When in June of last year, after months of hard work and preparations, he was getting ready to announce the creation of the Rockaway Blockchain Fund, which had set the daring goal of collecting $ 100 million (over CZK 2 billion) from investors and gradually investing it into blockchain start-ups and decentralized finance (DeFi), he was a bit nervous.
Three months earlier, the world had first been shaken by the crisis caused by the Covid-19 pandemic and financial markets had declined sharply over the course of a few days, as did crypto-currencies, so it was no wonder that the investors with whom fund founder Viktor Fischer had been negotiating for several months had other things on their minds.
“They told me: Viktor, I’ve got companies, restaurants, that are suffering and need help. It was horrible. Nobody was answering the phone, there was panic everywhere, and everyone was saying that cash is king,” recalls Fischer.
But eight months later, he’s smiling again. Despite initial fears, his fund is exceeding all expectations, almost half of the target amount has been raised, and its portfolio, which currently contains twenty-two start-ups and VC funds, is reporting growth of over 500 percent.
“When it was apparent that the crisis had impacted only some areas, and digitalization wasn’t among them, everything turned around. Blockchain is nothing more than the digitalization of traditional financial services,” adds Fischer.
Viktor, when did you personally last use a service on the blockchain?
Just a couple of days ago. I invested via the 1inch platform, which is in our portfolio. I invested liquidity, which made me roughly 10 percent a month. What bank today will give you 10 percent a month and 100 percent a year? No one will give you that. But 1inch will.
How does it work?
It’s an exchange that has this pool into which you throw various crypto-currencies, and people then trade them among themselves. Someone wants to trade USDC (a digital stablecoin tied to the US dollar) for Ethereum, so they go to the pool, which contains these crypto-currencies, throws in USDC, and pulls out their Ethereum.
And where does such large appreciation come from?
For one, you receive a share of the fees that traders pay 1inch, and the second reason is that the platform itself pays you to deposit liquidity. 1inch needs the pools to grow quickly, so it subsidizes them to motivate you to invest in them.
But there are more examples of the use of decentralized finance (DeFi). Which seems the most practical to you?
Insurance. That’s what is most needed in DeFi now. When you put your money into DeFi, into some pool, you’re risking that the pool will be attacked by hackers who will drain the entire pool, along with your investment. So I wouldn’t put all of my money there. Today, only one company is capable of insuring this, and that’s Nexus Mutual in London, but they’re completely sold out.
Are there other risks involved?
It’s important to say that transaction fees are still high. Imagine that you deposit €5000 into 1inch, in a month you make €500, but €250 of this gets deducted as fees. That’s a lot, and it’s due to everything running on Ethereum, which has very high fees. So some transactions are only worthwhile if the invested amount is sufficiently high.
As a layman I always had the feeling that the greatest benefit of DeFi will be cheap and simple ways to send money anywhere in the world. Is this true?
Payments, that is, sending money here in Europe, don’t make that much sense in DeFi because in this respect banks work very well. The transaction fees aren’t high either. Plus it’s a very simple transaction, so there’s no logic in it. The great thing about blockchain is that every transaction can be programmed. When you buy an apartment, you no longer need a notary. The blockchain world has something called smart contracts, which can detect the fact that the apartment has been registered in your name in the land registry and automatically release the money. You thus eliminate middlemen; you don’t need lawyers, notaries, and bankers, which makes the entire process cheaper.
Loans are another good example, right?
Yes. When a company sells something through Marketplace, it may not get paid for 90 days, though the goods have been sold. In the regular banking world we’ve got refactoring for this, but it’s expensive, whereas on the blockchain it’s much simpler. Or you’re a musician who composes music, and one day you’ll be paid by Spotify. Normally, no one will loan you money against this, or if they will, it’s expensive and complicated. On the blockchain it’s completely automatic.
It seems to me that this is what we once expected from Bitcoin. There was a lot of talk about how we’d use it for routine payments, but DeFi had to wait until now for its practical use. And not thanks to Bitcoin.
Yes. That is, this had already started in 2017. According to estimates, DeFi is being used by 1.4 million users today, and this number is growing incredibly quickly. Recently we were talking to the Polychain fund, in which we also invested, and their IRR on their first fund is 90 %. That kind of rate of return on a fund hasn’t been seen since the 1990s, when it was achieved by VC funds investing into start-ups.
Why has it all accelerated so much now?
There’s traction, and even though its use is still complicated, people have realized that DeFi makes sense. A year ago, there was $800 million in DeFi, after a year it’s $40 billion. I’ve never seen a sector with such rapid growth.
How has DeFi changed over the past year?
There are finally interesting projects. Development work on Ethereum started in 2015, and a year later it was being used to program the first projects. But these platforms started launching only last year. Compound, Aave, Synthetix… In the summer of 2020 it then took off when people realized that it really works. It needed time.
How did Covid contribute?
It accelerated everything. Bank branches are closed, so people are sitting at home on the internet, and when you’re on the internet you can connect to any blockchain anywhere in the world. Just like the internet globalized information, when from Prague you can read the New York Times on-line, blockchain is globalizing financial services – so from Prague you can lend anyone anywhere in the world via Compound.
Is it now possible to operate completely in DeFi without having to return to the conventional world?
