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THE YE AR AHE AD: THEMES , PROJEC TS , AND TRENDS

W E ’ R E WAT C H I N G I N 2 0 2 2 A N D B E YO N D
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THE YEAR AHEAD: THEMES, PROJECTS,

AND TRENDS WE’RE WATCHING IN 2022
AND BEYOND
1 February, 2022

Disclosure: Delphi Ventures and members of our team may hold tokens mentioned in this report, including, but not limited to, BTC,
ETH, LUNA, AVAX, SOL, FTM, ONE, NEAR, ATOM, GMX, IMX, LDO, OSMO, SYN, RUNE, AXS, ILV, CRV, CVX, DYDX, RBN,
DPX, RON, YGG, CLUB, as well as any nft collections discussed. these statements are intended to disclose any conflict of interest
and should not be misconstrued as a recommendation to purchase any token. this content is for informational purposes only and
you should not make decisions based solely on it. this is not investment advice.

Last year was a great time to be a crypto investor. Unlike prior years, 2021 marked a real inflection point,
where popular narratives finally captured mainstream attention, driven by adoption (and a healthy dose of
speculation) in emerging areas like NFTs and alternative layer one networks that challenged the dominance
of major incumbents (i.e., Ethereum). The pace of innovation felt exponential as creative composability
exploded, unlocking new use cases for developers to experiment with in hopes of creating the next
critical platform or standard on which others would build or integrate with. This wave of optimism and
experimentation was fueled by extreme returns, which attracted record amounts of venture capital as
investors piled in to capture a piece of a seemingly ever-growing pie.

With hindsight in our rearview, we know asset prices cannot rise indefinitely; at a certain point, the market
needs to cleanse itself of excess speculation (and leverage) to wade through the noise and reevaluate the
opportunities that still lie ahead. As we wind down the first month of the new year, we’ve gotten a pretty
good taste of what a healthy reset looks like. And as the dust begins to settle, we wanted to take this
opportunity to reframe where we are, major catalysts and narratives we’re following, and the key projects
we’re tracking in the new year and beyond.

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The key sectors and themes on our radar include:

• The Scalability Wars

• Cross-Chain DeFi / Interoperability / Bridges

• Stablecoins

• Decentralized Derivatives

• Metaverse, GameFi, and P2E

• DAOs

• NFTS

• Brands and Creators x Web3

• Divergence of “Macro Crypto” and Web3 Secular Trends

Note: Most of the calculations related to pricing data and returns were conducted before the latest market selloff
(unless otherwise specified), but our opinion on the themes and projects mentioned in this report has not changed.
If anything, the latest market drawdown has provided even more attractive entry points for those interested
(assuming you’ve done your own research and have built conviction in any of the names mentioned throughout this report).

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The Scalability Wars

Alternative L1s were among the most dominant trends in 2021, with names like LUNA, SOL, and AVAX
garnering a ton of investor attention. Meanwhile, ETH struggled to curb high transaction fees despite all
the hype behind L2 solutions and the move to ETH 2.0.

The “Scalability Wars” will continue to heat up as L1s battle for market share through their unique ap-
proaches to scaling throughput, reducing transaction costs, and attracting the best developer talent to
their ecosystems. High fees and congestion on Ethereum will continue to push founders and developers to
alternative L1s until L2 solutions become more popular (i.e., StarkNet, dYdX for trading, Immutable X for
NFT minting/trading).

The latest market sell off has weighed on many of these, though we have seen names like LUNA and
ATOM weather the storm better than many of their peers; their relative outperformance makes them ripe
contenders for further gains if and when the market does make a sustainable comeback.

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Narratives to watch
• D
 eveloper Interest: Continued adoption and usage of alternative L1s is one of the most common
themes our analyst team is bullish on next year.

- “ The recent strength of SOL, LUNA, and AVAX is notable, especially versus the ghost chain
alternatives; it feels like the market is becoming more efficient. As institutions and “smart money”
enter the space, these investors care more about user adoption/traction rather than promises/
narratives that can drive retail. This new wave of capital is looking to invest in technologies that
will capture hundreds of millions of users.” – Duncan (@Floodcapital)

• S
 caling Solutions: Popular L2s will get battle-tested as more applications — both financial and c
onsumer-centric — are built, requiring low latency and lower transaction costs. Given the success of L1s
over L2s, it doesn’t seem unreasonable that there will be some experimentation with L2 tokens to attract
users and build communities.

- “ At this point, it’s pretty clear that tokens are the most powerful incentives for attracting attention
and capital. Expect TVL across L2s to skyrocket past the current combined $5.6B as they roll
out the red carpet for projects with their own fresh token incentives building natively on L2s and

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other dApps migrating from other chains to L2s. Two more major catalysts would be the continued
support of CEX to L2 integrations to onboard retail and L2s releasing their own tokens. Similar to
how many alt L1s to from 0 to 1 we can expect a similar pattern to play out on L2s as it relates to
DeFi, Gaming, and NFT primitives.” – Alex G. (@Alex_Ged)

- “ Starkware, all forms of ZKrollups, and Optimistic rollups are extremely exciting. They offer a
great opportunity to scale ETH. I am really looking forward to modular chains like Celestia.”
– Aaron (@crypto826)

• M
 odular Blockchains & Data Availability: The rise of Rollups brought along the concept of
Modular blockchains. A full-fledged blockchain is made up of three core components: execution,
settlement, and consensus and data availability. Yet a blockchain doesn’t need to perform all of these
functions on its own. Instead, modular chains specialize in one or more of these components and
outsource the rest to other specialized chains to achieve higher scalability. For example, a core
element of the modular blockchain stack is specialized data availability chains such as Celestia which
have a very high data capacity. Many rollups can make use of this capacity by choosing to dump their
data to Celestia for shared security all the while focusing on scaling their execution. Our report,
Entering the Endgame of Blockchain Scaling goes into further detail on this topic.

