Hook’s initial product is a covered call strategy, which lets NFT owners convert market volatility into yield. Hook’s options are cash settled and so offer a way for option buyers to gain directional exposure to a given collection without having to buy the underlying asset.

Hook is the most novel approach that we’ve seen so far to NFT financialization and we believe represents a significant improvement over existing products. The two main current approaches to NFT financialization are lending and fractionalization. Lending lets NFT owners user their NFT’s as collateral, but then puts the burden on them to make their borrowed assets productive. This is useful in many cases but does not make NFT’s in and of themselves productive.

The other main approach to NFT financialization has been around fractionalization - you can take your NFT, split it into N parts, and sell those. While this is also useful, it has some issues. First, it’s generally a one way street - it’s very hard to make your NFT whole again after it’s fractionalized, and so this limits the market size. It also likely has negative tax consequences in that the owner is selling financial instruments. Lastly, it also often creates stranded assets where there is just not that much liquidity for these things.

Hook fits into the emerging wave of more sophisticated DeFi products, which generally abstract away complexity for users. Ribbon, which is building DeFi structured products, has grown at an impressive clip and is seeing most of their covered call vaults sell out quickly.

If you’re interested in connecting with the Hook team, reach out and we’ll connect you.

Cross-chain State Proofs aim at solving the fragmentation of contract state and liquidity across different chains, which has created inherent inefficiencies between instances of multi-chain DeFi applications. Since Lagrange State Proofs are purely cryptographic, they also provide an improved set of security assumptions to bridges, messaging protocols and oracles.

We strongly believe in a multi/cross-chain future because it allows for greater scalability, interoperability, and security. Multi-chain systems allow for the creation of multiple independent chains that can operate simultaneously and can be optimized for specific use cases. Cross-chain systems allow for the transfer of assets and information between different chains, enabling greater interoperability between different blockchain networks. This allows for more efficient and secure transfer of data, and this is precisely where Lagrange fits in.

The division of contract information and liquidity among various blockchain networks has led to inefficiencies within multi-chain DeFi applications. While messaging protocols, bridges, and liquidity transfer layers can address some of these issues, they do not solve problems related to complex interactions between different blockchain networks.

Today, the most common solutions for addressing fragmentation of liquidity in the DeFi ecosystem focus on consolidating liquidity onto a single blockchain network (e.g. Stargate). To determine the value of assets, off-chain price feeds such as Chainlink can be used, however, this approach may not support a diverse range of assets. For cross-chain state access, various makeshift solutions are often employed, utilizing messaging protocols to facilitate the transfer of information between different blockchain networks.

We have been impressed by the technology the Lagrange team has built and the number of use cases it is optimized for — from undercollateralized lending to cross-chain decentralized identity, or cross-chain yield optimization, such a cross-chain mode of interaction is beneficial to all parties involved in on-chain interactions.

We think that the team, co-led by Ismael Hishon-Rezaizadeh, is the right one to go after this technical challenges — they are very deep engineers who have demonstrated their ability to ship highly technical products utilizing modern emerging applied cryptographic primitives. On the cryptography side, the team also works closely with the Co-Director of Yale Applied Cryptography Lab, Prof. Babis.

If you’re interested in integrating Lagrange to optimize your cross-chain use cases, reach out and we’ll introduce you to the team.

When we started Lattice, I would’ve laughed at you if you told me that as a crypto focused fund we would be investing in a professional sports league. But here we are. And we couldn’t be more excited. Karate Combat is one of the most exciting visions we’ve seen for new consumer experiences enabled by Web3. We’re stoked to be backing the team alongside our friends at Bitkraft, Delphi, M13, and others.

Karate Combat is slowly decentralizing its league and transferring governance to token holders. This means that fans (through the $KARATE token) can help decide matches and league structure. They can help make key business decisions like IP licensing. And they can benefit as the league grows.

The Karate Combat team has also pioneered an innovative ‘Up Only’ gaming method where fans can stake $KARATE tokens to wager on fight outcomes. Fans who wager correctly can share in winnings from the prize pool, but losers don’t lose their principal. We think this model can massively increase fan engagement.

The Karate Combat team has been impressively executing on their vision for more than five years and we believe this financing is just the start of the second inning for them. We’re excited to be along for the ride.

• Building and using crypto remains painful b/c it requires direct interaction with base protocol layers (L1s) that have made technical and UX sacrifices to satisfy a pre-defined ethos (e.g. decentralization, scaling, etc).

• Modular architecture empowers builders to permissionlessly innovate and customize on behalf of users by creating abstractions on top of the base layer.

• The biggest unlock of modular won’t be general-purpose solutions (e.g. roll-ups), but rather use-case specific protocols and networks (AKA vertically-integrated middleware) that compete with their web2 counterparts — which will finally scale crypto to its proverbial “next 1B users”.

  1. The Wrong Bottleneck

• One of the prevailing sentiments in crypto today is that the lack of cheaper and faster transactions (AKA scaling) is the primary bottleneck for broader adoption. However, the data suggests a different story: Solana’s average TPS hovers around ~4K despite peak capacity of 65K. Rollups (L2s) on ETH on average utilize ~4-5% of available gas. There appears to be plenty of available blockspace and throughput —- but no one to use it.

  Moreover, Ethereum (one of the most popular blockchain ecosystem) has ~400K daily active wallets and 7K full-time devs (23K monthly active), both of which represent < .1% of scaled web2 platforms. So what’s really holding us back?

  IMO, the answer is clear (albeit not fun to admit): building and using crypto is painful. Why? Because builders and users are still largely required to directly interact with the base protocol layer of crypto ecosystems (L1s). This layer is inherently complex and has made pre-defined technical and UX trade-offs to fulfill the particular ethos across the blockchain trilemma it’s trying to optimize for (e.g. decentralization, scaling, etc). Directly interfacing with this layer isn’t easy — nor is it designed to be.

  The lack of abstraction is especially challenging for app builders, who have little choice but to pass on the technical constraints and tradeoffs (decentralization, cost, performance, MEV capture, etc) inherited from the base layer they build on top of on to their users. Because base layers are designed to support a wide array of use cases and total value locked (TVL), they are 1) not incentivized to rapidly innovate at the protocol layer (more downside risk than upside), and 2) general-purpose, requiring builders to implement specific capabilities or customizations required for their use case.

