InvestmentOutlookofPepperVenturesin2023

by 0xC&D, Pepper Ventures

In the past six months, we have basically clarified our strategy, built a team, started to show our skills in investment, and established a project reserve that is good at technology. We have gained a certain reputation and influence in the industry, and laid a solid foundation for our ambitious plans in 2023. Against the backdrop of a bear market in which the Federal Reserve raised interest rates and a series of “de-leveraging” liquidation actions in 2022 (figure below shows that on-chain leverage drastically reduced with -76% YTD in 2022), we made prudent investments and gained valuable investment experience.

In the new year, Pepper Ventures will be focusing on the following investment tracks.

Zero-Knowledge Proofs

Zero knowledge Proofs (ZKPs) are foundational technologies that work as one of important frontrunners in privacy-preserving applications, blockchain scalability, and much more.

For its privacy-preserving applications, we are particularly interested to see whether more innovative applications come up. We have already seen some privacy-focused applications such as ZCash and Tornado Cash. Currently we look forward to seeing how we can utilize ZKPs in decentralized identity wallets/middleware, attestation services, and cross-chain, interoperability or bridging protocols.

A scaling solution in blockchain layer 2 that uses zk-SNARKs (a special form of ZKPs) is called zk-rollup. While still more of an emerging, experimental paradigm, leading zk-rollup platforms, such as zkSync and Starkware, performed well throughout the year, especially through the second half (see the figure below). Also, we have seen VCs are quite enthusiastic about the zk-rollup sector, with valuations of the top zk-rollup projects, Starkware and zkSync, reaching $8B and $1B respectively.

We believe in the zk-rollup technology but we also notice that the current rollup solutions are highly homogenous and are still in their infant stage. Thus, we view the zk-rollup solution as a potential long-term investment opportunity. As the majority of zk-rollups have not even come to the full production stage yet and their core competitiveness is still being developed, attention should be paid to the impact of valuation levels on subsequent earnings.

With a strong background in crypto mining and hardware production, we also naturally focus on hardware, especially the hardware acceleration of the ZKPs sector. Multi-Scalar Multiplications (MSMs) and Fast Fourier Transforms (FFTs) have been bottlenecks in the proof generation process. In proof systems where both FFTs and MSMs exist, about 70% of the time generating a proof is spent on MSMs, and the rest is dominated by FFTs .Both MSMs and FFTs are slow, but have acceleration techniques of improving their performance and these techniques can be implemented on multiple hardware technologies: GPUs, FPGAs, or ASICs. We notice that multiple startups have been building solutions to accelerate the proof generation process using these hardwares and also we notice some barriers they met in practice. We’re probably multiple years away from hardware acceleration of ZKPs becoming practical and we expect the final winning players in the market will be companies that focus on FPGAs or ASICs, depending on lots of tradeoffs between ZKPs and hardware performances.

Furthermore, we believe the basis of the core value of WEB3 is sovereignty, and the extended track of ERC721 assets formed by this is also our long-term optimistic direction, such as GameFi, NFT trading market, Social and so on. We provide more details below.

Social

This trend is coming along with damus.io, funded by Jack Dorsey, the founder of Twitter. It will give this track some nice pushes and now the pressure is on Stani, co-founder of Aave and Lens protocol. Despite the bearish market in 2022, Lens managed to grow from 0 to over 140K profiles, which as a infrastructure in social, created a core user base to embrace all the possibilities upon it, e.g. Youtube-like, Twitter-like, Tiktok-like dapps etc.. As you can see in the figure below, the number of new wallets for those social applications have been increasing throughout the last year. With the instrument of NFT to document, to measure, to store and to feed the machine learning algorithm, we behold a very positive outlook of social applications in the coming circle.

DeFi

As one of the fundamental elements of WEB3 and blockchain, DeFi shall keep being the trend pointer to the industry and most essential liquidity generator. Especially, when Aave and Curve have announced their stablecoin plans, there must be more than we expect and the first to show growth before any other tracks on blockchain.

However, it’s becoming a pro-game and not heading towards a user-friendly direction. We are evolving with it and keep learning from it.

NFT

We view NFT as the core of WEB3. It not only represents ownership, but also represents compatibility with any assets in the world including tangibles and RWA (Real World Assets). Once there’s a solution of compliance to it, we shall observe a tremendous growth of RWA based on NFTs and all the marketplaces that support it.

GameFi

With a definite forecast, there will be at least one GameFi coming out from WEB3 and shaking the world, the question is which and when. The investment firms have played some eye-dazzling chips on it and we will keep looking at this track. However, we do not hold high expectations on the survival rate.

Artificial Intelligence

ChatGPT certainly has drawn the world’s attention to AI and reflected how humans can remind or redefine ourselves. Even though it seems a little out-stretched in WEB3, the only thing we’ve learned along with all the past three circles is that “it doesn’t matter!”, when it pumps it pumps!

At this moment, we observe that the investment environment in the WEB3 field is still immature, the investment form is not perfect, the pricing system lacks a systematic study, the exit method after investment is single, and there is a lack of exit methods such as mergers, acquisitions and listings that should be available. Based on the background of the Pepper Ventures team, which is backed by both the US capital market and various WEB3 investment firms, we hope to embed institutionalized capital market operations into the wild WEB3 environment, help identify high-quality projects/companies, and support founders move closer to become rule makers of WEB3 investment and trading rules. Also, our advantages in SPAC (Special Purpose Acquisition Companies) can be leveraged by a series of capital operations, such as approaching, positioning, financing, mergers, acquisitions and then exits, to help excellent WEB3 companies exit from the traditional capital market.