• T he ETH Merge: How could we forget arguably the most important milestone in Ethereum’s history,
marking the shift from PoW to PoS? This long-awaited event should not be overlooked, but it has flown
under the radar since there’s no hard deadline set for the merge. Public estimates target late Q2 at
best, but you can follow along here for updates. Here are a few post-Merge consequences from an
investor’s lens:

- E TH Staking Yields: Post EIP-1559, ETH fees have been split into two components: The base
fee and tip. (The base fee is burnt, and the tip goes to miners.) After the merge, the tip portion
of the fees will go to validators/stakers. This tip revenue alongside block inflation going to
stakers will turn ETH into a positively yielding asset.

- Net Deflationary Asset: Since EIP-1559 went live in August, ETH has had one net
deflationary week. If we retroactively show the merge being live at 30M ETH staked, ETH
would have been deflationary every week since August 23. Currently, the ETH 2.0 deposit
contract only holds ~9M ETH, so 30M is quite conservative. But we feel this is a solid
medium-to-long term figure to use while projecting ETH issuance. With 30M ETH staked,
issuance is slashed from the ~13,400 a day to ~2,700.

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• I nstitutional Capital Inflows: The second most liquid crypto asset — now with a more sustainable
monetary policy — that also offers higher yields in a low yield macro environment adds another layer
of upside for institutional investors. Coupled with the shift to a “greener” and more energy-efficient
model, we expect to see more capital inflows targeting ETH in the coming months.

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• N
 otably, institutional capital flows have started to broaden outside of BTC and ETH as more TradFi
investors fall down the proverbial crypto rabbit hole. This is likely to benefit larger liquid alternative
L1s in the top 10-20 coins, as most institutions are unlikely to dabble in smaller, less liquid names. The
increasing accessibility of crypto assets beyond BTC and ETH will help accelerate institutional capital
flows into these smaller yet prominent names.

- Multi-asset investment products haven’t seen a ton of demand yet, with their total AUM at
~$4.2 billion versus $35 billion for BTC-based products alone. Notable providers include
Grayscale, Bitwise, and 21Shares.

• S
 ingle-asset products outside BTC and ETH (i.e., BNB, LTC, SOL, DOT, etc.) collectively have roughly
$1.2 billion in AUM, according to data aggregated by CoinShares and Bloomberg.

- N
 otable single-asset product providers include Grayscale and 21Shares, the latter of which
offers ETPs for assets like BNB, XTZ, DOT, SOL, ADA, MATIC, AVAX, and ALGO.

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• L iquid Staking: Lido is well-positioned to capture incremental demand for ETH staking on the back of
the merge. Lido has already captured 18.2% of all ETH staked, not to mention $4.75B worth of LUNA
and nearly $200M worth of SOL. Staking derivatives are the most efficient route for holders of PoS
tokens that want to maximize yields and utility in DeFi. Lido is this category’s far and away leader, and
its DeFi integrations are accelerating.

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• LDO: “With ETH completing its transition to PoS in 2022, the market for liquid staking derivatives will
explode to hundreds of billions. Leaders in liquid staking will have strong integration moats and sticky
customer acquisition. Lido is currently the leading staking derivatives provider on Ethereum and Terra,
its integrations into platforms like Maker and Anchor show its strong first-mover advantage.”
– Duncan (Twitter @Floodcapital)

• W
 hile often overlooked, NEAR also received a shout from our VP of Engineering, Luiz Lopes
(@theprivileges), where he highlighted how “Aurora/NEAR have been quietly building a lot of
developer infrastructure and onboarding material.”

• B
 efore its most recent price correction, NEAR was on the cusp of breaking out to new all-time highs.
NEAR’s price had benefited from the launch of Aurora, which allowed EVM-compatible dApps on their
network. One notable innovation was also the use of ETH to pay for gas on Aurora, which makes for a
seamless transition for Ethereum users who do not have to purchase the platform layer token just to pay
for gas.

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Cross-Chain Defi, Interoperability, & Bridges

Interoperability and Rise of the Cosmos Ecosystem

In a post-IBC world with interoperability, once-siloed blockchains can now communicate with one
another. Going forward, the ambition for Cosmos —previously written about here — is to function more like
a holding company for the interchain ecosystem, which may offer better value capture.

The next wave of growth will be enabled by a more aggressive roadmap ranging from Interchain
staking expected in Q2, to interchain accounts, liquid staking, and the launch of better bridges to Cosmos.
Notably, the beauty of interchain staking is that it will enable a de-facto incubation zone as it becomes far
more accessible for developers to spin up apps.

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Narratives to watch
• I BC-Enabled DeFi: We can expect the emergence of a multitude of competitor hubs like Evmos,
Archway, and Juno that offer differentiated value propositions from Cosmos hub and can further spur
Cosmos DeFi. In fact, Osmosis is already competitive to Cosmos hub, facilitating 2x as many IBC
transfers as Cosmos hub over the last 30 days. We think that Cosmos season will enable markets big
enough for a handful of players to co-exist. Osmosis is tackling Cosmos-native DeFi, whereas
THORChain, , which opted not to join IBC in favor of Asgard, still has a massive market to tap into with
native BTC and other assets.

• N
 ew Liquidity Bootstrapping: The emergence of IBC-native DEXs like Osmosis will more easily
facilitate the liquidity bootstrapping of community-led and organic projects natively on IBC, versus
having to rely on CEXs. If past airdrops are any indication, power users and stakers/LPs of popular
tokens like ATOM and OSMO may be in for more treats this year.

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• I BC Dominance: Although ATOM fundamentals are improving and we can expect gradual
improvements to the token econ, we anticipate it will be hard to maintain IBC ecosystem dominance
percentage as a flurry of new higher beta protocols come into the mix. However, Cosmos does have a
healthy start; there’s been 3m IBC transfers across 27 zones on Cosmos over the last 30 days. This is a
topic we plan to revisit throughout this year.

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Bridges / Cross-Chain
Another way to play the theme of alternative L1s and scaling solutions is through bridges and cross-chain
infrastructure. Ultimately, the goal for cross-chain infrastructure is to seamlessly transfer assets across
chains in an efficient (and hopefully) decentralized manner.