  Builders who wish to innovate at the base layer by creating their own sovereign application chain (or “app-chain”) via an ecosystem such as Cosmos face a different but equally challenging uphill battle. Instead of having network security (validators) provided by the base layer (e.g. Ethereum, Solana, etc), app-chain builders have historically had to hand-roll these on their own.

  Worse, there are meaningful switching costs (technically and politically), which puts builders in the unenviable position of a) choosing a base layer at the onset before deeply understanding their use case, and b) having little flexibility to adjust after the fact.

  So how do we better empower crypto builders with the tools and autonomy to innovate on behalf of users?

  2. Modular Architecture & Permissionless Innovation

  The core value proposition of modular design to builders is simple: instead of relying on base layer protocols to serve their infra needs, modular enables builders and entrepreneurs to permissionlessly innovate on it themselves. This approach empowers builders to create the tech stack required to create delightful end-user experiences, rather than being artificially constrained by the technical and UX limitations of the base layer. Sreeram Kannan, EigenLayer’s founder, offered a recent example of how modular design facilitates innovation in a recent podcast:

  Scaling Ethereum has been a long-standing point of contention within the community, with sharding being the most amenable solution — but was moving slowly given the complexity and blast radius (billions in TVL). EF pivoted to a rollup-centric roadmap which enabled an “open market” approach and led to several teams building solutions (e.g. Optimism, Arbitrum, zkSync) using different techniques to help solve for scaling in a far quicker time than EF could have implemented sharding.

  Modular architecture unbundles the core capabilities and responsibilities of monolithic blockchain ecosystems (eg execution, data availability, consensus, sequencing) via an abstraction on top of the base layer, allowing builders to pick, choose, and modify the components that offer the best UX for their users — and “swap” them out as they learn more about user need. While modular is still very much in its infancy, there are exciting tools available* for developers:

  • Data Availability (DA) - Celestia and EigenDA offer 10-20X faster throughput via their proprietary solutions than Ethereum (83 KB/s).

  • Execution - This can be split up into two categories: 1) General Purpose Rollups or L2s (Optimism, Arbitrum, zkSync, Scroll, Polygon zkEVM, Starknet, Mantle), and 2) Custom Application Rollups (Optimism Bedrock, Arbitrum Orbit, Fuel, Eclipse, Caldera, Sovereign and more) which provide builders increased flexibility and performance via utilizing custom VMs and DA solutions (e.g. rollups as a service)

  • Consensus + Settlement - EigenLayer, Celestia, and Cosmos Hub offer the capability for credibly neutral infrastructure or protocols to rent network security from existing L1 validators (e.g. Ethereum or Cosmos), instead of bootstrapping it from scatch.

  For example, modular allows builders who want to build on Ethereum but may be willing to sacrifice some decentralization/censorship resistance for performance improvements to utilize off-chain execution (e.g. rollup) and/or off-chain data availability (e.g. validium or IPFS).

  A builder who wishes to innovate at the protocol layer to better capture MEV (e.g. a popular game or NFT collection) can more easily do so by standing up an app-chain and bootstrap network security via EigenLayer or Celestia — without requiring large CapEx or recruiting validators.

  And while using a roll-up or a more performant data availability solution is cool — modular design presents a much larger opportunity for builders…

  *some of these tools are not yet launched on mainnet

  3. Vertically Integrated Middleware

  The most exciting unlock of modular design won’t be the general purpose offerings that are popular today (e.g. L2 rollups). Rather, I believe we’ll see the formation of a new layer built on top of general purpose L1/L2s: vertically integrated middleware.

  Before we get any deeper, let’s first define what this term means. I define this layer as:

  • Sufficiently decentralized networks, products and services which utilize modular design to deliver core innovations at the infrastructure or protocol layer

  • Natively designed from day 1 across hardware, software, protocol, integrations, partnerships, etc to power specific use cases with both table-stakes functionality as well as capabilities uniquely native to crypto.

  • Empower app developers to build on top of to create compelling consumer experiences.

Let’s walk through an example: let’s imagine you want to build a payments / remittances app for cross-border use cases on crypto rails. Today, you’d have to solve for a whole host of problems (i.e. identifying the chain to process transactions, multi-chain support, who pays gas, throughput, KYC/compliance, privacy, chargebacks, FX/currency exchange, off/on ramps, etc) — all before you even start to think about your own app experience!

Worse, every other builder trying to create a payments app is experiencing the same pain 😟.

Modular re-imagines this. Entrepreneurs or companies are now empowered to innovate at the protocol layer and create a permission-less network specific to payments with all these capabilities natively supported out of the box — in the shape or size they think is best for builders to build on top of. This vertically integrated middleware solution might look like an evolutionary descendent (and more payments-specific version) of Base, Coinbase’s new L2 which offers access to 100MM+ KYC/KYB-approved users, is gas-less, supports account abstraction, and has native interop with other Optimism-based L2s as part of Superchain.

Alternatively, it might look like an app-chain with bootstrapped network security that uses a stablecoin as its native asset, is gas-less, privacy-first, has escrow/chargeback support plus partnerships with international banks for instant on/off-ramping and uses CCTP or Axelar to abstract multi-chain.

These solutions might additionally offer crypto-unique functionalities such as stable-stable pairs to eliminate FX fees/slippage or bi-directional payment flows to facilitate affiliate/referral marketing.

Middleware solutions such as this unlock app developers to build strong consumer payment experiences that have a meaningful shot of adoption.

The meta-point in all this: instead of waiting for any single ecosystem to enable capabilities like these, modular allows builders to create middleware solutions and compete for developer mindshare in an open marketplace.

We see other examples of this thesis playing out. Farcaster, a sufficiently decentralized social network that facilitiates user-owned data via off-chain hubs, has sprung up an entire constellation of interesting consumer social applications built on top. Chainstory, a project I’m helping build, aims to serve as a permissionless reputation primitive to help builders, projects and communities build more customized experiences by helping them better understand the skills and experiences of their users.

This is just the start. I believe we’ll continue to see this trend of specialized middleware solutions supporting a wide array of verticals from verifiable AI model training & execution to on-chain game execution — and much more.

