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July 2, 2024 General Investment Theses

Auros Ventures: How We Invest

We think of our investment universe in concentric circles. Starting from liquidity deployment, to market structure evolution, and finally the large macro themes which will transform adoption.

Auros, one of the crypto industry’s leading algorithmic trading and market making firms, is thrilled to announce the launch of Auros Ventures, our dedicated ventures and investment arm. Auros Ventures, led by Julien Auchecorne, will leverage the firm’s expertise in risk management and liquidity provision to generate outsized returns in a medium to long-duration portfolio, investing in the full lifecycle of deal flow from early-stage primaries right through to liquid secondaries. 

Auros will invest significant resources and leverage the full capabilities of the firm to provide support and assist in the growth of all the Companies and Projects it will invest in. Operating in stealth over the past 9 months, Auros Ventures has already invested $20 million and intends to allocate more than $50 million over the next 24 months. 

Who is Auros Ventures?

  • We invest across the crypto ecosystem, with the aim of delivering an outsized positive impact on our portfolio: Embedding ourselves within specific ecosystems and supporting projects by fostering innovation and growth. 
  • We’re token economy investors first: This means a preference for decentralised projects over centralised applications and token opportunities rather than pure equity. Exceptions apply! 
  • Auros is also a seasoned team of traders and power users: We are accustomed to the frictions created by current market structures; and we invest in projects and ecosystems that can benefit from our expertise in reducing these frictions, enabling exponential growth. 

Auros’ Unfair Advantage: Alpha Generation — from High-Frequency to Long Duration 

This market cycle will be different. 

Scalable use cases are emerging, and 1 billion daily recurring users needs to be the industry’s next imperative. As the ecosystem matures, we are witnessing the development of promising projects that can support massive Web3 user bases. This evolution underscores the necessity of focusing on end-user growth and long-term engagement.

This thesis focuses on Auros’ medium to long-duration portfolio. It is however crucial to understand our firm’s broader investment position as it mirrors the idiosyncrasies of crypto market structure. 

Auros strategies span the liquidity and duration spectrum and adeptly navigate the intertwined short-term volatility and long-term value creation that is unique to the crypto market. Successfully managing this market requires seasoned expertise and integrated risk management strategies that cannot be developed overnight. Our evolution from HFT to venture investing showcases our ability to manage these interconnected risks cohesively. Unlike traditional venture firms, Auros combines trading experience with the specialised insights derived from being a domain expert and market power user, making Auros Ventures a natural extension of our expertise – thereby leveraging an unfair advantage in long-term crypto investments. 

This document aims to explain the filter we apply to our portfolio, and is also an invitation directed at builders, ecosystems and fellow investors to connect with us.

Wen Token? Liquidity is the Bootstrap

The discourse on tokens is ever-evolving and increasingly expansive. However, in the spectrum between “a fully tokenised future” and “the futility of tokens”, Auros firmly aligns with the former. As committed token economy investors, we support the tokenisation-of-everything thesis, having observed the potential for tokenising utility, value creation, and new asset classes. 

The industry’s narrative naturally shifts along this spectrum primarily due to price action and general sentiment. However, with each passing season and cycle, we observe that the development and broad-based use of new market structures as well as token models are moving us closer to a world of ubiquitous tokenisation. The price volatility of these tokens and the cyclical nature of the economies that they power may point to a young, immature market but such market activity should be seen as a feature, not a bug, of an industry in the early stages of price discovery. 

Auros’ investment strategies are founded on deep insights into the critical role tokens play in project success, and the importance of token management cannot be stated enough. We view early project traction and token price as separate, loosely correlated signals. Our long-term value as an investor and partner lies in our ability to help projects and ecosystems navigate the liquidity landscape and manage stakeholder incentives within a token ecosystem. This is in line with our commitment to foster sustainable value creation and generate outsized returns for our stakeholders.

What makes this all worthwhile for us as investors is that 15 years after the emergence of crypto, the investment opportunity in this industry continues to be driven by positive price convexity and the potential for outsized returns. This indicates that sector value creation is still evolving and has not yet reached maturity. For instance, investing in Bitcoin and Ethereum is akin to holding a call option on their future potential as a store of value and a World Computer, respectively.

Market Structure, Capital Efficiency and Price Discovery: More than Memecoin YOLOs 

The venture arm utilises Auros’ expertise to carefully evaluate long term value creation in both off-chain and on-chain solutions. 

