While the crypto ecosystem has seen many investors come and go, there are a select few funds which have held true through it all.
One of those coveted teams is that of 1kx – an entirely token oriented fund focusing on being the most founder-friendly and helpful source of early-stage capital for web3 projects.
In this interview, we sat down with Lasse Clausen – a founder of 1kx – to discuss his view on the current DeFi landscape and where users should be pointing their attention in the coming months.
We covered a lot of bases so let’s get right into it!
What was your background before starting 1kx?
Prior to blockchain, I was a software entrepreneur in Berlin. I was one of the first users of Product Hunt during the peak application days. I remember wanting to know what it was like to pay with a mobile phone in 2012 and was largely fascinated by the mobile user experience which was largely underdeveloped.
When I tried to wire money to Mt. Gox to buy my first Bitcoins, I had to send a wire to Japan but it didn’t go through. This actually led me to buy OTC Bitcoin at the Room77 Bar in Berlin, which was apparently the first place to ever accept Bitcoin as a payment method.
The mobile Bitcoin wallet actually had a pretty great UX but I felt like it wasn’t going to win the payment adoption war. I met Amir Taaki and some people from the early Ethereum team in 2013 and quickly saw the value in what they were building. While Bitcoin is only a payment network, Ethereum is a platform for so much more. Whatever gets built on top of it I benefit from – largely tying into the fat protocol thesis.
It was at that point that I made the decision to turn all my Bitcoin into Ether during the Ethereum ICO. I was passively watching it on the side for the next few years and at the end of 2016, decided to come in full time.
As an application layer entrepreneur, I was tempted to explore building my own products but decided to do funding instead. This is how 1kx was born.
What was it about 2016 that caught your attention?
I started to see another hype cycle forming. Mainstream adoption is sticky and I knew that every cycle would likely bring in new kinds of people. It wasn’t really a matter of if, it was more a matter of when crypto would happen. Before 2016, in my mind, there were still some chances of things going to zero.
We were largely focused on core infrastructure in the form of layer one solutions which had a clear niche or difference from Ethereum. The Ethereum network effect was – and still is – huge. I didn’t want to bet against that and instead started focusing on innovative web3 systems like Arweave.
Big news: We have announced a major new funding round with @a16z, @usv and @coinbase. We are using this funding to start a series of initiatives to empower the Arweave community! Read more here: https://t.co/rEC03nx04w 📢🚀🗞️
— Arweave Team (@ArweaveTeam) March 5, 2020
In the last 6-9 months, all the focus has been on DeFi protocols, and our attention has slowly been moving up the stack as far as where we invest today.
What were some of the first DeFi projects which caught your attention?
Nexus Mutual is also fascinating, as it’s almost like an index bet on all of DeFi. No matter who wins, part of the value locked in DeFi will need to be insured, and Nexus is here to do that.
The challenge of Nexus is that there’s almost like a contentious hard fork every couple weeks or months. Whenever there’s a claim that needs to be filled, you have to have humans reach consensus which naturally is pretty difficult.
Usually the people trying to get paid out from a cover just lost a lot of money and are very emotional. The last hope for them is Nexus Mutual. That’s why the mutual’s members need to be prepared to have a rational conversation and be well informed on what happened.
It’s a very nice challenge, but inherently very difficult.
Pretty historic moment. The world's first decentralised insurance mutual just made their first payouts for a total of $31,120 . No forms were filed and payment was automatic. https://t.co/2zP5AoHz8k
— Lasse Clausen (@lalleclausen) February 19, 2020
For example, with the most recent Keeper exploit, we still need to understand what happened with the 0 DAI liquidations. There are now a number of claims on Nexus asking to be paid for what happened. Not to mention, all this is time-sensitive. Even when things are falling apart, members have to stay informed with all the misinformation going around.
To me, that’s why the Nexus Mutual Discord is one of most interesting places in all of crypto.
How much does the NXM token model play into your decision to back the project?
I’ll put it like this: If you’re bullish on ETH, it’s unlikely you’re going to lose money against ETH if you invest in NXM. Every time someone buys insurance, the price moves up a little bit on the bonding curve.