4. Areas of Opportunity

Over the next 12-18 months, these are the areas surrounding this thesis I’m most excited about:

1. Vertical-Specific Middleware - Sufficiently decentralized protocols and networks that act as core services for specific verticals that crypto is uniquely positioned to disrupt (such as the payments example above).

2. Capability-Specific Middleware - Components or products which abstract specific base layer capabilities for developers such as key management (Lit Protocol**), sequencers, or bridges / interop solutions (Lagrange**).

3. One-Click Infra - Tools that make it simple for developers to stand-up modular infrastucture (e.g. app-specific rollups).

4. Developer/Observabillity Tools - With the developer stack becoming more disparate in a modular world, I’m interested in tools that help builders monitor the health and uage of their tech stack (e.g. web3 DataDog)

5. Blockchain UI as a Service - As middleware networks and protocols proliferate, there will be a growing need for users and developers to navigate them via clean UI interfaces. I’m interested in modern takes on block explorers (e.g OnceUpon) or search engines (e.g. Ora) offered as a service to middleware owners.

**Lattice Portfolio Companies

If this generally resonated with you and/or you’re building in these spaces, please reach out or TG me. We would love to chat!

Huge thank you to Regan, Mike and Pierre from Lattice Fund, Sreeram from EigenLayer, Kyle from Multicoin, Miko from Gumi Cryptos Capital, Dylan Hunzeker, Harrison Dahme from FactionVC, Shawn Dimantha from Hydra Ventures DAO, Eshita from Messari and the many others who reviewed this post.

Ensemble aims to create value from these assets by providing them with digital scarcity and showcasing them in context. Many artists have valuable creations that are left unused, but currently have no means to release them. In the traditional world, these assets are often left in closets and studios. Sometimes they’re sold through outdated auction houses. We believe that utilizing the capabilities of Web3 technology can help establish these assets as valuable commodities for individual artists, and even enable entertainment companies that own large amounts of intellectual property to monetize their previously unreleased digital assets.

Having partnerships with renowned generative artists such as DEAFBEEF and Mitchell F. Chan provides a strong foundation for Ensemble. From this point, Ensemble can expand to incorporate other forms of art in the Web3 space, such as music NFTs and film/content studios. By establishing a strong presence in this space, we think that big brands and enterprises will become involved — similar to the transition of Art Blocks to Art Blocks Engine, Ensemble can give brands a way to enter the NFT space and convey their stories through art.

SuperRare addresses an NFT sub-vertical by emphasizing the exclusivity of its digital artworks. Any artist who wants to mint NFTs on SuperRare must apply and gain approval from SuperRare Labs. SuperRare also requires artists to submit only one-of-one art NFTs to ensure their pieces are rare.

SuperRare is a good analogy because, similarly, it focuses on a specific art NFTs vertical, that we believe will keep growing as fans will leverage Web3 to get access to previously unreleased assets through stories — the market value of all art is a function of the value of the story or narrative behind it.

With 42 artifacts sold through 6 drops in a few weeks only, we believe that tier-1 artists are very likely to collaborate with the Ensemble team as there are literally no other platforms that are committed to storytelling. For artists, the only real alternative is self-publishing, which is far from being a good option.

It is our belief that the true value of art is established by the authenticity and originality of its stories and concepts. The market value of art may fluctuate rapidly, whereas its cultural value tends to increase steadily, provided that it possesses genuine quality.

We think that Mackenzie is the right crypto native founders to go after this market opportunity. He is a a theatre artist and video essayist who understands what his fellow creators really need.

If you’re interested in selling your artifacts on Ensemble, reach out and we’ll introduce you to the team.

While multi-sig’s have become a key part of crypto financial infrastructure, they have draw backs. They are smart contract based and so they can be challenging to upgrade. This architecture also makes them single chain by design. Moreover, it can be challenging to interact with the ever growing universe of Web3 apps through a smart contract wallet (as app developers generally have to build a special connection).

What if I told you there was a technology that solved these problems but still provided similar security guarantees as a multi-sig? This is the promise of MPC (Multiparty Computation) which has seen adoption grow steadily over the last few years.

Tholos is building an MPC wallet that can be secured by an arbitrary number of owners and works on any blockchain. Their initial focus is going after the sub-institutional market. Tholos is betting that by making MPC technology easier to use and starting with a lower price point, they can take market share from projects that use multisigs today.

Tholos’s use of MPC represents a meaningful improvement for crypto-native organizations:

• MPC is a flexible architecture whereas SAFE wallets are built on smart contracts, meaning you have to upgrade those contracts to change the wallet architecture

• MPC allows you to easily connect to any Dapp through WalletConnect, this is not currently possible with SAFE’s

• MPC is cross-chain from day one

• There is a security improvement in that the private key is never stored or displayed anywhere

We think that Abraham and Peter are the right crypto native founders to go after this market opportunity. They understand this problem deeply, having previously founded ReidarDAO and Coterie Capital. They’ve also recruited world-class cryptography experts like Shalev Keren to help them bring this technology to market.

If you’re interested in using Tholos to securely manage your treasury, reach out and we’ll introduce you to the team.

Decentralized governance has been a long-discussed topic – it aims at helping to prevent corruption, empowering a community to have a voice, and ensuring that a crypto network is run fairly and transparently.

But one of the biggest challenges is achieving consensus among the network members: in a decentralized system, there is no central authority to make decisions, so all members must agree on the best course of action. Coordinating and communicating among many decentralized users can be challenging, as there is no central point of control. The potential for malicious actors to try to undermine the governance process, either by trying to sway the consensus or by attacking the network itself, is another threat.

In February 2020, Compound, by introducing the $COMP token, started a trend of DeFi governance tokens. In Robert Leshner’s words, it consists of “a governance system that will replace the Compound protocol’s administrator with community governance — allowing you to suggest, debate, and implement changes to Compound — without relying on, or requiring, our team whatsoever”.

Since then, governance has been one of the spaces that have seen the least amount of innovation. Most governance models are still based on the one-token-one-vote model, which is very vulnerable to market manipulations.

