Thesis
Stateful is a crypto-native investment firm founded on the thesis of the Sovereign Individual, the slow debasement of currency, and the subsequent disruption of cryptocurrency. We believe that the state-of-the-art investment fund should offer investors radical transparency, authentic exposure, and a clear perspective of the entire digital asset space. We affirm that internet sovereign money yields a generational asymmetric return profile.
The traditional financial system is plagued with rent-seeking intermediaries, archaic payment systems, and prying financial surveillance. While it is a commonplace for new entrants to compare cryptocurrencies to the dot-com bubble, this nascent technology will have more significant implications. Few investors in the late 1990s foresaw how the term "dot-com company" would soon be obsolete as all lasting enterprises migrated their operations to the world wide web. The internet transformed how enterprises operate, and people communicate. Similarly, decentralized peer-to-peer crypto networks will fundamentally alter how businesses create value, coordinate capital, and incentivize users across all sectors. We see the movement of governance natively onto the blockchain, faster capital coordination than traditional stock markets, and community formation around specific types of protocols and digital assets. Every lasting company will have a crypto strategy moving forward. Our firm believes that the continued rise of cryptocurrency is just the beginning of a technological and societal paradigm shift around individual ownership of data, assets, and identity.
Defining Money
Money, by definition, is a store of value, a medium of exchange, and a unit of account. Functionally, money is a legal tender and an information mechanism for labor allocation. Whereas sound money derives its value from scarce intrinsic properties that make it desirable to own, government-issued fiat currency has a value primarily based on the public's faith in the currency's issuer. Since the U.S. Dollar has come off the Gold Standard, it has depreciated immensely relative to other assets. Issuers can create and lend money on a whim without public oversight. There are minimal checks or balances on the issuer, and the public's confidence in the currency's purchasing power has degraded considerably.
The Federal Reserve's monetary actions during the COVID 19 pandemic were unprecedented. Since the COVID-19 pandemic began, authorities injected over $30T in fiscal and monetary stimulus, the largest-ever percentage of world GDP. The economic downturn spurred by the COVID 19 pandemic was five times the average recession since WWII, and the drawdown took 25% of the time. More bizarrely, while 11 million Americans were unemployed, the most significant increase in personal income in 20 years occurred. The cares act added trillions in fiscal stimulus, and in three months, the deficit increased more than the last five recessions combined. Corporate borrowing, which almost always goes down in a recession as corporations reliquefy, spiked from 6 trillion to 10 trillion. Nearly 25% of global government bonds are negative-yielding, and after considering inflation, the rate of negative real-yielding bonds is significantly higher. Investors are pushed farther out of the risk curve if central banks continue quantitative easing, and the consequences of the Federal Reserve's actions remain unseen.
New Money
A year after the global financial crisis in 2008, the invention of Bitcoin marked the birth of blockchain technology and the ability to transact peer-to-peer without the need to go through a financial institution.
Ethereum launched in July of 2015 and produced a Cambrian explosion of financial innovation. Ethereum took the underlying concept of Bitcoin, sending money globally from point A to point B, and added programmability to it. The breakthrough technology of Ethereum, known as smart contracts, are pieces of immutable code on the blockchain that connect parties, exchange consideration and execute transactions of arbitrary economic value and direction.
An area where the application of smart contracts has excelled is transforming the traditional finance space. By transferring control of financial instruments from centralized institutions to the blockchain, a new era of decentralized finance (Defi) is now possible. Functions such as swaps, futures, options, spot transactions, lending, borrowing, collateralized debt obligations, no-loss lotteries, and prediction markets, while perhaps still nascent, have already been programmed on top of Ethereum. Outside of finance, the development of Ethereum has catalyzed a way to build monetary networks that establish a level playing field for creators, developers, and businesses. Users can hold tokens native to the network, participate in network governance and receive staking rewards.
The Future of Value Exchange
Fast forward to now, and many more blockchains have come into existence, each with unique features and trade-offs. Stateful believes in a future of many blockchains that interact with one another. This concept, known as interoperability, diversifies risk, increases competition, and hardens the new financial infrastructure.
Bitcoin has a strong narrative and is predominantly the gateway into cryptocurrency. In our view, Ethereum will be the primary settlement layer, and transactions that necessitate higher throughput will take place on different layers of Ethereum. Other blockchains with different architectures will be interoperable with Ethereum. Furthermore, we believe a strong focus on zero-knowledge proofs will illuminate the path forward for blockchain technology as it is employed to remedy scaling and privacy matters.
With new technology comes new opportunities. Through the advent of interoperable blockchains, users and institutions maintain digital wallets with various assets that participants can trade against one another. This concept opens up more exploitable market inefficiencies such as cross-chain arbitrage and value extraction. The next decade of sovereign internet money is beginning, and the networks facilitating transactions are improving daily.
Opportunity
Stateful is well-positioned to navigate emerging technologies in this rapidly changing market. 2021 was a pivotal year for crypto, various use cases have been validated and have achieved institutional adoption. Asymmetric information is prevalent, and multiple sectors have outperformed others at different periods- exemplifying the need for dedicated capital management.
Different crypto sectors have alternate value drivers, and as a result, valuation models are opaque. When it comes to the fundamental valuations of these networks, it stands to consider the size of their respective economies, their developer activity, and the value the protocol secures. The mechanisms for capturing value, level of interoperability, and the technical trade-offs that the most significant applications will utilize. The cryptocurrency market is seemingly cyclical and based on new capital inflows convoluted with oscillations between fear and greed.
Given the industry's infancy, it is inevitable that we will continue to experience periods of stagnation and volatility as the market matures. We strongly believe that having a low-time preference, optimizing allocation techniques, and constructing modernized valuations will lay the infrastructure for a dominant and profitable strategy moving forward.