As an increasing number of L1 and L2 solutions continue to emerge, it’s still too early to pick a specific
asset — or even group of assets — that will ultimately win this race. One thing is for sure, though,
competition in this space is only going to heat up as the multi-chain narrative that exploded in 2021
is not going away anytime soon.

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Narratives to watch
• Bridge TVL: Above, we list some non-native bridges that have liquid tokens. Notably, their TVL has
skyrocketed since September, and currently sits around ~$9B. In aggregate, this group of bridges has
returned an average of 108% since September 1st through early January, compared to -1% return for
ETH, marking pretty strong outperformance in the latter part of the year as alternative L1s took off.

Analyst Notes: Below are some analyst quotes regarding some bridges we are excited about.

• H
 op Bridge (Hop): “Rollup<>Rollup bridges is a highly underexplored design space and Hop is
pioneering on this front. While its current TVL of ~100m$ is relatively modest, its traction is already
impressive given the protocol hasn’t rolled out any tokens. Hop bridge is well positioned to become a
fundamental part of Rollup centric Ethereum” – Can (@CannnGurel)

• T HORChain (RUNE): “THORChain has some key milestones ahead including the Mainnet launch,
introduction of THORFi products as well as THORSynths. Besides these, a key and arguably the most
important milestone to look out for will be the introduction of vault nodes. With vault nodes, a wider
community will be able to bond in Rune and contribute to the security of the network. This in turn will
allow pools to grow without being subject to long-lasting cap limits. We expect to see the true potential
of THORChain getting fully unleashed.” – Can (@CannnGurel)

• S
 ynapse (SYN): “My original thesis on Synapse was that alt L1s would keep appearing and continue
to launch large liquidity mining programs, so if you could own the bridge in between all of them (i.e.,
connecting all L1/L2s as capital flows between them) then you capture index-like exposure.

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SYN has outperformed most alt L1s since its launch in September but also comes with more risk than
large caps like SOL, LUNA, AVAX. I see SYN as a cheaper and higher beta index bet on L1s and
scaling solutions. It also services as a next logical rotation if you feel you’ve missed the run in L1s.
– Duncan (@FloodCapital)

• “ With the continuation of L1 and L2 wars, keep an eye on cross-chain liquidity bridges which will be
indirect beneficiaries of the war with lots of liquidity sloshing around.” – Alex G. (@Alex_Ged)

• C
 osmos (ATOM): “Cosmos (ATOM) should shine in a multi-chain future, which I believe we’re heading
towards, with more and more chains and protocols leveraging their infrastructure and relying on IBC.
They’ve been relatively unloved compared to the other L1s like LUNA & AVAX.”
– Teng Yan (@0xPrismatic)

Stablecoins & Curve Wars

Stablecoins exploded in 2021, surpassing $150B in combined market capitalization. This surge is a
testament to great product-market fit as one of crypto’s “killer apps,” with assets like USDC and USDT
becoming almost ubiquitous across the entire crypto ecosystem. We strongly believe this trend will
continue on the back of a few major catalysts that have paved their success thus far:

• A
 bility for investors and traders to easily pair back risk exposure during risk-off periods with
heightened volatility. Stablecoins have become dominant trading pairs across both CeFi and DeFi.

• Stablecoins in DeFi offer high yield opportunities without the risk of a volatile underlying asset.

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• T ransact permissionlessly with anyone in the world at any time, with near-instant settlement and none of
the usual friction associated with the current financial system.

Narratives to watch
• Decentralized Stablecoins: If you believe in truly decentralized finance then there needs to be a
decentralized stablecoin to support it. This can take the form of either an algorithmic stable (UST,
FRAX) or an overcollateralized one (DAI, MIM).

- If a regulatory crackdown begins on stablecoins, this could push marginal users and builders
to use decentralized alternatives.

• Curve (CRV) As Critical Infrastructure: It’s very difficult to talk about stablecoins, especially
decentralized ones, without mentioning the “kingmaker” of stablecoins — Curve. Through gauge
weights, Curve governance can direct CRV issuance to pools, directly resulting in higher liquidity mining
rewards and thus increased TVL. Since liquidity for stablecoins is crucial, this makes Curve the most
important piece of infrastructure for stablecoins. Convex controls roughly half of all Curve governance
allowing it to vote in or be bribed to create the most liquid stablecoin pools in all of DeFi.

- It’s important to note Uniswap has been taking market share for stables trading from Curve re-
cently. Average fees for stable swaps are often 1.5-2x greater than similar trades on Uniswap,
adding to the appeal of the latter at times.

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• C
 onvex’s (CVX) Governance Black Hole: Major stablecoin projects have realized Curve’s weekly
gauge weight allocation is critical to keeping their liquidity high. Losing that vote means LPs’ yields
drop, and capital may move elsewhere. Now, a so-called “war” has ensued, with various protocols
openly bribing votes and rewarding veCRV holders with their native tokens. In April 2021, Convex
pioneered this bribing game with a 1% airdrop in exchange for support from veCRV holders. Now,
it has grown to have great sway on Curve’s valuable governance vote: 85% of Curve TVL is now
routed and staked via Convex. And nearly half of all veCRV supply is owned by Convex. In short,
Convex is a new model for protocol-controlled value (PCV), trailblazing the accumulation of power
through governance.

• C
 urve + Convex Symbiosis: Curve and Convex have a symbiotic relationship that’s has launched
Curve to the number one application by TVL sitting at $23B (current TVL is closer to $19B at the time
of publish). This relationship has helped both outperform many other DeFi “blue chips” in terms of
performance in 2021.