While there may be challenges and limitations to decentralized governance, we believe that there is still significant potential for experimentation and exploration in this area. We have only just begun to uncover the possibilities that the space offers, and it is important to recognize that there is no single, universal solution to every problem. Our aim with this article is not to present a definitive answer or 'silver bullet' solution, but rather to consider the issues and opportunities surrounding governance and consider how we might move forward.

The effectiveness of a governance system will depend on a variety of factors, such as the specific goals and needs of the organization, the size, and complexity of the organization, and the level of participation and engagement of its members.

Current Approaches to Decentralized Governance

1. Decentralization (One Token, One Vote)

The risk of plutocracy in “coin voting” has been widely discussed over the last few years. Small groups of whales have too much influence over large groups of small-holders because the former type of voter has no incentive to actually vote.

As an example, the MakerDAO Endgame Plan, proposed by Rune, passed despite controversy. Even delegation, a political tool created thousands of years ago, doesn’t solve that centralization issue because they are paid in line with the number of tokens they get delegated – it creates a situation where a small number of powerful actors can sway decisions in their favor rather than allowing the broader community to have a say in the decision-making process. Paying delegates has been a source of debate we will not cover for the sake of simplicity.

Delegation can create a dependency on the third parties to whom tokens are delegated – if a large number of token holders delegate their voting rights to a single individual or organization, that third party may effectively become the "gatekeeper" for the entire community, making decisions on behalf of all the delegated token holders.

Consequently, delegation has been relatively underutilized in the ecosystem to date, with less than ten threads created in the Uniswap Delegation Pitch section. Nonetheless, we notice a strong trend towards a delegate class with professional delegates like Flipside, StableNode or Llama. Even some of the biggest DAOs out there like ENS heavily rely on delegation today

Many token holders’ interests are tied to the token price, even though communities are composed of members with different values and goals. This, very often, leads to over-considering the value of the token during voting processes – many proposals aim to reduce the token supply, increase the value of fees paid in the token, or implement a buyback program to increase demand for the token.

But is the fact that tradeable asset is used to vote on proposals necessarily the cause of these pitfalls?

According to data from Messari Governor, the wide majority of governance proposals today pass (or don’t) with dozens or a few hundred individual voters only. For example, 390 people voted to elect the new Sushi Head Chef (vs. 108k+ token holders at the time of voting), and 0.69% of UNI holders voted to create the Uniswap Foundation, four months ago.

The participation rate depends on several factors:

• Fatigue – token holders might face a burden of having to vote frequently on a large number of issues.

• Alienation – token holders may feel that their efforts to influence a protocol are futile or ineffective.

• Privacy – token holders may feel uncomfortable expressing their true opinions publicly.

• Options – even if there have been previous discussions on the topic at hand, token holders may still feel uneasy about the potential choices available to them and may be hesitant to express their opinions.

• UX – token holders might encounter UX problems that deter them from participating in the voting process. Gas fees are still major pain point to on-chain governance, despite interesting projects being developed, such as the Biconomy gasless relayer SDK.

This list is not meant to be comprehensive but rather to demonstrate that hard data on voting can be complex to analyze and influenced by various factors that are often similar to what causes voter apathy in political elections.

There have been various innovations in decentralized governance, but their success relies on a sufficient level of participation in governance – not enough people get involved. Can we use incentives that are native to the Web3 environment to reduce voter apathy?

2. Participation Incentivization

Paying people to vote is not exclusive to crypto – in a study conducted by Fordham University political scientist Costas Panagopoulos, offering cash incentives of $25 increased voter turnout in a local election from 14.9% to 19.2%.

Some crypto-native models have been designed to find the most efficient way to pay people to vote. To increase voter turnout in a project, it is necessary to consider the cost of voting, or the amount that a project would need to pay token holders to motivate them to participate. This model, while straightforward, can provide valuable information about voter characteristics and behaviors when implemented by projects. However, there is a potential for voters to use bots to collect rewards without fully understanding the voting process, which could result in an increase in voter ignorance.

Governance mining is an innovative concept that aims to distribute a portion of the token supply to groups or individuals who contribute to the protocol, based on the value of their contributions. This approach could improve decentralization in governance by offering rewards in the form of governance tokens to those who work to address governance-related issues. While it does not specifically address voter apathy, governance mining could potentially increase participation by providing incentives for individuals to engage in governance activities. But distributing tokens is also a flawed approach – as Jacob himself put it, “people may spam governance in hopes of capturing some portion of tokens.”** **

The "how do we get people to vote" might be the wrong problem to focus on – participation rates can surely be improved, but as long as speculation will be at the core of any behavior in crypto, voting will never be a top priority.

3. Representational Systems

What if token holders voted on representatives who would then handle day-to-day votes?

A few projects like C.R.E.A.M. Finance, Kwenta, and Synthetix, have been experimenting with term-based governance systems.

Council-based governance is a different approach to the main governance models of token-weighted and delegated governance, which are more like representative democracy and a board of directors. Council-based governance aims to fix the problems of these models by having a smaller group of people with equal voting power make decisions. Token-weighted and delegated governance often have low voter participation and a concentration of voting power. To choose council members for the DAO, Synthetix uses a quadratic voting mode.

As shown by a recent Messari report, there may be some areas for improvement in Synthetix Governance. Still, the Synthetix Councils have generally been successful in adding value to the Synthetix protocol and acting in the best interests of the Synthetix community (808 possible votes could have been cast by the eight Spartan Council members in Q2 and Q3 2022, during each epoch – of these 808 possible votes, 112 votes (13.86%) Spartan Council votes were not cast). The upcoming voting and implementation of Synthetix V3 SIPs (300-312) mean that the Synthetix Community can expect a lot of positive developments in the coming year.

Some would argue that the devil seems to be in the details with representational systems – term length, type of votes handled by the representatives, council members removing process, voting weight mechanisms design, etc. are all parameters that could need adjustments for each protocol to work well.

But there are also a few potentially more serious issues with native-term representation in decentralized governance that may need to be addressed:

• Limited participation – in some cases, a native-term representation may exclude certain individuals or groups from participating in governance processes, potentially leading to a lack of diversity and inclusivity.

• Misalignment of incentives – native-term representation may result in a misalignment of incentives between those who hold native tokens and those who do not, potentially leading to conflicts of interest.

