Noyes was only 21 years old when he joined Paradigm. It has to be said that the crypto industry is an industry for young people).
The drama of heroes cherishing heroes began. What’s interesting is that when Fred Ehrsam was still at Coinbase and Matt Huang was still at Sequoia Capital, Fred Ehrsam applied for financing from Sequoia Capital twice on behalf of Coinbase, but was rejected both times.
Back to the topic, when Paradigm was founded in 2018, the crypto market was gloomy, but Paradigm convinced many top institutional investors to participate in the crypto field.
In October of that year, Harvard, Stanford and Yale, the three most eye-catching university endowment funds, joined hands with Sequoia to invest in this emerging VC institution. This was the first time that the three university funds provided large-scale support for a fund focused on investing in the crypto field (American university funds have always been very active in the VC field. When Zhang Lei founded Hillhouse in 2005, the Yale Endowment Fund invested 20 million US dollars and became one of Hillhouse's early key supporters).
Then Paradigm boldly invested all of its initial $400 million in raised capital into Bitcoin. At the time, the market was at a low point and the price of Bitcoin was less than $4,000. Looking back now, Paradigm's timing of entry was perfect, thus starting its legendary experience in the crypto world.
Just three years later, on November 15, 2021, Paradigm announced that it would establish a $2.5 billion crypto venture fund, the largest crypto asset venture fund ever, surpassing the $2.2 billion fund raised by Andreessen Horowitz (a16z) in June 2021.
This further helped Paradigm establish a leading position on par with a16z and others.
02 Full of academic research atmosphere, once the "VC with the highest satisfaction in the circle"
Paradigm has invested in many star projects, from StarkWare, Mina, Uniswap, Compound, MakerDAO, Yield to Optimism, Amber, Fireblocks, Synthetix, Opyn, TaxBit, BlockFi, Chainalysis, Gitcoin, Lido, dYdX, FTX and so on.
On July 17, 2021, someone initiated an open anonymous survey and voted to investigate the VC rankings in everyone’s minds. The results showed that the top ten venture capital institutions were Paradigm, 3AC, Delphi Digital, Framework, Multicoin, eGirl Cap, Defiance, Parafi, CMS Holdings, and Polychain, with Paradigm ranking first.
It is no coincidence that Paradigm has become the VC institution with the highest satisfaction in all aspects. Unlike other venture capital firms, Paradigm not only relies on various resources for support, but also has the temperament of its founder, and Paradigm's own research team is very strong.
Therefore, Paradigm often deeply participates in the projects in which it invests, and personally helps to complete the economic model design. Among them are many well-known industry-leading projects, thanks to its top researchers (papers are often forwarded and shared) and top computer experts (some members have received millions of dollars in bounties for vulnerabilities).
The Paradigm research team is undoubtedly best known for the design of Uniswap V3's new automated market maker (AMM) solution, which was publicly praised by the founder of Uniswap.
Other research results are also full of academic atmosphere and full of practical content:
- Paradigm helped dYdX design its economic model and fully decentralized solution;
- The Opyn team and the Paradigm research team jointly released the "perpetual options" product Squeeth, which has been audited by ToB, Akira and Sherlock;
- Paradigm research partner proposed NFT-based primitives Martingale Shares, which can be fragmented or developed into derivatives;
- Paradigm research partners proposed an NFT derivative solution, Floor Perps, which can lock NFTs to mint synthetic NFTs that track the project's floor price;
In addition, there is TWAMM, a new market-making model designed in cooperation with the founder of Uniswap, and so on.
Display of some research results
03 The cyclical shift of “Crypto VCs”
Paradigm is not the first venture capital firm to adjust its investment strategy in the crypto space. Especially in the crypto bull-bear cycle since 2020, venture capital firms that shined in the traditional Internet era first rushed into the market and made high-profile investments, but gradually returned to rationality as the market slumped.
The most typical example is the red shirts that frequently send high-profile All in Crypto and Web3 signals:
On December 8, 2021, Sequoia Capital changed its Twitter profile to "Mainnet faucet. We help the daring buidl legendary DAOs from idea to token airdrops. LFG", and invested in multiple crypto projects in a high-profile manner (including FTX, which later lost $150 million), but then quietly changed it back.
Not long ago, Temasek, a Singaporean national investment fund that suffered heavy losses in the FTX incident, also cut the salaries of senior executives and the investment team responsible for investing in FTX (Temasek invested approximately US$275 million in FTX and FTX US, all of which has been written off).
So from a business perspective, Paradigm's decision to shift from Crypto to the currently popular new technology fields such as AI is understandable. After all, as a venture capital firm, it is also responsible for LPs. Moreover, in the current gloomy market environment, Paradigm, which has billions of funds, may not be able to find enough high-quality projects in the crypto world to spend the money.
Under the meme wave, "king-level projects" with large amounts of financing such as Aptos and Sui are becoming less and less popular in the market. The huge risks of single high-valuation investments such as FTX are not far away. There are indeed not many optional paths, and gradually breaking out of the encryption field has become an almost inevitable option.
However, as a crypto-native VC that grew up from Crypto dividends, Paradigm’s shift is tantamount to "betrayal" in the eyes of many crypto-Maxists.
Since 2020, we have successively experienced the optimism of cheering for the rush of traditional VCs into the market, accusing many projects of forming different factions due to capital support, and now the resentment of the "betrayal" of native VCs in the circle, which corresponds exactly to a complete market cycle stage.
After going around in circles, it is actually just the reincarnation of the market. Having come to this point, the arrival of the next cycle does not seem to be far away.
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