• Analyst Notes: Below are some analyst quotes regarding Curve, Convex, and stablecoins:
- “Convex’s tokenomics is one of the most unique things that has happened for DAO
metagovernance as well as rethinking incentive alignment in 2021, in my opinion. I also think
that increased protocols shifting to a vote escrow token model will serve as a strong tailwind for
Convex. Since convex has such a large sway in the Curve ecosystem, it’s possible that Convex
will potentially “weaponize” this ability to direct CRV emissions to accumulate other veTOKENs
without using CVX emissions. The bull case here is if the fat convex thesis, where Convex becomes
a majority metagovernor of multiple DeFi protocols employing veTOKENs.”
– Jeremy Ong (Twitter @jeremongws)

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Decentralized Derivatives
2021 was the year that decentralized derivatives found product-market fit within crypto. We believe that
this market is only warming up and still has room for enormous growth before it starts to compete and
potentially overtake its centralized counterparts. The first step in this playing out was two of our favorite
narratives coming together: decentralized derivatives and scaling solutions to create dYdX.

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Narratives to watch
• A
 lternative Perp Markets: Given dYdX’s complete dominance over the DeFi derivatives space, we
expect it to continue to be an important player, but competition in 2022 should heat up with more
perpetual exchanges launching across various scaling solutions. Sadly, in dYdX’s current state, the
token lacks value accrual beyond its governance power. Although this might change with dYdX V4,
we are still looking out for other options that may be more interesting for holders. Some projects our
analysts are excited about in the perpetuals and DEX space include:

- “Vega: marketplace for all and any financial products/instruments. Vega can create complex
products and condense them into a unified order book for a slick user experience. There are
decentralized derivative exchanges and decentralized spot exchanges, Vega is both. Vega is
decentralized Binance.” – Ashwath (@Ashwathbk)

- “ GMX: Using the oracle pricing model GMX doubles as a spot and leverage trading exchange.
The dual use of capital making it an attractive place for LPs to deposit funds and oracle
pricing provides on-chain zero slippage trades. Its recent launch on AVAX should be interesting
to watch.” – Duncan (@FloodCapital)

- N
 otably, volatile markets have driven volume to GMX, resulting in a volume surge on both
Arbitrum and Avalanche. The combined daily volume on both chains hit $700M on January
21st, the highest the platform has seen to-date, resulting in ~$900k in fees for GMX and GLP
stakers. GMX’s recent launch on Avalanche has boosted daily volumes considerably (which
now accounts for 30-50% of daily volume on GMX).

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• O
 ptions and Structured Products: While perps are a massive market within crypto, we are arguably
more excited about the burgeoning options space as we look forward to 2022. Ribbon and Opyn
kicked off the first decentralized options products that actually made sense back in April. Since
then, we have seen the rise of various L1s and L2s that have made option protocols within DeFi
more feasible.

• O
 ptions Innovation: One area of innovation we are excited about is options protocols integrating
perpetuals platforms in order to delta hedge and improve capital efficiency. This was previously
impossible on Ethereum layer 1, so faster chains and layer 2s open up the design space to innovate
and compete with centralized option exchanges like Deribit. Secondly, a broader range of structured
products touching both the real world and DeFi native assets. Given the accessibility of DeFi options,
there is the opportunity and potential liquidity for hundreds of smaller more niche strategies opening
up billions in TVL to these protocols.

Two options projects we are excited about:

• Z
 eta Markets: “Building the best in class decentralized options exchange. Base infra is Serum
orderbooks with a native Zeta AMM plugged into it. With an AMM, Zeta will overcome bootstrapping
issues with decentralized options OBs like Opyn. And via the orderbook, they’ll be able to overcome
UX barriers presented by options AMMs. Coupled with high throughput, low latency, low fee
environment of Solana, this could be THE options project that is able to incentivize institutional players
to seriously trade options in DeFi. Also, the first team to recognize the importance of expirable futures in
the hedging process for dealers. Did I mention the AMM will eventually delta hedge for casual LPs?”
– Ashwath (Twitter @Ashwathbk)

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• D
 PX “Dopex does the typical covered call strategies, but instead of selling those calls to market makers
(who take a spread), they sell it back to call buyers right on the platform. Dopex is also working on a
Deribit-like options chain thats pricing is calculated based on IV multipliers from their market making
delegates. More excitingly, Dopex is entering the curve wars with their “redacted” vaults allowing users
to speculate and hedge Curve pool APRs determined by gauge weights.”
– Duncan (Twitter @FloodCapital)

Metaverse, GameFi, & Play-to-Earn

Last year, Axie Infinity sparked perhaps the single largest narrative in crypto and proved the concept for
play-to-earn games. Consequently, there’s now been an explosion in P2E games trying to replicate Axie’s
success. As the ecosystem multiplies, filtering noise from innovation will be an increasingly important and
difficult task.

As with any market in a land-grab moment, most projects will wind up falling by the wayside. In our
view, though, this is just the beginning of a new era of games. Projects like Illuvium, Crypto Unicorns, and
Ember Sword are bringing AAA-caliber graphics and gameplay. Furthermore, we have yet to see the
“Gaming-Chain” competition, with prominent ones currently being Immutable X, Ronin Chain, Solana,
and Polygon.

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Narratives to watch
• W
 atch the leader: As early contributors and investors in Axie, it’s little surprise our team is still bullish
on its prospects going forward.

- A
 XS: “Axie Infinity. With several major updates in the pipeline for 2022 including land
gameplay, RON token launch, battles V3, Axie evolutions, and new use cases for SLP to ease
oversupply issues, it’s easy to be excited about Axie going into the new year. While there are
several other up-and-coming play-to-earn games, Axie solidified its dominance in 2021.
Recently crossing 10 million Axies, 3 million daily active players, and earnings 2nd only to
Ethereum for much of the year. The Sky Mavis team continue to demonstrate their dedication to
the game economy and Axie community with frequent updates and engagement with players,
and 2022 is unlikely to change that.” – Jayden (Twitter @notatugboat)

• S
 caling unlocking new gameplay: While valuations are sky high, there could be a perfect storm
of L1/L2 scalability plus an awakening from the broader entertainment industry. Expanding on this
concept, our COO of Delphi Labs, Kevin Simback (Twitter @KSimback), sees GameFi going
“parabolic.” He also foresees “media and entertainment jumping into crypto in a big way” and thinks
“more corporate brands will launch web3 projects and bring a new wave of consumers into crypto”.