• Complexity – decentralized governance systems that rely on native-term representation may be complex and difficult for some users to understand and navigate, potentially limiting their effectiveness.

• Vulnerability to manipulation – native-term representation may be vulnerable to manipulation by those who hold large amounts of native tokens, potentially leading to unfair or biased decision-making.

4. Gamified Governance

As said before, governance can become a stressful and unpleasant experience while necessary. This is the main reason why governance-minimization frameworks exist – they aim at reducing the power and reliance on governance wherever possible.

However, we’ve recently seen an interesting approach to make governance enjoyable – jokedao allows platforms that want to take action to set up contests and ask users for ideas. Users can then vote on their favorite idea. Participants use tokens to cast their votes based on their unique addresses.

For example, Layer3 used jokedao for its own user-generated roadmap—letting its users nominate and pick the next protocols it would partner with for quests

Gamified governance means that decision-making processes must be collaborative and offer clear rewards for participating.

Gamifying governance is, in a sense, not new – Compound, in August 2021, started drafting ideas to implement a points-based governance system to incentivize users to participate in governance and make the whole experience more enjoyable.

While we think that Web3, by nature, can create a brand new voting experience far from the boring political process by creating a gamified governance process, the clear lack of standardization would make it hard in the short term. Also, decentralized networks often have a smaller user base compared to centralized platforms, which can make it difficult to create a critical mass of users to make gamification effective. And gamification elements may not be easily integrated into existing governance processes, which can make it difficult to implement. We also believe that gamified voting is not sustainable in the long term as the issues mentioned above still exist; despite people’s motivation becoming greater.

While these different experiments have pushed the governance design space forward, none of them has established itself as the golden standard. A fair governance process must rely on a system that creates and maintains inclusivity, transparency, consistency, security, and efficiency.

Other Internet (decentralized applied research organization that received a grant from Uniswap) proposed a few changes to the Uniswap Protocol a few months ago, going in that direction.

At first glance, governance minimization could be a straightforward solution to any governance-related inefficiencies. Whether the “un-governance” model proposed by Vitalik turns out to be true or not, this doesn’t really solve anything at the community and ecosystem level.

Human coordination has always been – and will always be – a source of issues, and the most widely-used protocols generally have to highest levels of informal governance.

Many experiments have been done on non-essential problems – these are necessary but will not create efficient governance systems per se. The Nouns community has been very active in the field, with tools like HeyAnoun that lets nouners give feedback on NounsDAO proposals

We think that governance must be rebuilt from the ground up with governance token distribution, voter incentives, and limited governance complexity as core principles.

So, how did we get there? One (partial) explanation is that decentralized governance was also introduced for regulatory arbitrage. By introducing decentralized governance, teams could kind of skirt the Howey test by saying that it fails on the common enterprise prong, without caring much about the potential issues related to governance.

Mapping The Next Big Things in Governance

1. Get Away From Token-Based Voting With Soulbound Tokens

We should build reputation systems by rewarding voters based on the success of a proposal – souldbound tokens are an interesting tool for this, as ERC-20-based voting has many pitfalls we, at least partially, explored above. Governance power should not be transferable or bought by anyone with no competence to govern. As Vitalik put it, “governance is fundamentally a public good, not a private good”.

SBTs provide a way to recognize and acknowledge the governance-related contributions of individuals in a non-financial manner. They encourage governance to consider alternative methods of retaining valuable members and thanking them for their efforts, rather than just relying on financial incentives.

Some projects like Gitcoin have been experimenting with ideas around Quadratic Voting, but its limitations are due to the possibility for a voter to misrepresent himself as multiple individuals in an attempt to gain an unfair advantage. Since soulbound tokens are tied to a specific address and cannot be transferred, it would not be possible for a single individual to create multiple accounts or identities in an attempt to misrepresent themselves as multiple voters.

Optimism, has proposed using the SBT voting mechanism. It has a bicameral governance model with two divisions: Token House and Citizens House. Members of the Citizens House are involved in governance decisions such as determining how revenue generated by the protocol should be allocated. In its first stage, the House is solely responsible for voting on retroactive public goods funding though.

Even if the risks of poor distribution and the risk of centralization don’t disappear with SBTs, by removing pure financial incentives, they represent an interesting tool to embrace non-financialized decentralized governance.

2. Simplicity Is Key to Onboarding New Governance Participants

Ease of access is a major challenge in the cryptocurrency and governance space. Many people are unfamiliar with the process of purchasing cryptocurrencies and setting up wallets, and may struggle to participate in governance activities such as Snapshot votes and on-chain voting. There are several ways governance processes could be made simpler:

• Reduce barriers to participation – removing high token requirements, or expensive gas fees would make it easier for people to get involved.

• Use user-friendly interfaces – people would more easily participate in governance activities if interfaces were easy to navigate.

• Educating the community – providing resources and information to help people understand how decentralized governance works and how they can participate can go a long way in making it more accessible.

• Regularly reviewing and streamlining processes – per time, governance systems can become cluttered with unnecessary processes and procedures. Regularly reviewing and streamlining these processes can help to keep the system simple and efficient.

3. Multiple Autonomous Centers of Authority Within an Organization

MetaDAOs can be efficient in bringing people together into groups that share similar values and goals, which reduces the chances of conflicts arising due to differences in power or political beliefs. MetaDAOs are in fact an evolution of subDAOs, defined as new organizational structures operating with complete autonomy while remaining aligned with the superDAO.

Rune Christensen tried to demonstrate that voter apathy could be reduced by creating sub/child DAOs that are aligned to MakerDAO but able to seek profit and compete with other MetaDAOs. They would run their own governance processes on top of the Maker Core governance infrastructure. It increases the chances that some of them will be able to achieve strong and widespread success without experiencing corruption or problems caused by freeloading.

The idea of having smaller autonomous groups is not new. Yearn Finance, in a Governance 2.0 proposal, proposed to implement “yTeams”. Yearn contributors are organized into small, self-governed groups that YFI holders grant certain decision-making powers. These groups are responsible for acting in the best interest of Yearn within a specific area of responsibility and have the authority to make specific, defined decisions.