Infrastructure

Off-Chain Infrastructure

Off-chain infrastructure currently meets market demand but fails to fully leverage blockchain’s potential. While on-chain infrastructure is still overcoming its scaling challenges, off-chain centralized services offer a practical counterpoint to these limitations. Efforts such as rollups, modularity, bridges, and new Layer-1 solutions aim to address on-chain hurdles but intermediation remains prevalent. While regulatory frameworks and simplified UX of centralised infrastructure are benefits, they do not outweigh the long-term challenges of value extraction and poor unit economics, which ultimately stifles innovation over the long term. This guides Auros’ strategy to invest cautiously in centralised Web2 infrastructure, focusing on companies with compliance-centric services or unique market advantages when we elect to do so. 

On-Chain Infrastructure

Auros favours Web3 solutions such as new chain ecosystems, cloud services, decentralised exchanges (DEXs), and settlement networks. These solutions represent an ambitious effort to enhance and utilise the underlying core functionalities of blockchain technology: 

  • Execution
  • Consensus
  • Data Availability and Transparency 
  • Settlement

On-chain solutions are harder to scale and often lack the traditional architectural standards that would normally provide a well trodden scaling path for founders. Scalability issues, fragmentation, and the need for continual stabilisation present significant challenges. These challenges are typically less prevalent for large ecosystems supported by the deep bench of a dedicated community, but they are particularly significant for: 

  • New projects that are eager to go to market and incentivised to bypass our own poorly defined standards for the sake of expediency.
  • Older projects with their share of churn and technical debt
  • Smaller, more targeted projects launching products which expose them to specific attack vectors.

These risk factors will persist as enduring challenges for ecosystem players even as the industry attains escape velocity. Herein lies Auros’ unfair advantage as an investor, power user, and service provider. Our unique position enables us to seamlessly integrate technical expertise and allocate capital with a comprehensive understanding of these risks, surpassing firms with narrower focuses and lesser technical skill. This holistic approach is ingrained in the Auros DNA. 

Capital Efficiency and Price Discovery

Real World Assets (RWAs) and memecoins are two sides of the same penny; that  both represent on-chain value discovery.

Looking at the tails of our investable universe, Memecoins are an incarnation of our collective quest to assign value to digital computations within a nascent cultural zeitgeist, traded in the virtual realm.  RWAs on the other hand are tethered to a broadly accepted unit of ‘real world’ value. But price discovery extends beyond the binary function of transferring asset X from seller A to buyer B. 

Keeping things as simple as possible, it can be summarised as:

  • Mutual Trust: How can A and B mutually trust each other, or ideally, conduct transactions without needing to trust anyone and still achieve the desired outcome? 
  • Risk Mitigation: Can B acquire X in a manner that addresses nuanced concerns about perceived risks? 
  • Capital Availability: Is there sufficient capital accessible (at an acceptable cost) to facilitate this process?

Converting these principles into opportunities translates into some of the most promising aspects of  on-chain infrastructure and DeFi today. At Auros, our focus extends beyond mere asset transfer to encompass broader principles of mutual trust, risk mitigation, and capital availability. 

Settlements — from Trust to Trustless

Transitioning from trust-based to trustless settlements involves productising decentralised on-chain execution, consensus and data availability. On-chain settlement, atomic swaps, and intent (all the way to AI powered agents) models, supported by new cross-chain and interoperability models, all point to the long and necessary process of migrating core infrastructure on-chain. 

Capital Efficiency 
  1. Capital availability: What do Liquid Staking and Lending Protocols have in common? Both facilitate capital velocity. Liquid Staking allows pools of capital, typically locked to support the Proof-of-Stake (POS) validation process, to be utilised (rehypothecated even). These protocols have evolved from simple overcollateralised pools to adding an additional service layer to the business model of increasingly commoditised validators. This evolution is also surfacing in new ecosystems embedding new capital utilisation and stakeholder mechanics at the protocol design level. 
TVL for liquid staking protocol as of July 2024

On the other hand, Lending Protocols aim to reintroduce leverage into a market that remains starved for capital. There is ongoing innovation targeting the implementation of ‘smart’ collateral and liquidation mechanisms to address the multiple facets of credit risk. To supplement this, Auros is also supportive of new implementations of stablecoins as our collective settlement and collateralisation instruments. While bootstrapping challenges exist, Auros’ long-term view is that an oligopolistic stablecoin market, rather than a fully diversified or monopolistic one, is desirable. 

