DFG’s James Wo Talks Investment Strategy, 2024 Crypto Predictions, and Advice for VCs

Life as a blockchain venture capitalist (VC) mirrors the industry’s capricious nature defined by market instability, low liquidity, price spikes, and human emotion. In Q2 of 2023, VC crypto funding totaled just under $2.3 billion, marking the lowest quarterly level in over three years, according to PitchBook . Investments in the first half of 2023 slowed down by almost three-quarters compared to a year ago, totaling $5 billion. 

VC investment trends in 2023 shifted away from speculative areas like NFTs and metaverse, focusing more on the foundational aspects of blockchain technology. Crypto infrastructure firms, including exchanges and wallets, attracted $325 million in investments, surpassing blockchain networks ($220 million) and Web3 companies ($274.6 million), as per PitchBook . Notably, the second quarter witnessed only two funding rounds exceeding $100 million, with LayerZero and WorldCoin securing substantial investments in blockchain connectivity and digital identity, respectively.

Some firms, such as Digital Finance Group (DFG), have responded to this climate by diversifying their business interests. As a veteran blockchain VC, DFG boasts early support for companies including LedgerX, Ledger, Coinlist, Circle, and ChainSafe, alongside protocols such as Bitcoin, Ethereum, and Polkadot. 

In an interview with James Wo, the Founder and CEO of DFG reflects on the challenges and developments of the past year. Wo shares his vision for the coming year, thoughts on Polkadot and Layer 1 ecosystems, and offers tips for fellow VCs looking to consolidate their place in the crypto investment space. Despite industry challenges, DFG stands as a testament to the enduring resilience and adaptability of VC firms in the crypto landscape.

How do you reflect on the developments and challenges DFG faced over the past year, particularly considering its diverse investment portfolio?

DFG has built a large investment landscape. We have invested in 100+ crypto projects across multiple mainstream sectors such as Web3.0, Layer-1s, CeFi, DeFi, NFTs, etc., with well-known names such as Circle, Ledger, Coinlist, FV Bank, Astar, ChainSafe, and so on. These diversified portfolios have posed considerable challenges to our post-investment management services.

After more than 8 years of practice, DFG adheres to the investment service logic that crypto VCs are not only investors but also immersive participants in the whole decentralized blockchain network and community. The vast majority of crypto projects are in the startup stage. They not only lack startup capital support but also need corresponding product and technology guidance, marketing and business development consulting, etc. It involves a whole set of post-investment management services, which take up a lot of our team’s energy and time.

But regardless of the bull and bear markets, we maintain a consistent level of enthusiasm and professionalism in treating and servicing all of our portfolios. In the case of Polkadot, for example, not only did we provide crowdfunding for the project, make development suggestions, and continue to publicize the project through social media, but we are also the only investment firm in the industry that has continued to publish Polkadot’s annual reports since Polkadot’s mainnet launch, which has also made a significant contribution to the entire Polkadot ecosystem. 

What are your general predictions and expectations for the industry in 2024,  are there specific trends or tech advancements you anticipate will have a significant impact on crypto?

2024 is a very exciting year to look forward to.

For starters, BlackRock, iShares, Valkyrie, and other notable firms are actively applying for Bitcoin Spot ETFs, which will help bring Bitcoin and the crypto industry into the mainstream, potentially bringing in a massive infusion of traditional money. We expect that with the approval of the U.S. Bitcoin Spot ETF, the fourth halving of Bitcoin, and the easing of overall U.S. macro policy, a Bitcoin bull market is expected to kick off.

Secondly, the world’s second most popular cryptocurrency, Ethereum, will complete the Dencun upgrade next year, and the progress of Ethereum’s scaling technology is one of the core hot topics in the crypto world. After the Dencun upgrade, it is expected to help Layer-2 Rollups further reduce costs and increase throughput, which will stimulate more dApps to be deployed. In addition, Ethereum has now entered a deflationary phase, and with the arrival of the bull market, there will be more and more use cases, and the burn of ETH will continue to increase, also further increasing the value of Ethereum.

Once again, in addition to Ethereum, other blockchain infrastructures are also experiencing a lot of innovation and breakthroughs. For example, modular blockchains are emerging, modular blockchain is more flexible and malleable than traditional monolithic blockchain. Zero Knowledge Proof is also a key focus to watch, with ZK Rollup yet to explode compared to Optimism rollup projects (such as Optimism and Arbitrum) dominating the current Layer-2.

Finally, we also hope to see greater development of eco-applications and the user side while the underlying infrastructure continues to improve. Although this is not our key investment direction at present, the ultimate goal of developing the underlying technology is to bring users a good product and application experience. Account abstraction (AA) wallets, socialFi, GameFi, and applications combined with AI are all directions worth studying.

How do you view the current state and future potential of Layer 1 ecosystems, has this year affected DFG’s future outlook on them? 

We believe that Layer 1 is an eternal investment theme in the crypto industry. From Bitcoin and Ethereum to Polkadot and Solana to Move-based chains such as Aptos and Sui, the development of Layer-1 public chains has been seen throughout the entire history of the crypto industry. Most of the top 30 crypto projects by market capitalization are Layer-1 blockchains, which proves that Layer-1 is still the dominant player in the industry. Of course, the current Layer-1 development is also relatively mature, with many projects of varying quality. We focus on projects with unique barriers to competition rather than mere imitators, such as projects that dominate a regional market or have unique technological innovations.

Taking our portfolio companies as an example, Astar is very popular in the Japanese market, and is also working with Polygon to develop its zkEVM, and will further expand Astar’s adoption in Asia and globally through Layer-2 in the future. Layer-1 has already seen a significant increase in both market capitalization and ecosystem activity this year as the bullish expectations of the impending approval of the U.S. Bitcoin ETF get closer. So we’re going to be even more bullish on these portfolios going forward.

Given the dynamic nature of the crypto industry, how do you advise VCs to navigate shifting trends while maintaining focus on their current investments?

What DFG does is not so much follow the trends as lay out the trends before they arrive so that we can be successful in the ever-changing industry of bulls and bears. Take the recent $4.3 billion settlement by Binance, the AI boom, and the Bitcoin spot ETF as some examples. We invested in regulated CeFi projects such as Circle, FV Bank, and AI project Render at an early stage and have bought and held positions in Coinbase and GBTC at an early stage in the secondary market, because of which we have outperformed the Bitcoin rally this year in our secondary investments, and there are many more examples of such success. 

Another important point is that we believe VCs should give full play to their expertise and experience instead of following the trend of investment. Often we are confused by appearances; Only by being professional enough and making independent judgments can we not lose ourselves in follow-the-wind investments, and this is the lesson that the FTX crash has taught us. As noted in the question above, DFG’s focus on Layer-1 and underlying infrastructure investments as long-term value investors will not change. We have consistently focused on the development of the underlying blockchain infrastructure and, as a result, have accumulated a wealth of experience. We will continue to focus on cutting-edge technologies and innovative projects in this area in the future.

While Web3 is still in its early stages, we would like to suggest that investors consider the long term, acting not only as financial investors but also as industry builders. By doing so, they can participate in the investment and allocate more resources to the development of new technologies and innovative business models. This will not only better aid in the development of the project but also allow us to sense and understand the state of the industry and its trends, which is also one of DFG’s consistent values.