Investment
Strategy
We know the importance of timing in investments. Other crypto ecosystems may already have a higher profile, and their early investors have benefitted handsomely. But because of Polkadot’s superior technology, we believe that every decentralised application in existence today will either move to Polkadot or have an equivalent built on top of it. Many more will be created here natively. Now that the ecosystem is still nascent, is the best time to invest. Our fund offers investors to be part of the journey from day one.
A Brief History of Crypto
The invention of Bitcoin in 2008 gave rise to the industry commonly referred to as “Crypto” today. While Bitcoin has become the reserve asset of this industry and an asset class in itself, the Layer 1 protocols that came after, are now battling for dominance amongst each other. When Ethereum launched in 2015, it led to a Cambrian explosion of projects building on top of it, enabling everything from DeFi to NFTs.
From an investment perspective, getting into some of these projects early on, has generated life-changing wealth for some. However, in many ways Ethereum has fallen victim to its own success, as illustrated by the scaling issues and the exorbitant transaction (gas) fees. And while the jury is still out on whether Ethereum can overcome these issues with “Ethereum 2.0”, economic incentives have led to a plethora of potential “Etherium killers” vying for the top spot.
Enter the Protocol Wars
During the bull market of 2017 and early 2018, Layer 1 protocols traded as potential Ethereum killers included the likes of NEO, ICON and EOS. However, the technological lead and entrenched network effects of Ethereum have proven too difficult to overcome and the projects have fallen short of expectations, both in terms of development activity and market cap. This has not stopped others from trying.
2020 and 2021 saw the rise of Solana, Cardano, Fantom, Cosmos and Avalanche amongst others. Smart contracts and dApps originally built on Ethereum have either moved to these platforms or had equivalents built on top of them by third parties. This permissionless innovation has produced many new exciting products and concepts, but also led to a fragmentation of the market, and “siloization” into certain ecosystems.
Polkadot vs. Blockchain
Maximalism
Harbour Industrial Capital has chosen to focus its first fund exclusively on the development of the Polkadot ecosystem for the following reasons.
Polkadot is a bit of a latecomer to the party, and since it has no smart contract functionality or fancy dApps, it has been dismissed by some as an empty “ghost chain”. This could not be further from the truth. Polkadot was conceived in 2017 by Etherium co-founder Gavin Wood, and has kept a relatively low profile for the following 4 years, and kept busy testing and developing its codebase.
While others “move fast and break things”, Polkadot maintained a slower but more rigorous process. Its cousin chain, Kusama, acts as a “canary network” on which new functionality is tested under real economic incentives before being deployed. Polkadot has been designed from the ground up to plug into other blockchains, such as Ethereum. Rather than trying to be the Etherium killer, Polkadot is a bet on interoperability and a rejection of the idea that “one size fits all”.
Polkadot and the League of Parachains
Polkadot is undoubtedly a complex project. Unlike Ethereum it is not a single blockchain, but can be best understood as a shared security architecture for a wide range of different blockchains (parachains, in the lingo). Each of these parachains can opt for their own parameters in the trade-off between decentralization, scalability and security.
This allows for much greater adaptability, so that for example the security of a payments network is not held back by bandwidth required for a decentralised social network. Upcoming Parachain candidates cover the whole spectrum of the crypto industry, such as DeFi, yield farming, NFTs, metaverse, gaming, asset tokenization, identity management and much more.
However, slots to plug into the Polkadot main chain (relay chain) are limited, creating a scarce resource which is allocated through slot auctions.
Capital Deployment through Slot Auctions
Parachain candidates allow outside investors to contribute to a collective bid, and reward them for their support with their Native Project Tokens (“NPT”). It is worth noting that the auction mechanism always returns the DOT, for unsuccessful projects immediately, and for successful ones after the Parachain lease ends (usually 2 years). To further maximize yield, our fund will enter auctions through a mechanism of liquifying the DOT locked in a parachain lease.
The resulting DOT may then be used to support subsequent Parachain auctions, allowing the fund to support more than one project at once. Upon maturity of the fund, DOT will be sold and the hedge closed which will yield the initial dollar-value (minus fundings costs for the hedge). The primary profit of the fund will derive from the liquidation of NPTs upon maturity.