At the very least, you have a baseline of delta verse ETH plus a bunch of potential upside. On top of that, you have a clear product-market fit (covers are constantly sold out) and a fantastic team tackling one of the best native use cases of blockchains (scaling trust among a large number of actors).
And what would you say Nexus’s competitive advantage is to other insurance projects like Opyn?
The choice to be designed as a mutual means the project can become undercollateralized and ultimately more capital efficient. This gives it the potential to provide the most cover for middle-risk situations at the best prices. I believe this leaves it best suited to scale. Opyn and options are very good for specific insurance that is inherently harder to price.
Let’s talk about the larger DeFi landscape. What’s excited you recently?
I’m very excited about undercollateralized lending, especially when an over collateralized lending project like Compound just raised $25M. The size of undercollateralized lending is 20x the size of this lending so I’m excited to see how that makes its way into DeFi.
With that in mind, undercollateralization is vastly more complex on a protocol basis. This is why the potential for a global credit protocol – specifically an undercollateralized one – is massive.
From interbank lending keeping banks solvent through liquidity crunches, to venture capitalists putting millions($) in the hands of those with just an idea as collateral…
The ability to access credit drives growth in an economy at every level. https://t.co/A6rDjwKigD
— Lasse Clausen (@lalleclausen) February 5, 2020
When I met Jacob from Union, I quickly recognized he was one of the first people to address this and was very thoughtful about the topic. His design was very purposeful. It does very little which allows parties to build on top of it extremely well. When I heard about the Union Credit DAO, I was immediately interested.
Let’s shift gears to DEXs – Why do you think they’re getting so much traction recently?
While many like to think centralized exchanges are better because of their perceived liquidity network effects, this isn’t always the case. There’s this awesome video on Binance vs Kyber which shows how MetaMask trades are virtual instant. With Binance, there are tons of hurdles and with Kyber, you actually get better spreads.
Eventually, this will all catch up. If something is a bad service at a high cost, it’ll have to change.
This is why I’m very excited about futures exchanges as well. The ability to offer high leverage makes them very explosive and projects like FutureSwap which offer smart liquidity incentive mechanisms have the potential to be widely successful.
For those who haven’t heard of FutureSwap, you can expect 20x leverage with liquidity and volume for almost any token on the market. These products can mitigate a lot of risk and I think we’re only seeing the tip of the iceberg for what’s possible.
Automated Market Making Futures without price slippage: https://t.co/4tFY2CWGoJ
— Futureswap Exchange (@futureswapx) March 10, 2020
Let’s talk about 1kx investment strategy – what does it look like?
It’s simple really, we invest in tokens only. We’re open to investing in equity, but only if it converts to token at a later date.
Tokens create an incentive for open-source software. We’ve seen that peer review brings trust and had very large software networks been open-sourced, it’s likely we would have prevented crashes like with Boeing.
Further, tokens help mitigate the chance of monopolies. Open-source software is amazing, but there was never an incentive structure in place to sustain them. With tokens, projects can remain open source but have incentives which give their users economic upside.
Crypto Investor @lalleclausen from @1kxnetwork is sharing his line of thought at @EthCC_ on why they are token maximalists
1. Better than free
2. Permissionless innovation
Aligning the interests of all parties #EthCC #Crypto #Investor #Tokens #Blockchain pic.twitter.com/cnp61Q7z47
— Sebastien (@borgetsebastien) March 3, 2020
A shitty token is better than a business model.
Even simple governance is worth it to us as it illustrates how much value can be unlocked.
Imagine if Facebook had a governance token that shared control over the Newsfeed algorithm. It would trade into the trillions. Now I’m not saying we *should* do that, but it’s a great example of how much value there is for people to ascribe to.
In my mind, payment tokens are pointless and collateral tokens might not be panning out as we are seeing with SNX. Maker’s token model is good as the Stability Fee isn’t to enrich people, it’s more to regulate the supply, yet you it serves to incentivize MKR holders to take on risk of the system. Just as designed, we’re now seeing MKR holders footing the bill for the recent liquidation scenario.
How do you think DAOs help enhance governance?
When people don’t have a choice, they start revolutions. When we have a choice, even if it’s negligible, it’s extremely powerful.