  1. Capital fragmentation and non-linear risks: The low barriers to entry for creating new assets, while facilitating innovation, can feel chaotic. Fungibility between the plethora of tokens available today is often only superficial, once one considers the complexities of price discovery (including on-chain oracle data) and difficulty of execution (cross-chain solutions that incur cost and latency). To that end, Auros is a high-conviction supporter of both oracle and data projects as well as solutions that provide greater depth and nuance to the market such as perpetuals and derivatives, crucial for capital deployment and risk management in this space. At scale, these tools are some of the most essential building blocks to help us navigate the non-linear risks associated with investing in the crypto market. 

The Long Tail: This Time It’s Different 

The 1 Billion Daily Recurring Users Challenge 

Investors recalling the first ICO cycle of 2017 may approach the cycles of rebranding with skepticism. While it is true that old crypto ideas often resurface with new branding, we perceive this as a part of a non-linear evolutionary process , where good ideas return to the drawing board until scalable execution capacity is identified. We anticipate that the current cycle will be notably successful in this regard, as we now possess the capability to credibly pursue the ‘1 billion Recurring Daily Users’ (1b RDU) horizon. 

Looking at where this target applies in Web2, we bucket the transferable verticals to Web3 as: 

  1. Social and Media: In Web3, there is a notable shift towards models where creators and users are incentivised directly, moving away from the traditional ‘user as the product’ approach with all its negative externalities.
  1. Identity: This includes user data management and messaging, extending to the concept of wallets as our digital identity, or passport, in the decentralised web.  
  1. Finance and E-commerce: The decentralised nature of Web3 offers new opportunities for financial transactions and online commerce, with increased security and transparency.
  1. Gaming: Web3 opens up possibilities for decentralised gaming platforms that enable new forms of ownership and interaction within high-engagement digital ecosystems.
  1. DePIN: Decentralised Physical Infrastructure Networks are shaping up to be a crucial aspect of Web3, offering novel incentives for managing and optimising physical infrastructure across networks. 

Computation as the Asset Class

While these categories overlap, projects with credible go-to-market trajectories are emerging in each of these spheres, driven by a multitude of factors that include the need to review legacy business models, promote capital cost normalisation, drive native innovation, and accelerate blockchain’s compatibility with real-world infrastructure.

The overarching point in all of this is that the single greatest innovation of our industry may in fact be the uncovering of a price discovery mechanism for the cost of computation, as its own asset class.

This reframes our relationship with the digital world in an entirely novel way – the implications of which are barely surfacing. 

Auros Ventures: Spearheading the Evolution of Digital Assets

Auros Ventures is a natural evolution for Auros as we continue to redefine investment norms and seize nascent opportunities. With a sharp focus on leveraging our expertise in risk management and liquidity provision, we are poised to enable innovation and drive the digital asset ecosystem to maturity. Our journey, marked by resilience and strategic growth, underscores our unwavering commitment to mastering the market’s complexities. 

As we embark on this bold new chapter, we extend an open invitation to builders, ecosystems, and fellow investors to join us in shaping the future of decentralised finance. Reach out now to be a part of this thrilling journey: [email protected]

An Afterword Bitcoin: Ordinals and BTC Layer-2 Matters 

No thesis on digital assets would be complete without acknowledging Bitcoin (BTC) – the cradle of the cryptoverse. Auros actively invests in BTC scalability solutions and advocates for smart contract implementations on the Bitcoin chain. We believe in expanding BTC’s relevance beyond the reactive macro trade that has sustained its adoption narrative to date. We see it going beyond hard money to becoming the base currency of computation. 

This is because our perspective transcends BTC’s role as a store of value or means of payment. We see its increasing connectivity as a signal of its role as the security backbone and ultimate validator of  the cryptoverse. 

As demand for on-chain security and related computations grows, BTC’s blocks will become the sought-after point of finality. 

Auros aligns its investments with this vision, which, over the long run, entails that BTC is much more than an inflation hedge, but rather a sentiment indicator for our rapidly shifting relationship with technology at large. 

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The views expressed here are those of the individual Auros Ventures personnel and are not the views of the Auros Ventures or its affiliates.

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