Mind the Gap
February 14, 2023
Welcome to the M31 Capital Investor Newsletter! We use this platform to share monthly updates on the industry, our views on the broader market, important crypto-native metrics, as well as to highlight specific DeFi & Web3 protocols we find interesting.
We at M31 Capital have staked our careers and our reputations on the success of this technology. As always, we thank you for putting your trust in us and for your support of this new asset class. Please feel free to reach out to our Investor Relations team with any questions, ideas, feedback, or just to say hi: contact@m31.capital.
Nathan Montone
Chief Executive Officer
M31 Capital Management, LLC
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- News: Fed slows rate hike pace & crypto buy pressure faces zero sellers
- Narrative: Bear market for price, Bull market for everything else in 2022
- Highlight: Render Network (RNDR) allows users to earn money renting their spare GPUs to render visual effects for Hollywood movies, AI apps, & more
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2022 YEAR IN REVIEW LETTER
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Insights from 2022 & predictions for 2023
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Sponsored by: Blockware Solutions
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January Performance
Market highlights and rationale from a selection of the most interesting assets in the industry:
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(NOTE: M31 Capital may hold positions in the tokens listed)
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P A R T N E R H I G H L I G H T S
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M31 Capital is currently accepting new investors globally
We are open to qualified U.S. & non-U.S. investors
(including self-directed IRAs)
Contact us to see if you qualify
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A Market With No Sellers
The market rally in January kicked off a strong start to the year as the Fed slowed the pace of hikes for the first time since before the COVID crash took rates to zero, signaling the beginning of the end of the sharpest and fastest tightening cycle in history.
As the market priced in the possibility of a soft landing, the incoming buy pressure faced zero resistance. There are quite simply no sellers in crypto. Individuals who wanted to sell had over a year to do it, and those who didn't want to sell but still lost funds on centralized platforms are now scrambling to buy back in.
The collapse of exchanges and major market makers last year also means even the part of the market that's OBLIGATED to take the other side of a buy order... doesn't exist.
Nature is healing.
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Web3
Extremely strong performer this month as the market started catching on to a lot of the positive tailwinds we've been discussing since launching our Web3 Opportunity Fund in November.
Excitement over GPT3 and the AI narrative captured the Web3 space, and sent AI-related tokens (even if in name only...) screaming higher. The computational intensity of AI products also boosted the value prop of Web3 infrastructure like RNDR (covered in the Protocol Highlight section below) which will be necessary to scale AI beyond the limits of centralized servers like AWS.
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DeFi
The DeFi sector also did well, as a large amount of dry powder and stablecoins came off the sidelines and back into the market. Stablecoin dominance (the % of crypto mcap held in USDC, etc.) fell from ~17% to ~12%.
And with one less exchange to handle the inflows to both spot & derivs trading (*cough* FTX...), DeFi derivatives DEXs in particular caught some positive attention. Activity on DEXs like INJ, GMX, DPX, DYDX, & SNX jumped. A win for self-custody.
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TL;DR
As we said at the end of last year and in our annual letter, the market was aggressively oversold. Now, nearly all the leverage, speculation, and bad actors have been flushed from the industry, things are finally starting to turn around on the macro front, and most importantly, fundamentals like usage and revenue continue to trend higher.
Now back to crypto's regularly scheduled programming.
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N A R R A T I V E F O C U S
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Mind the Gap
A lot of stuff happened in 2022 - a lot - so I definitely suggest taking the time to read our 2022 Year In Review letter if you haven't yet.
But, to summarize the almost 40-page report in a Tweet: 2022 was a Bear market for prices, but a Bull market for nearly everything else.
An ATH funding ($40bn) poured into the sector, usage & revenue hit ATHs for many assets as global adoption went parabolic, both Web3 & DeFi found incredibly strong product-market fit, innovation flourished, longtime tech problems were finally solved, the world’s top tech talent flowed into the space, bad actors flowed out of the space, and speculation & leverage disappeared.
DeFi operated flawlessly 24/7/365, protecting consumers from financial sociopaths like SBF in the centralized finance world, while Web3 came to the rescue of citizens around the world, protecting them from political sociopaths like Putin.
This uptick in use of decentralized tech drove many onchain fundamentals like usage, adoption, revenue to all time highs, while fear (and a leverage washout) drove prices lower.
I've said for a while that this trend of improving fundamentals and declining prices would not last forever - it's just not how markets work. Eventually price mean reverts to close the gap with fundamentals. And that's exactly what we saw in January.
The under-the-radar improvement in fundamentals last year was particularly strong for Web3 infrastructure protocols which is why that sector was the top performer last month.
Web3 Metrics
Ethereum Name Service (ENS) ignored the bear market and quietly reached ATH sales last year. The decentralized domain provider has sold >2.5m domains to date, collecting >$55m in a bear market, an amount that is wholly owned by ENS tokenholders.
What I love about this is not only that ENS is a profitable protocol with real users paying real money for the product, but also that domain name purchases are a leading indicator that people building something for the long term.
These users aren't going anywhere.
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Decentralized video streaming protocol Livepeer (LPT) also saw ATH usage (>200m minutes of video transcoded) & ATH revenue (>$850k).
Livepeer migrated to Arbitrum, reducing gas fees by 97% and significantly increasing network usage from dozens of projects like Huddle01 (below). The uptick in usage led to a large uptick in revenue which jumped +25.8% y/y.
Everything relies on video. Every website, app, streaming service, gaming platform, etc. and the demand is increasing exponentially. So is cost. While Web3 moves to Livepeer for superior privacy, censorship-resistance, and permissionless innovation, Web3 is moving to Livepeer for the 10x cost savings.