Metropolis is an interesting project that puts working groups on-chain, which creates an organizational "source of truth" for DAOs. Besides adding organizational clarity, Metropolis helps you understand and make sense of the information within your organization. It offers insights on the members, finances, and permissions of each working group, called “Pods”, making it easier to comprehend and navigate the data in an organization.

But there are still grey areas around the emergence and viability of MetaDAOs. In its current form, it’s still hard to scale MetaDAOs. As MetaDAOs are nested within a parentDAO, they can add additional layers of complexity to the governance structure

SubDAOs can also lead to fragmentation as they may have conflicting goals or priorities. This can make it difficult for the parentDAO to make cohesive decisions, leading to reduced scalability. Managing multiple subDAOs can be resource-intensive, requiring coordinating with multiple subDAO leaders and managing multiple sets of smart contracts. This can add overhead and reduce scalability.

We need the right set of tooling and interface to limit organizational complexity and optimize governance efficiency.

4. Exploring the Possibility of a Hybrid Governance Model for Decentralized Autonomous Organizations

We believe that one solution to the plutocracy issue is a hybrid model that combines elements of traditional governance structures with the benefits of decentralized technology.

Combining direct democracy with representative democracy, while ensuring that the decentralized governance process remains inclusive, diverse and fair, by giving representation to communities with different characteristics and interests, based on both on-chain and off-chain insights. With more and more companies building analytics tools, that allow to understand, segment, and activate user data, community members are more likely to elect representatives that truly represent their interests.

As relying on representatives means adding an additional governance layer, we think that easy-to-navigate platforms that improve the searchability of governance-related content should be created. Governance is characterized by silos with poor communication and data, which makes it difficult for the average voter to understand how the system works and its advantages.

Closing Thoughts

Decentralized governance presents a unique and exciting opportunity for experimentation and exploration. While there are certainly challenges and limitations to this approach, we believe that there is significant potential for innovation and progress.

Decentralized governance doesn’t necessarily make sense for early-stage startups – it very often reduces the pace of innovation and can be very distractive for founders whose focus should be on finding early market validation, and potentially product-market fit. To not hold teams back, decentralized governance should always be progressive and focused on specific dimensions instead of the entire governance stack.

As we expect more and more teams to work on more fair token distribution mechanisms at a later stage of their development process, governance powers will remain in the hands of a centralized team longer, and be distributed in smarter ways.

If you are building in any above mentioned areas, please reach out to pierre@lattice.fund.

Fixed-rate lending dominates the mainstream world

Fixed-income markets remain an integral component of economic growth, providing efficient, long-term, and cost-effective funding. The U.S. fixed income markets are the largest globally, comprising 38.5% of the $125 trillion securities outstanding across the globe ($48 trillion in 2020). The outstanding value of global bond markets is 17% larger than the global equities market.

Fixed interest rates are beneficial to financial investors: they offer predictable returns, lower the reinvestment risk (users cannot reinvest gained interest at a rate equal to or greater than their current return), and incentivize a set-and-forget mindset by offering longer timeframes, and making tax and accounting management easier.

On the other hand, investors can earn fixed amounts of capital over a predetermined period by locking their interest rates ahead of time. Government and corporate bonds are two of the most popular fixed-income products. Others include T-bills, T-notes, T-bonds, Treasury Inflation-Protected Securities, Junk bonds—you name it, the U.S. government has probably invented it. By being backed by “full faith and credit” of the US government, Treasury bonds are a good fit for investors looking for safety but traditionally offer low yields.

DeFi should follow the same trend

Early crypto adopters were not reluctant to ape into products offering variable yields. However, volatile yields are risky and complex. Clearly, we need fixed-rate-based financial products to onboard a new generation of aspiring crypto-natives. Today, the most widely used DeFi lending protocols are AAVE and Compound, with $110B+ and $100B+ of borrowing volume since they launched, respectively.

Interest rates on these protocols are variable and are a function of the utilization rate, which represents an indicator of the availability of capital in the pool. The interest rate parameters have also been calibrated per cluster of currencies with similar risk profiles.

Though we will not dive into how these models precisely work for simplicity, the short version is that rates accelerate when they go past 80% of the utilization rate to urge borrowers to supply money on the platform and lenders to reduce borrowing.

Given the historical volatility of DeFi interest rates, it’s clear that none of these protocols is a serious solution for long-term investors. Variable rates are fine for speculative purposes but for the B2B lending market, protocols will expect more predictable returns and rates.

We all know that many institutions are waiting on the sidelines to put money into DeFi – a trillion dollars could flood into DeFi if the world’s 100 biggest banks invested. However, for institutional money to come in, we need a trustworthy and efficient fixed interest rate DeFi protocol, which could become the new holy grail of DeFi. We believe that this is Notional.

Additionally, variable rates have progressively decreased over time within these large protocols. This has incentivized yield-seeking users to rotate their tokens onto other DeFi protocols, forcing them to pay (oftentimes high) gas fees. With yields on USDC hovering around 4-6% and 5-7% for different maturities on DAI on Notional, fixed rates don’t have to mean sacrificing yield.

There is no doubt that Compound and Aave are very cyclical platforms. Usage mostly comes from yield farming and leverage, which are naturally collapsing when the market slides. Obviously, Notional’s rates have been decreasing too, but are still 2%-3% higher than Compound and Aave. 

Lending on Notional is straightforward and offers a better rate than a majority of the other fixed-rate protocols. Additionally, because most other fixed-rate DeFi protocols do not also serve borrowers, yields on Notional consistently outperform and stand alone in the DeFi ecosystem. Indeed, Notional offers lenders high fixed rates via the premium paid by borrowers. Yield generation is “organic” because it comes directly from the platform.

Notional: The Fixed Income Market Leader

When Notional launched in early 2020, it was one of the first fixed-rate DeFi apps. Since then more than 20 fixed-rate DeFi protocols have launched. They have generally innovated on liquidity mechanisms and maturity dates, but very few of them have been focused on the borrowing side. The zero-coupon bond model – used by Notional – allows the lender to purchase these bonds at a discount and redeems the assets at the denomination on the maturity date, which makes it equivalent to borrowing at a fixed interest rate. 