- “ Immutable X: IMX is riding on both the gaming and zk rollup narratives that will be key in
2022. Fast, secure, cheap transactions. Lots of teams are building on it now. Probably only a
matter of time before a major successful app is deployed on it.”
– Teng Yan (Twitter @0xPrismatic)

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• N
 ew incentives remixing: Play-to-earn is just a subset of a growing sector focused on building robust
token economies around gaming, leveraging web3 infrastructure and even DeFi primitives to create
unique incentive systems that attract players via both entertainment and financial motives.

- “ Axie kicked off a storm with P2E [play-to-earn] but many don’t seem to realize P2E is just one
aspect in the broad narrative of financializing games. There are several aspects from DeFi that
can be pulled into crypto gaming to make it both lucrative and enthralling, because let’s face it,
trading and speculation is basically a game in and of itself.” – Ashwath (Twitter @Ashwathbk)

• G
 amer income: This past year was also defined by the rise of play-to-earn gaming guilds that
connect players and provide them with in-game assets they can play with to earn real income.
Yield Guild (YGG) was an early pioneer of this model and is the largest blockchain-based gaming
guild today.

- Y
 GG: “For those who can’t afford the initial start-up costs of such play-to-earn games, guilds like
YGG have stepped in, providing access to thousands of people who otherwise wouldn’t be able
to participate. They provide the digital assets these players need to participate in exchange
for a small portion of their earnings, thus creating a mutually beneficial relationship between
the two parties. In addition, YGG has positioned itself as a top-tier investor within crypto
gaming. Giving new up-and-coming games access to funding, player liquidity (scholars), and
domain-specific expertise of the YGG team. From an investment perspective, it’s like investing in
one of the earliest employers of the metaverse that also happens to give you early-stage
exposure to a basket of up-and-coming play-to-earn games. YGG is the play-to-earn index.”
– Jayden (Twitter @notatugboat)

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DAOs All The Way Down

2021 was the year DAOs made a name for themselves — and changed their definition. Previously, the
vanguard was pushed by protocol DAOs like Uniswap voting on grants and treasury allocations. Now,
the term has expanded to include an umbrella of web3 organizations leveraging crypto rails. As Balaji
Srinivasan notes, “think of them [DAOs] as instant entities for group coordination with a shared bank
account and payment capability.”

Crowdfunding, deploying capital, and binding votes to tangible outcomes can now be done at
hyperscale, enabling remarkable new possibilities. Experiments like ConstitutionDAO proved the concept
that self-organizing groups can amass tens of millions of dollars in a matter of weeks and buy assets
together (or at least attempt to). But that’s just the beginning. Much like the existing menu of LLCs,
corporations, and non-profits, DAOs are taking shape for just about every mission imaginable.

Already, some DAOs have massive treasuries with hundreds of millions (or even billions) of dollars and
tens of thousands of users; new ones are also springing up constantly.

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Narratives to watch
• D
 AO accounting & finance: One of the main themes of 2021 was the maturation of our
understanding of DAO treasuries. DAOs that considered their own native tokens as part of their
treasury realized that they did not have access to the amount of funds that they thought they did.
Deploying the value in their own unissued tokens is challenging. For example, for Uniswap to deploy
some of their roughly $6.6bn treasury, they would need to sell UNI, creating down pressure on the
token price, and potentially hurting their own token holders. Recent work by Llama DAO and
Uncommon Core have contributed to conversations around unissued tokens and whether they’re better
thought of as parallels to authorized shares in traditional company structures. There’s also a strong
argument to be made that DAOs will need to accumulate secondary assets to build a workable
treasury, otherwise they risk significant capital losses during market drawdowns. Consequently, we
have seen a stampede of DAOs begin to experiment with their treasury by acquiring vote escrow
tokens, hoarding stablecoins, adopting PCV, and deploying assets to earn yield. We believe these
DAOs are ahead of the curve entering 2022 because they understand that a DAO should be
well-capitalized and forge relationships with other protocols to strengthen their position in the
community. As for those DAOs that are unsure where to begin, protocols like Tribeca DAO and Andre’s
teased ve(3,3) might prove to be a great starting point.

• Tooling improvements: The number of DAOs will undoubtedly increase from here, as will the
complexity of the largest and most active DAOs, driving demand for better tooling around governance
and coordination. This is a big challenge for even the most successful DAOs today. But it’s a sector
we’re actively investing in to accelerate more widespread adoption.

- Tools: “I am excited for the conversation, tooling, and experience around DAOs to mature.
DAOs emerged as a legitimate form of social and capital organization in the last few years,
and many people took notice. I think we will see a new wave of people who leave traditional
work forces and who shift to working with/for DAOs.” – Aaron (@crypto826)

- API-ification: “More X-as-a-Service for DAOs, as we see more DAOs come into existence,
projects will be created to offer different XaaS for recurring problems that DAOs run into.”
– Luiz (@Theprivileges)

• D
 AOs becoming modular units: As coordination and governance tooling advances, DAOs will
interact and contract with other DAOs for economic exchange (i.e., a DAO hiring DeveloperDAO for
its web page, or DAO working with a DAO to diversify its token treasury). Meanwhile, within the
DAOs themselves, smaller units of subDAOs will emerge, as pioneered by Yearn 2.0 governance.
We expect smaller autonomous business units will proliferate and execute atop tools such as Orca
Protocol and Squads.

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• M
 eme DAOs and non-profits: The number of Meme DAOs will likely explode. ConstitutionDAO,
channeling a weird combination of anti-establishment fervor and Nicholas Cage National Treasure
memes, managed to get $40m+ worth of contributions to purchase one of the few copies of the U.S.
Constitution. With the release of Dune, Spice DAO emerged to purchase and preserve the manuscript
for Jodorowsky’s unfinished Dune epic. Even the performance of meme coins like DOGE and SHIB, at
one point, demonstrated how strong memes can drive price.