Not yet. What’s missing is a link to the real world, at least from the perspective of payments. You can have your own account on the blockchain, which is a wallet, so theoretically you can say to your employer: Send me my salary in USDC, which is a dollar stablecoin. But then you run into two problems. The first occurs when you enter the blockchain world, when you tell your employer this. I can already see the accountants panicking, trying to figure out how to do it. The second problem is on the other end. You’ve got USDC stablecoin, but then you go out for dinner with your wife and you can’t use it to pay.
So you can’t have all of your personal assets on the blockchain yet.
You can have investments there, but not money you need for daily use and payments. For example, I have most of my money on the blockchain, 80 percent, perhaps more. When I get my pay, I send some part of it to Revolut and to a normal bank, to cover the mortgage and food, but then I send the remainder for investment to the blockchain, because nobody else will give me a rate of interest that is as high.
What phase is DeFi in now?
It’s the same as in the beginnings of the internet, when various protocols were being created. TCP/IP for communication, IRC for chat, Gopher for browsing, these were all terribly ugly and user-unfriendly. Back then, engineers weren’t interested in user interfaces. Only later did the HTML protocol arrive, Netscape, who said: Let’s make it even simpler. And only then did America Online arrive, which began sending people CDs and modems to connect. That’s exactly where we are now with blockchain. Various protocols are being created, but an “America Online” that could bring in masses of people hasn’t arrived yet. We see the potential, but it’s still unbelievable complicated.
So complexity is currently the biggest problem?
Blockchain’s biggest problem is that it completely changes the entire concept of the financial world as we know it. We’ve got money that is issued by the state, which we trust. We’ve got a bank account that we trust because it’s at a bank. Blockchain changes this completely, and says: Now you should only trust software, and it all occurs automatically now. And most people can’t understand that.
If you’re not an IT specialist or mathematician.
Yes. All money is worth only what you believe it’s worth. Once upon a time we used seashells for payment, because everyone believed they had value. Today we believe that gold has this value. Banknotes. In the case of the US dollar, you believe that it has some sort of value because it’s backed by the US government, while you don’t trust the Venezuelan bolivar because they’ve got 300,000 % inflation. Up to now, all financial products have been about the fact that you trust someone. But now blockchain is changing all that – and forces you to trust software. So if you don’t work in IT and don’t understand it, you don’t trust it.
What will change this?
The whole complexity of blockchain needs to take a back seat. People actually must not even know that blockchain is behind some services. What people trust, is for example an app on their phone. Look at Revolut, for example. Today, it could offer a 1inch pool on which you could earn 10 percent a month. All that it would take would be to link 1inch to Revolut. That’s the vision. We need two things. Greater adoption, because people will start to trust it when they use it. And the second thing is simplification of application interfaces so even our parents can use it.
We’ve been watching crypto-currencies grow a lot lately. Is this the result of the growth of DeFi, or the cause?
The cause. DeFi is growing thanks to crypto-currencies. In May 2020 Paul Tudor Jones performed an analysis of how best to protect yourself from inflation, and found that bitcoin was the best. He said that bitcoin reminded him of gold in 1970, the year he began working on Wall Street. He’s a hedge fund manager in charge of $ 22 billion, and last year he decided to put one percent into bitcoin. That’s $ 220 million. He wrote a detailed article about it that everyone read, and suddenly all investors in the USA said that they also have to put one percent into bitcoin. So it began to grow, and now retail investors are joining in. They’re investing in bitcoin, they’re starting to take a greater interest in it, and suddenly they discover the DeFi world, and begin investing in it too. That’s why DeFi is also growing.
And so is the Rockaway Blockchain Fund. Are you satisfied?
I’m very satisfied with the portfolio’s performance. We didn’t make every single target we’d set, but that’s not even possible. We’re trying to go mainly for fundamentals, and aren’t interested in projects that merely have good PR. Our biggest problem right now is that our team is too small. There are five of us and we’ve already got 22 investments. We’re doing everything and can’t keep up. Yesterday everyone was sitting here until 10:00 at night and working on a transaction, and at 8:30 in the morning they were sitting here again. I’ve got an incredibly motivated team, and I’m immensely grateful to them for that.
What’s investor interest like?
It’s growing. And when someone tells me no, it’s not because they don’t trust this market. They just don’t have the money at the moment. But in the beginning it was harder. Back then, everyone said: Victor, bitcoin is dead, and blockchain has no other use.
What’s your goal?
We’ve got a top-notch product; no one else in Europe has a fund like we do. We invest into top-notch projects and funds, and we’ve got a team that understands what we’re doing. By the end of the year I’d like to raise that $ 100 million, and then invest it well and build a strong portfolio. We want to be Andreessen Horowitz or Index Ventures for blockchain. We’re changing the world from Prague, and I like that.
And the future of DeFi as such?
I’m confident that DeFi is the backbone of the financial system of the future. One day you’ll make money directly in crypto-currencies, and you’ll spend the same crypto-currencies. No transfers. That the whole world will simply move to blockchain. But the traditional financial world will still exist, and we’ll be able to connect to it from DeFi via simple FinTech applications. Banks will offer blockchain products, but their role will tend to be that of a phone operator – a middleman you pay to connect you to blockchain. The main fees will flow to blockchain services. So if I had a child now, I’d tell him or her: Don’t become a banker.