Fixed-rate protocols are more complex than variable ones. When an investor wants to get exposure to a fixed rate, another person must guarantee to pay a specific interest rate instead of interacting with a lending pool. To do so, you can rely on the fixed interest paid by the borrower or on the redistribution of interest among the lenders.

By providing yield to lenders from the borrowers on the opposite side of the platform, offering a wide selection of maturity dates, and lowering reinvestment risk (upon maturity, lending positions on Notional auto-convert to earning the variable interest rate) we believe that Notional has built the most thoughtful platform in the space. Beyond the product design, we are also excited by the upcoming Notional applications that we believe are solid catalysts for its adoption.

Catalysts for $NOTE

Levered Vaults

Notional has recently reached $500M in fixed-rate lending and borrowing volume, less than seven months after the V2 launch.

In particular, we are excited to see the team innovating and driving this volume up, notably by working on levered vaults. Today, a large majority of borrowing in DeFi is done to fund DeFi yield strategies: when a user puts down an asset to borrow another asset that is taken over to execute that yield strategy, he is no longer able to use that capital as collateral on the lending protocol. With levered vaults, users will be able to borrow from Notional and deposit that capital into a whitelisted smart contract that executes a specific yield strategy. 

By doing so, the users will earn the return between the returns of the strategy and the fixed borrowing cost on Notional. It will significantly increase the borrowing demand, as well as the interest rates for lenders. We expect the rates to get as close as the rates of return that sophisticated users get executing all these complex strategies that involve selling token incentives. Levered vaults will also increase fees for LPs and NOTE holders.

Composable Fixed Rate Lending

Then, Notional will soon be partnering with The Index Coop to launch the FIXED Suite, a suite of decentralized fixed-rate yield tokens offering high, market-neutral, dollar-denominated yield. This creative model would abstract complexity away from investors who would not have to manage their positions actively. It would also provide a secondary liquid market so that users don’t have to choose between earning yield (and potentially having to pay early withdrawal penalties) and keeping their assets liquid. This suite of products would enable users to get exposure to fixed rates without managing lending positions or paying fees. 

DAO Treasuries

This makes a perfect transition to another point that excites us: we think that Notional could be leveraged to become a privileged solution for DAOs to deploy their treasuries. DAO treasuries could utilize this ERC-20 token to earn high fixed yields on their stablecoins to cover expenses.

With $10.3B locked up in DAO treasuries (17x since June 2021) at the time this piece is being written, Notional has just begun to scratch the surface of an overlooked and massive market.

Top 20 DAO allocates only 7% of its liquid treasuries to earn yields. 6 DAOs even deploy 0% of their treasuries into DeFi protocols. We expect things to change over the next few months.

In early March, one of Angle’s co-founders proposed to invest some of the protocol’s reserves into Notional fixed-rate lending to benefit from higher rates than what AAVE and Compound offer by lending over longer maturities. In his words, “predictable yields allow for better risk-adjusted yields and attractiveness for veANGLE holders and Standard Liquidity Providers.”

This was not the first apparition of Notional in the B2B space either. A month earlier, PoolTogether drafted a governance proposal to lend 500K USDC and 480K DAI from their v3 reserves to Notional to increase the yield obtained on treasury assets while keeping a low-risk profile.

The top priority for DAOs is to ensure that they will have sufficient capital to fund their operations over long periods, irrespective of market conditions. As Shreyas from Llama argues, DAOs must maintain an infinite time horizon while managing their treasury – the treasury should be structured to exist in perpetuity.  

Because crypto markets can be detrimental to the survival of DAOs, fixed-income products are the right tool for them to make informed investment decisions and plan the amount of yield they will generate over time. How DAOs spend their assets has become a concern and a key area that needs to be addressed to usher in new developments into the space. By offering maturity dates ranging from three months to 20 years, we believe that Notional is the best-positioned protocol to help DAOs capitalize on DeFi yields and stay afloat amidst tumultuous market conditions.

 Beyond DAOs, Notional has been onboarding a few large lending desks and is planning to expand this institutional user base. Volatile yields offer too much friction and risk for traditional players. 

 At Lattice, we believe that fixed-rate yields are needed for the next wave of adoption and are proud to be supporting Notional in that mission.

The DIMO vision will flip the script on device data monetization and will empower the individual to take control over how their data is utilized and monetized.

What is DIMO

DIMO is an open-source protocol leveraging the architecture of web-3 that will connect data producers and data consumers. Today in private beta, DIMO is providing an easy to use solution for electric vehicle owners to collect, use, and monetize the data their cars generate. Drawing inspiration from human powered 5G-network Helium, DIMO will rely on a cryptographic token to bootstrap initial growth and to govern the DIMO network with upgrades overtime.   While DIMO will start with the narrow (but still large) focus of electric vehicles, the platform will provide the flexibility to expand into data from any device or service including, wearables, cell phones, environmental sensors, and more. DIMO supports 1,000 different vehicles and you can get today by pre-ordering a device for your vehicle (order here).

Why does it matter?

The amount of data being produced by humans and our machines is exploding with vehicles being one of the largest contributors. The data emitted from our devices is incredibly valuable but unless cultivated, it can’t be utilized by developers & businesses in an optimal way. To borrow a line from British Mathematician Clive Humby, “Data is the new oil. It’s valuable, but if unrefined it cannot really be used", we believe DIMO will act as a refinery in this new data economy.

DIMO’s open platform breaks down the walls surrounding the data sources, opening it up to a new class of applications across battery manufacturing, clean energy, climate, insurance, and more. Further, by leveraging a crypto-economic network, DIMO will ensure that the producers of the data are the ones to benefit not just the manufacturers vehicles & devices.

The leadership team at DIMO is a special blend of talent that spans mobility, IoT, and Crypto with experience at cross-industry heavyweights like Ford, Transdev, Waymo, Consensys, and Chainalysis. The team’s unique mixture of backgrounds combined with CEO Andy Chatam’s clarity of vision for the industry has us thrilled to be partnering with them on their journey to bring about the Trusted Machine Age, where devices work for their owners, not the companies that built them.