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Huddle01 (HUDL), a Web3-native Zoom, has been remarkably impressive since launching into a bear market. Every single metric hit an ATH every single month of 2022. ATH users (>16k), ATH usage (>400k minutes to date), ATH meetings (>27.5k), among others.
Critics say blockchain tech is a solution looking for a problem. My problem? Zoom sucks. Terrible audio & video quality, 40 pop-ups when joining a meeting, username/password account log in, bad UX/UI, and apparently everyone's chill with them spying on us...
Huddle01 uses blockchain tech like Livepeer, Filecoin, and Ethereum Name Service to solve all those problems, and since it's superior features appeal to both Web2 & Web3 users, it's TAM is ultimately larger than Zoom's.
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Another example of the real world impact of blockchain tech is Helium (HNT), the decentralized AT&T building a globally decentralized wireless network for the decentralized internet.
Price fell in 2022 even though Helium made enormous progress, forming partnerships with established IoT and 5G companies such as Microsoft & DISH Network, and increasing the total number of hotspots +116% YTD to a total of 980k globally (ATH network size). Helium also expanded their global coverage +120% YTD, providing coverage for 188 different countries (ATH country count) and 76,611 cities (ATH city count).
The protocol is now expanding into 5G, Cellular, VPNs, and began the offline buildout of other, real-world networks.
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And speaking of significant, tangible, positive impacts of blockchain tech, Arweave (AR) saved Ukraine and reached ATHs doing it. As Russia attempted to erase Ukraine's independent history, Arweave demonstrated its real-world utility by documenting over 90 MILLION cultural documents and events related to the Russian invasion.
The network saw ATH usage & ATH revenue growth as the amount of data stored on the platform reached 71.3 terabytes, +103.2% y/y growth, increasing revenue +84.5% y/y.
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Conclusion
Prices were down all year in 2022, but not because people stopped using Web3 products, or because Web3 products stopped innovating, or because that innovation lacked funding. The opposite. A lot of those metrics hit All Time Highs last year and the metrics look even better so far this year.
So January's rally was an early sign that the enormous gap between price & fundamentals starting to close. As investors look at the data and realize these protocols are profitable, heavily demanded, invaluable to the world, and here to stay...
(...and are dramatically undervalued
...and the bad actors are gone
...and the leverage is gone
...and the Fed is pumping the brakes on rates)
That gap will close.
Mind the gap.
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If you are interested in investing with M31 Capital, visit this page to access our subscription materials.
You can also reach our Investor Relations team at: contact@m31.capital
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P R O T O C O L H I G H L I G H T
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In our ongoing effort to be a value-add educational resource for our investors, we include a section in each newsletter highlighting an interesting or important part of the crypto ecosystem
Render Network (RNDR)
The Render Network is a decentralized GPU computing protocol for rendering content like Hollywood movies, Disney animations, construction modeling, healthcare imaging, AR/VR, gaming graphics, AI, and more.
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Why It Matters
Using GPUs the cloud to render 3D and other visual effects is a lot cheaper than having dedicated supercomputers running in-house. The catch is you need a lot of them. So Render built a globally decentralized, blockchain-based network where millions of PCs (and soon mobile phones) can earn money renting out their spare GPUs when they're not in use.
Your iPad Pro can become an additional income stream rendering graphics for the next Hollywood blockbuster while you sleep.
It's a win for all but the centralized Big Tech behemoths:
- Makes rendering a lot cheaper, meaning higher quality movies, games, AR/VR apps, medical imaging, AI tooling, etc. for everyone
- Gives everyday users the ability to participate in the network, processing rendering jobs, and earning an additional revenue stream
- Takes power away from centralized Big Tech commercial cloud computing infrastructure, like AWS, known for price gauging & censorship
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- Decentralized: Render is far more scalable because it leverages a distributed network of computers rather than a fixed number of servers in a fixed number of data centers.
- Affordable: Because it doesn't require the initial buildout of large scale data centers, Render offers rendering services at a much lower cost compared to traditional centralized solutions.
- Faster: Render can process a typical job 50x - 100x faster than when processing through centralized servers.
- Profitable: Render's token (RNDR) is the currency of the platform, incentivizing users to participate and contribute computing power for rendering jobs.
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Usage & Network Growth
The protocol has seen a significant rally, +443.4% over the last few weeks, as investors pay attention to growing fundamentals and long term partnerships.
Render Network is built on the Ethereum blockchain, allowing a permanent track record of all rendering jobs to make sure that buyers actually get what they ordered, and track rights associated with those jobs. Also, users who take on rendering jobs get paid in tokens.
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Takeaway
Render is another prime example of a Web3 protocol whose token price suffered last year despite immensely improving fundamentals and adding real value outside the crypto world.
The protocol uses blockchain tech to solve a problem Web2 simply can't. It can be used by both Web2 & Web3 users alike. It's simultaneously less expensive for GPU consumers and more profitable for individual GPU providers.
The protocol profits from multiple tailwinds like the increasing growth of everything from gaming to healthcare to AI, as well as recent partnerships with companies like Apple who recently integrated Render into the iPad Pro.
If you want to go more in depth into Render, read our detailed thesis on Render Network here.
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If you want to start working at a Web3 project today, take a look at M31 Capital's Jobs Board to find opportunities with some of our portfolio protocols
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W H A T W E ' R E R E A D I N G
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A selection of our favorite long form content this month:
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U P C O M I N G E V E N T S
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The M31 Capital team will be speaking at and attending a number of upcoming conferences and events. Please reach out if you are interested in connecting, or better yet - meet us there:
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