Santiago Roel Santos, partner at alternative investment firm ParaFi Capital, is revealing key components behind his formula for investing in the embryonic decentralized finance (DeFi) markets.
In a new episode of Real Vision, Roel Santos explains that ParaFi’s exposure to DeFi is somewhat concentrated in a handful of main positions, complemented by investments in early-stage projects.
“I think how we think of the space is we want to make multiple bets in core use cases that we think are going to be big, that have product-market fit today. So for instance, we have a fairly concentrated portfolio. I’d say we have probably 10 very core positions that encompass the bulk of our portfolio. Then we have some experimental positions where it’s either very, very early or it’s like first-money-in, pre-seed round, where we just – but everything kind of peels back.”
Roel Santos also highlights that the research-driven firm does its homework before investing in a project.
“And we say, it is thematically driven. So by the time that we talk to a founder we have a view of, insurance needs to be a thing in the space, or money markets are big, or hey, we need derivative markets, or we need to have the ability to tokenize risk and tranche it.
And so we’re out actively looking for these teams. And once we find them, at that point, it becomes easier to just say, OK, is this the right team? Is this the most competent, technically savvy team to invest behind?”
As DeFi is still a budding sector, the ParaFi executive points out two criteria that they look for in a project.
“So ultimately sort of this liquid venture approach, where as you rightly point out, this space is very risky still, very experimental. I’ll be the first one to tell you that. And so our approach is we want to place multiple bets in things that we think have strong product-market fit and traction.
But we’re not prepared to say this is Myspace or Facebook or Google and Ask Jeeves. I think it’s too early. I’m not prepared to make a statement. All I can do is place multiple bets. And I guess one of the key beauties of this space is being able to constantly test your assumption.”
Another factor that influences ParaFi’s investment thesis are on-chain analytics, which are available in real time, says Roel Santos.
“In real time, right now, you’re able to see the number of liquidations or a number of originations and loans in Compound or in Aave, the number of users. And that, I think, is perhaps the biggest kind of paradigm shift in how we invest in this space. Because you’re able to, in real time, assess the growth of these networks and underwrite and constantly test your hypothesis if it’s working or not.”
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