• A
 s information flow becomes more unrestricted through social media and human interaction becomes
disintermediated, the potential for meme-mind viruses increases exponentially. The mind-viruses that
require some form of trust-minimized coordination to achieve a goal seem a natural fit to organize like
DAOs. The biggest beneficiaries of this wave of Meme DAOs will be the tools and platforms that make
creating and managing a DAO easier, allowing founding members and contributors to focus more of
their efforts on the ultimate mission rather than inefficient operational tasks. DAO tooling will be able to
capture some of the value driven to meme DAOs, just like CEX’s gained value through trading fees on
DOGE and SHIB.

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NFTs: From Static Collectibles to Interactive Digital Property Rights

NFTs took off in 2021 with marketplaces like OpenSea going from zero to hero seemingly overnight.
While NFTs have been around for the better part of half a decade, 2021 is the year they exploded into
mainstream conversations.

On the demand side, NFT markets continue to attract new investment. First, there’s now a well-heeled
base of collectors who correctly anticipated strong market demand. (The floor price for BAYC has now
surpassed 100 ETH, making its initial mint price of 0.08 ETH nine months ago incredibly lucrative for
early owners who held on to their apes.) These eye-popping figures are likely to keep speculative
demand strong. The NFT wave was also turbocharged by many A-list celebrities like Jay-Z and Steve Aoki
publicly adopting NFTs as their social media profile pics (PFPs).

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Unlike the broader crypto market, NFTs are off to a red-hot start in 2022. January is shaping up to be
the best month we’ve seen for NFT volumes and number of unique buyers as excitement for new projects
remains extremely high.

Narratives to watch
• C
 ommunity, community, community: The success of CryptoPunks and BAYC spawned hundreds of
copycat projects, but like many emerging web3 primitives, the ability for an NFT project to sustain
itself (and its value) boils down to the strength of the community behind it. The focus on building a
passionate, engaged community will become increasingly important, especially as the number of NFT
communities grows. Heightened focus on NFT strategies among web2 companies, most notably those
with strong brand affiliation and active, pre-existing communities, are also ripe to bring new people
into the web3 space. Teams will also focus on providing greater utility and unique perks for NFT
holders in order to differentiate from their competitors, a trend we’re already seeing develop.

• U
 nderrated communities on the rise: Cool Cats is a prime example of community building done
right. They have a big opportunity to tap into the family brand market for NFTs, which could create
major partnership opportunities. They also have a great founder origin story, a beloved and
well-executing team, and a fanatic community that’s inclusive to others and helping to grow the
overall NFT pie. Upcoming catalysts include the Cool Pets companion drop later this month and
the launch of a $MILK token, both of which add to the gamification ecosystem they’re creating.
For reference, floor prices for BAYC apes trade at a ~7x multiple to those of Cool Cats.

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• M
 any popular NFT collections also served as quasi-hedges the last few weeks compared to the major
price drawdowns we saw in other more liquid crypto assets.

• A
 new crop of collectors and artists: 2022 will usher in a new wave of web3 participants as NFTs
continue pushing into mainstream conversation. We can look forward to seeing speculative hype start
to give way to functional use cases as more innovative projects that have been building these past
months finally launch. The design space for NFTs is only limited by human creativity. This will be
supported by better NFT tooling that makes it easier for creators to enter:

- T ools are a barrier: “NFT tooling and infrastructure comes to the forefront – Tooling that allow
artists to easily launch NFT projects without requiring technical knowledge. Customize and de-
ploy smart contracts through a few clicks. Today, this is still a barrier for many creators and there
are so many poorly designed smart contracts that are exploitable.” – Teng Yan (@0xPrismatic)

• D
 eFi for NFTs: Financial services for NFTs are lacking, yet holders of blue-chip projects have amassed
a lot of wealth (at least on paper) that can be borrowed against.

- “ Leverage becomes commonplace for certain NFTs. Personally think this is a trigger for a new
DeFi + NFT narrative. Thinking new iterations of DeFi 1.0 projects like Aave v3 gets a revival
season at the same time to bolster the narrative.” – Jeremy Ong (@jeremongws)

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Creators and Brands Diving Into Web3

Web 2 platforms like Patreon and Substack changed the game for creators and brands, enabling them
to own their distribution and generate income. But that’s being taken to another level with NFTs and
tokenized communities. The tokenization of otherwise intangible value (i.e., “fandom”) will create an
entirely new class of investable assets for individuals who can now monetize and accumulate wealth in
a way that aligns with their passions.

Artists, athletes, celebrities, and influencers are already beginning to explore how NFTs and tokens can
create stronger connections between them and their fans and followers. We’re already seeing a lot more
interest from creators and talent ranging from music artists to athletes to celebrity brands, all of which
have the ability to usher in the next big wave of non-crypto native folks by experimenting with digital asset
strategies. We also expect the focus will shift towards real utility and unique use cases for NFTs next year
as crypto continues its march to the mainstream.

In fact, we’d argue any brand that isn’t considering a community engagement strategy will likely fall victim
to higher customer turnover as people choose to support brands they can relate to or engage with
(let alone those they can actually earn an ownership stake in). Brands that leverage web3 to build robust
community engagement strategies earlier in their journey are at an advantage in this new world. Those
that recognize the power of community and lean into its positive-sum forces will be tomorrow’s
household names.

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Meanwhile, names like Adidas and Universal Music are some of the biggest name brands that have
gotten involved with web3 communities like BAYC recently. We witnessed a streak of brands hitching
their name to popular NFT collections towards the end of last year, which caused a tangible increase
in floor prices.

Narratives to watch
• B
 rands on the bandwagon: Brands entering web3 will accelerate, and this will take several forms.
Brands will launch their own NFT drops, competing to create utility for holders through unique
benefits/perks, access to exclusive experiences, and the like. Some brands will also look to partner
with web3-native communities that align with their mission and values. These web3 communities will
often have greater leverage as brands pitch them on partnership opportunities, which will likely include
a combination of capital and additional resources that some web3 communities may need to fulfil their
own vision.