With the DAO model, the construct of users and owners becomes one. The votes of a DAO is still largely a social signal, but at least you have a timeline and efficiency for a community to vocalize their stance on a given issue.
Where are DAOs going to work the best?
I believe it works best in small communities, like the MetaCartel Ventures experiment. More successful funds have tended to have small investment committees.
Our mission is to fund & back teams on the frontier.
Those who are building DApps crypto-natively with a community first ethos. Community is everything.
If you want to go fast, go alone.
If you want to go far, go together.
👑 We are now live: https://t.co/Pi3gbX9yGZ
— METACARTEL VENTURES (@VENTURE_DAO) March 1, 2020
MakerDAO is interesting as it seems to scale very well.
In the end, all protocols should become DAOs. For example, Polkadot has very elaborate governance and I’m excited to see it play out in the wild.
What’s a contentious opinion you have about DeFi?
We’re not sure liquidity is a moat. Most people think that we’re going to attract liquidity and then become invincible. However, I’m not sure that’s the case.
This is how Uber was pitched – “We have our app on the phones of 500M people.”
While I agree that most people are largely lazy when it comes to changing providers, in its current stages, crypto capital is highly mobile.
To me, the defensible moat is yield. High yield leads to lots of capital.
How does yield in DeFi compare to something like returns on ICOs?
It is for retail people but still with some nuances. I thought that the new version of Dharma was awesome. However, when I showed it to friends who are not in crypto – they didn’t believe an 8% annual return was real. They thought it was too high and that the project was a scam.
Due to fluctuations in the cryptocurrency markets and in the broader economy, interest rates on Dharma have increased significantly.
Make a deposit today to earn over 15% APR*!
— Dharma (@Dharma_HQ) March 12, 2020
I’ve learned that people get suspicious when discounts/savings are too high. Even with our portfolio project Terra, conversions actually go down when the discounts are high.
Taking a step back, ICOs were a completely different category – they were a lottery experience. There was extreme risk because there was a real chance of being able to retire off one good investment.
Savings accounts are mainstream. Lending and borrowing are mainstream. What we need to work on is fixing the onramp experience. I’m still looking for a cheap onramp infrastructure with stablecoin integrations. If we need to pay 1 – 2.5% for all money going into crypto it’s going to decimate lending yields.
A good example of this is Flexa with their NCR terminal integration. As it stands today, cashing checks has a high admin cost. Now imagine in the future you got to Walmart and instead of waiting to cash the check at the counter, you plug it into an NCR terminal and load stable coins onto any app that has the FlexaSDK integrated. The user just sees dollars, but under the hood could be using DAI and they can also spend it at McDonalds and Starbucks.
What’s the current state of the 1kx fund?
We’re actively investing, especially now. And we’re an open ended fund which means we can continue taking in new capital.
To generalize, we’re looking for large software networks. We follow the Silicon Valley network investing style but with the twist that they should be open source token networks. We think the tokens are rocket fuel for network effects and massively jumpstart the bootstrapping phase while allowing them to scale to be larger than companies because the incentive alignment of the different actors in the network is much better.
Think about it. No one voluntarily supports Facebook – at this point, it’s essentially pure extortion. This is contrary to a situation where it could be tokenized so that publishers and their articles published can participate in the upside, blurring the lines between users and owners. Users would have a sense of ownership and sovereignty. Everyone can come together for a more frictionless experience.
This is the type of stuff we’re looking to fund at 1kx.
For our readers eager to learn more about 1kx, we recommend following them on Twitter.
As one of the most active investors in the space, Lasse is a frequent attendee at virtually all major Ethereum events, making him one of the most approachable fund managers I’ve spoken with to date. You can follow him on Twitter here: https://twitter.com/lalleclausen
As someone constantly pushing forward new initiatives like HouseParty during the global pandemic, there’s no doubt that he and his fund have a clear vision for how the future will unfold.
Until then, be sure to keep a close eye on their portfolio projects to make some noise in the coming years!
Cooper is focused on building compelling blockchain products. He currently works as the managing director at Fitzner Blockchain Consulting and is a contributor to DAOs like MetaCartel and Moloch. He is an active member of the Ethereum community and has a strong interest in for-profit businesses such as The Block Crypto and Messari.