ParaFi Capital, the DeFi-focused asset management firm led by Ben Forman, announced a strategic investment from Galaxy Digital Holdings Ltd. (TSX: GLXY), in which the firms would join forces to seek co-investment opportunities to drive further adoption of decentralized finance.
Publicly traded Galaxy Digital, led by blockchain investment veteran Mike Novogratz, is a leading financial services and investment management company, current boasts over $400 million in assets under management. With this transaction, Galaxy Digital has become a minority shareholder in the firm, joining other ParaFi investors including Bain Capital Ventures and Henry Kravis, Co-CEO and Co-Founder of KKR. As of August 31, 2020, ParaFi had assets under management of over $100 million.
ParaFi was founded by Ben Forman, previously an executive at private equity firms KKR and TPG. ParaFi began investing in DeFi in 2018, deploying capital behind leading protocols such as Compound (lending and interest accrual), Aave (asset borrowing), Uniswap (automated liquidity provision), and Synthetix (synthetic asset trading).
I had an opportunity to sit down with Mike Novogratz and Ben Forman to ask a few questions about the new partnership below.
Thank you for joining us today. Congratulations on the new partnership. Mike, what drives your ethos and your unshakeable belief in this industry?
MN: Crypto, blockchain, bitcoin and DeFi are having a moment. I had this expression, “the herd is coming.” Galaxy was a couple years early. After COVID, we’ve seem a massive acceleration in digitization of everything and innovation of the crypto space. There’s bit a jolt of energy into our industry. We now see the wealth channels. The 50-80 year olds in the world now view Bitcoin as a tradable macro asset for them. I like to split up the crypto universe in Bitcoin and everything else, where all of the intellectual innovation is happening, including DeFi. We have about 5% of our capital committed to DeFi and a whole lot more of our intellectual capital.
Ben, tell us a little bit about your journey into DeFi.
BF: We started in early 2018. Our initial thesis was around ‘crypto finance,’ at the time DeFi wasn’t around. Today, we are focused on investing in the application layer – lending, borrowing, hedging, insuring, indexing. All the things you can do in the traditional financial markets, you can now do in DeFi.
How would you describe DeFi to someone new?
BF: It’s an open-source architecture that enables financial services to be built on top of blockchain-based architecture like Ethereum. They can be built and used by anyone globally, decreasing the barriers of entry and adoption. They are peer-to-peer and non-custodial. Eventually, people won’t know that they are using DeFi, it will all be on the back end…it will be the same as sending an email.
MN: No one cares whats in the back of the TV. You just want to watch the TV!
Tell us a little bit more about your new partnership together.
MN: We reached out to ParaFi to take a small stake in them, mostly because we think they are smart guys and we want the intellectual capital. If I’m the big banks, I’d be more worried about DeFi than Bitcoin. Bitcoin may be ‘digital gold’, but DeFi is where their margins are going to go. This is the democratization of finance… We are going to give access to finance to far more people.
This is not even the first half of the first inning for DeFi. This is the democratization of finance we’ve all been taking about since we got into crypto. It’s too early to understand how this all plays out.
BF: DeFi is the first thing outside of Bitcoin, that has actual usage and actual product market fit. It has month-over-month growth of 20%. It’s 3% of the broader crypto market, yet it is the one area with real market adoption. And with talent flowing in, according to every KPI, we are seeing significant growth.
How does DeFi compare to the ICO craze of 2017?
MN: There was a lot of frenzies up and down. In 2017, most of the tokens were “allegedly” utility tokens that didn’t have long term value. Bitcoin created a “store of value.” A store of value is a social construct, it’s not the technology. You can’t have a store of value with 5000 tokens. DeFi tokens are more like security tokens, they have a yield, or a dividend, or a fee… You start taking a ‘wall-street’ dynamic into the space really fast.
The regulators are working hard to understand it. They were way behind the curve in 2017, they will be less behind here.
What parts of DeFi are you most excited about?
BN: There are four major categories that we see in DeFi – fixed income (borrowing and lending, yield products), insurance (buying put options to hedge against an event), decentralized exchanges (for example UniSwap), and asset management products (robo-advisors, ETFs, closed-end funds, YFi as an example).
This is a better first principles design of finance.
In five years where do you see DeFi?
MN: In five years, DeFi will go from crypto to FinTech, it will start to eat into the mainstream.
BN: We are going to be living a world where there will be a convergence of FinTech and blockchain. People just want to use products that make their lives better. Blockchain will be the new backend for financial services.
Thank you for joining us!
Full interview available October 3, 2020 on www.MythofMoney.com.