• T he new fan club: Longer-term, we foresee artist-backed community DAOs to form, adding another
layer of engagement between artists and their biggest fans. For example, it’s not hard to imagine a
world where members of DrakeDAO and RihannaDAO both voted to unlock a certain amount of
money from their respective treasuries if the two artists collaborated on a new single. Members of
each fan DAO would get exclusive access to a listening party to celebrate the track’s release, after
which funds would be released to both artists for fulfilling their fan’s proposal. The possibilities here
are almost limitless.

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• M
 usic has its moment: Music NFTs are one such subsector that’s poised to explode in the coming
years. The persona of the typical NFT buyer is evolving rapidly, and music NFTs undeniably speak to a
wider audience. So far, Catalog’s model of 1-of-1 music NFTs seems to have the most traction in Music
NFTs, but new models like Royal and Sound have high potential.

- Asymmetric value: “Music has a unique history and ownership culture that could unlock
asymmetric value, especially compared to other mediums. Among artists, musicians arguably
create the most cultural impact relative to what they capture. Music NFTs offer a copyright-like
representation, but without all the legal red tape. And 1-of-1 NFT platforms like Catalog are
starting to prove the concept can work at scale.” – Nick (@NpappaG)

- URL > IRL experiences: Another playbook to follow is Avenged Sevenfold’s Deathbats Club
(DBC), an NFT-centric fan community. Certain traits in the band’s NFT artwork dictate what
kind of access fans get at concert meet-and-greets. This model can easily be replicated by
established artists, although it takes some serious commitment and follow-through to deliver
on the IRL experiences. The DBC collection has already generated over 200 ETH in trading
volume. Artists who take the time to do this right and lean into the most exciting aspects
of web3 will be best positioned to see their fan clubs take on a life of their own.

- Pipeline to crypto: Marquee brands will also serve as a gateway for many non-crypto native
folks to interact with web3.

- B
 rands committed to growing their presence in the virtual world and want be
first-movers will even directly acquire web3 companies like we saw with Nike’s
acquisition of RTFKT studios.

• T okenized Everything: “We’re starting to see teams use NFTs as a means to tokenize valuable items.
E.g. Altered State Machine tokenizes machine learning algorithms. This trend will extend into all
different kinds of assets. – Tokenisation of real-world datasets such as consumer data, genomic data
etc – Tokenisation of real-world IP i.e., scientific discoveries, patents – Soon, maybe things like
real-estate, cars, branded goods will also become tokenised and represented in the digital world
while retaining their physical presence – Teng Yan (@0xPrismatic)

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Divergence of Macro Crypto vs. Tech and Web3 Crypto

Fundamentals will be an increasingly important driver of outperformance, especially as crypto captures
more capital and investor attention.

The last several weeks have reminded us just how correlated crypto assets are to one another. This was
primarily driven by the recent jump in market volatility, which tends to strengthen positive correlations
between crypto assets regardless of their underlying fundamentals. It’s important to note this isn’t a
phenomenon native to crypto. Traditional asset classes like equities, for example, tend to see higher
intramarket correlations during periods of heightened volatility as well.

In these moments of acute uncertainty, macro events still dictate much of the price action in these
uncertain times. Over the past couple months, the correlation between BTC and SPX has increased, as
both risk assets were similarly affected by changes in the current macro regime.

In other words, BTC and crypto assets appear to be trading more like macro assets, in large part because
the biggest tailwinds that propelled them to new highs over the last 18 months have strong crossovers with
those driving traditional asset classes like equities.

That said, investors should brace for a world where the sectors within crypto — BTC, ETH, DeFi, NFTs, L1/
L2 — start behaving more independently as correlations between different crypto sectors start to weaken.
Fundamentals were almost a running joke in the early days of the crypto market. Now we’ve reached a
point where protocols generate significant value in wholly unique ways. Investors will begin to recognize

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this, the same way they recognized that stocks in different sectors will exhibit unique return patterns,
and will be benchmarked accordingly (i.e., how a SaaS company’s revenue and cash flow are entirely
different from a global retailer’s or an industrial conglomerate). In the coming years, crypto investing
will be no different.

Broadly, there’s a growing divergence between “macro crypto” and “web3 crypto.” Macro crypto (think
BTC) will continue to be impacted by key macro factors, whereas the impact on the broader crypto
market will depend more on the type of asset or protocol and whether or not such events directly impact
its value proposition. In other words, the success of these dApps and protocols will be determined more
by adoption and usage activity rather than the same macro factors impacting BTC. Bitcoin is still a play on
network effects, and if the macro backdrop doesn’t encourage new participants to come into the network,
its price will reflect that.

For instance, the next viral play-to-earn game will play an outsize role in attracting players and capital
to the gaming sector. Meanwhile, the growing prevalence of institutional-compliant liquidity pools
via CeFi<>DeFi bridges could grow inflows to DEXes like Uniswap or lending protocols like Aave.
The narrative developing around web3, for example, is a diverse collection of project teams focused on
building entirely new applications that create step-function improvements over legacy companies and
networks. NFTs represent a new paradigm of interactive digital assets with built-in property rights. Those
that provide enough value for their target audience will see a reciprocal level of ownership demand,
regardless of whether the Fed raises rates or BTC sees a 20% drawdown.

Part of this divergence narrative will be driven by “smart money” that recognizes the potential for crypto’s
outsized returns. The days of classifying everything as either Bitcoin or “something trying to be Bitcoin”
are long gone. Investors will realize that unlike traditional equity, most crypto assets are designed to be
productive assets, and the use cases (or utility) of these assets varies by application or protocol. Sure, you
can take a buy-and-hold approach, but in order to participate in many of these networks (or at minimum
avoid dilution), you need to do something with the native asset that contributes to its success (such as
staking or providing liquidity, for example). One of the big unlocks in crypto is greater capital efficiency,
and smart investors will come to realize this.

That’s not to say macro factors won’t impact the broader crypto market. After all, we know rapid liquidity
growth can be a strong tide that lifts all boats. Regulatory risk is another known unknown, and has the
potential to slow the pace of innovation — or the geolocation of said innovation — if policymakers
continue to put up a hard front, regardless if they truly understand what’s going on or if it’s just for
political soundbites.

• A
 scissor issue: “I think we will continue to see the politicization of crypto, which will lead to a
friendlier regulatory landscape than some predict in the United States, and by extension most western
markets. The capital controlled by crypto natives is substantial, Republicans are courting crypto

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Republicans are courting crypto influence, Democrats have low approval ratings, and something like 17%
of the populace owns crypto. I predict at some point in 2022 that squeezing the crypto industry with un-
friendly regulations will be political suicide and policymakers will reign in unfriendly regulators.”
– Aaron (@crypto826)

Regardless, we believe specific sectors and their top names will stand to benefit from strong fundamentals,
creating a ripe environment for active management if you know how to spot trends early.

Crypto IS Macro
Ownership is one of the key pillars of crypto and web3. This transition to an Ownership Economy is
rooted in secular trends that are years in the making. Now, in an effort not to contradict ourselves, we
have repeatedly said that crypto is the most macro thing happening right now. In other words, crypto IS
macro. And it’s so much deeper than just the digital gold or inflation hedge narrative surrounding BTC.

Just like our current economies, the question of how the pie gets divvied up can be contentious. Take the
widening wealth inequality gap, for example, which has both financial and socioeconomic consequences
for all of us, crypto believer or not (this shares some parallels with Jack Dorsey’s recent Twitter sparring
around the role of investor ownership in major web3 rails).

Those who contribute to building these decentralized networks and applications should have ownership in
the networks they help create. Similarly, those who use these protocols or provide valuable contributions
to grow them should have ownership in the networks they’ve helped toward success.

Giving ownership to those responsible for creating value is also rooted in the growing importance of
community as a competitive strategy, not just for web3 projects, but for many existing industries and
businesses. The most tangible examples today are in creative industries like music or media. But any
business capable of creating loyalty among its stakeholders will look to build stronger communities
around their shared values. The expansion of web3 tech and applications will usher in a new wave of
creative destruction, paving the way for new jobs and new opportunities for wealth creation.

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Nick Pappageorge
Nick is a senior analyst working across research, ventures and operations. Previously,
Nick was a long-time analyst at CB Insights where he covered blockchain and fintech
venture capital.

Duncan Reucassel
At Delphi, Duncan is currently focused on researching and investing in long-term-
oriented decentralized finance projects. Duncan seeks protocols with strong liquidity
and network effects, looking to make investments that will last. Crypto was a perfect
intersection for his interests of finance and macroeconomics, first getting involved in
the space in 2017.

Aaron D
Aaron came late to crypto, encountering the space during DeFi summer in 2020.
After seeing first hand the revolutionary potential of DeFi, NFTs, Bitcoin and DAOs,
Aaron pivoted his career from telecommunications and ICI project management to
crypto. Joining Delphi Digital in early 2021 Aaron specializes in DeFi, DAOs
and Middleware.

Alex Gedevani
At Delphi, Alex focuses on producing quality and in-depth research that provides
actionable insights for clients. He covers a diverse group of topics and sectors across
the digital assets landscape, with a special interest in the thriving Ethereum ecosystem.
Alex combines fundamentals focused research with a strong focus on token economic
design and product-market fit. He enjoys testing out projects and using on-chain
analysis to separate the signal from the noise to identify opportunities both at a project
and sector level. Given the nascent industry, Alex prefers to keep an open mindset
and is constantly reading up on the latest advances in crypto-systems design to stay
on top of market trends. Prior to joining Delphi Digital, Alex was a Financial Analyst at
Barclays Investment Bank with a focus on the Equities asset class and also played an
instrumental role in building out the Volcker Finance program at the firm. Additionally,
as a Community Research Analyst at Messari, he helped expand the cryptoassets
library by creating resource pages, asset profile pages, and publishing 3rd party
research. Alex then interned with Delphi before joining full-time. Alex earned a
bachelor’s degree in Finance and has passed Level 1 of the CFA exam.

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Joo Kian
Joo’s main focus on the emerging sector of DeFi within and outside of Ethereum. In this
fast-changing sector, he uses a combined approach of fundamental and trend analysis
to identify investment opportunities to be on top of the markets. As a Research Analyst,
he provides succinct and key insights on upcoming trends and launches in the DeFi
space. Joo has a background in Finance and started his cryptocurrency journey back
in 2016 and dived deep into the DeFi sector in 2020.

Rob Sarrow
At Delphi, Rob is actively looking for new investment opportunities across the
ecosystem as well as supporting the current portfolio. Prior to joining Delphi Digital,
Rob had a stint in consulting focusing on technology strategy before joining Blockchain
Capital as a Research Scholar, where he performed deep analysis on various scaling
solutions and open finance primitives. Though Bitcoin is his first love, he approaches
the space with an unbiased mind and is focused on projects that reduce friction in the
traditional world. Rob attended Stevens Institute of Technology where he earned
both a M.E. in Systems Engineering and B.E. Engineering Management with a
concentration in Financial Engineering.

Ashwath Balakrishnan
Ashwath helps create insights-driven research for a variety of crypto verticals, but is
primarily focused on DeFi and crypto markets. He uses an integrated approach of
behavioral and fundamental analysis to identify promising opportunities in the space.
Ashwath aids Delphi Research’s decision making, helping the team spot key trends
before the vast majority of people see it. Prior to Delphi, Ashwath worked as an equity
research analyst at India’s largest institutional asset manager, and as an analyst with
Crypto Briefing.

We are Delphi
“Delphi Digital” is a collaborative association of independently owned and operated entities sharing the
“Delphi” brand and certain shareholders, resources, personnel and values. “Delphi Ventures” entities,
“Delphi Research” entities and the “Delphi Labs” entities collaborate under the “Delphi Digital” brand.

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INSIDERS
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in partnership with
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