Token Incentivizes in the Physical World:

DIMO fits into a nascent category of crypto projects that leverage a token to incentivize action in the physical world. To date, most crypto projects have focused on modifying behavior in the digital realm. At Lattice, we believe there is significant potential to disrupt existing business categories particularly marketplace business models where previously massive amounts of venture capital were required to bootstrap the network. Why spend mountains of cash on building out supply in a network when you can incentivize early actors with a token and give them upside in its growth. DIMO is following in Helium's footsteps in this category and we are excited to hear about the next dozen crypto startups who will blaze a similar path.

If you are working on something similar, we want to hear from you, please say Hi to us —> hi@latticecap.co

What is Lit?

Lit (Lockable Interactive Token) Protocol is a decentralized access control network that provides infrastructure for granting permissions between blockchain users and the world they interact with. In order to understand Lit, one must understand Access control lists (ACL). In modern computer security, an access-control list (ACL) is a mechanism used to define who has access to your data and objects, as well as what level of access they have. An ACL specifies which users or system processes are granted access to objects and actions that users can take on specific data and objects within it. Lit acts a decentralized ACL which leverages on-chain data from user's wallets to grant access to certain content or software. The easiest way to think of Lit is middleware that enables gated experiences based on what's in a given users wallet.

Why does it matter?

The rise of web3 and decentralized infrastructure is requiring radically new thinking for how people interact with content & software. Today, businesses rely on companies like Okta, a $30B behemoth in the identity and access management space to provide user authentication as a service. In open operating systems without centralized login credentials, people still need ways to unlock access to specific experiences and web3 developers will need a way to easily enable permissioning without reliance on siloed data. In the future when humanity's collective data moves on-chain (financial, identity, social, etc), we will need infrastructure that allows developers to access that data in an encrypted way. We are already starting to see rudimentary examples of this where web3 businesses are looking for ways to control access based upon on-chain credentials. Ashton Kutcher and Mila Kunis launched a new show called Stoner Cats where users need a specific NFT to watch it and you can’t get into a Bored Ape party unless you’ve got an Ape (at least that is what they try 😂)

The Lit protocol has many different applications and future use-cases for developers to explore:

• Crypto login credentials to web2 services (e.g.Zoom & Google Drive), e.g. accessing a DAOs google doc based on holding a specific ERC-721.

• Permissioned access to content (e.g. streamable videos) that becomes unlocked with a NFT

• Credentialed access to sensitive data records (e.g. health or financial)

• Think anywhere you login to a service today with email, Lit can replace that in web3

The computing stack is being rapidly re-architected for a permissionless decentralized world and Lit protocol accelerating that transition. David and Chris are incredibly experienced builders with a proven track record having sold their previous startup to Linkedin and Lattice is excited to back them in building critical infrastructure for the web3 world.

Background

According to Linda Xie, “a decentralized autonomous organization (DAO) is a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.” We strongly believe that DAOs will eventually change the way humans work. However, DAO’s face many challenges in their current form.

Specifically, there can be a high barrier to entry for new members to start contributing to DAO’s:

• DAOs operate across all time zones

• Onboarding funnels are often disorganized

• Working groups can be opaque for new contributors

Above all, it’s often not clear what work needs to get done.

Layer3 & The Future of Web3 Work

Layer3 is a key piece of the DAO infrastructure stack. Their platform acts as marketplace between DAOs and talent, whereby contributors can come to Layer3, complete work, and earn governance tokens across categories:

• Social (tweets, memes, real-world tasks, etc.)

• Content (videos, infographics, figma work, etc.)

• Technical (bug bounties, front-ends, contracts, etc.)

Since launch, Layer3 has onboarded over 20 DAOs.

Layer3 also gives the next generation the funds they need to attend more Web 3 events. Then if we include travel scholarships, total rewards are more significant: more than $150k worth of bounties have been distributed in total.

Communities are crucial to Web3 projects because engaged communities give projects leverage in everything they do. This is evident if you look at the Twitter feeds of projects with engaged communities - every announcement sees a ton of engagement and retweets. That protocols are distributing meaningful ownership to early adopters is something that we are likely just scratching the surface on. Indeed, imagine if early Airbnb hosts or Uber users had earned small chunks of equity in the company. Those companies would likely look very different today.

Layer3 is helping DAO’s and Web3 projects better engage their communities and turn them into cheerleaders. These communities are filled with incredibly passionate early adopters who want to make these projects successful and Layer3 is helping to leverage that energy for marketing purposes. For example, an Index Coop community member claimed a bounty to skydive wearing Index Coop merch (the video was viewed more than 3000 times!)

Layer3 <> The IndexCoop

In early October, we introduced Layer3 to the Index Coop. The Index Coop is widely recognized as one of the most active and well-structured DAO’s in the space. Prior to co-founding Lattice, Regan Bozman had been an active contributor to the Index Coop and was intimately familiar with the logistical challenges of the DAO. By far the biggest challenge was coordinating what needed to get done. A group of insanely talented people wanted to contribute. Nonetheless, onboarding folks, tracking tasks, paying contributors, understanding people's skillsets - all of this was very hard.** **Enter Layer3. In mid-October, Layer3 launched Index Coop bounties to help simplify even more people join and contribute to their growing community.

More than 340 $INDEX has been paid to 18 winners across 11 bounties. Select bounties:

• Blog Post: How to Create a Leveraged Long-Position on DPI

• Video Tutorial: Provide Liquidity for DATA 

• Twitter Thread: Why is DPI the best way to get DeFi exposure?

“Layer3 has proved a powerful platform for our organization to quickly and effectively promote bounties and get contributors involved.  Their intuitive and easy to use interface is miles ahead of the competition.” - The Index Coop Team

Layer3 <> Olympus

On October 26th, Layer3 launched Olympus bounties - a big milestone given how active and solid the Olympus community is.

More than 11.22 $OHM has been paid to 30 winners across 4 bounties. Some bounties:

• Explain Olympus to Newbies

• Infographic: Olympus 101

• Tell Your Olympus Story

After such success, the 2nd campaign was launched with a boosted budget of 25 $OHM ($15k at current prices).

"Layer3's end-to-end solution for increasing community engagement via bounty incentives has helped mobilize more and more of the Olympus community. Their platform has one of the easiest and most intuitive interfaces for bounty completion, and they take on all aspects of the bounty, from submission-collection to payout. We're excited to find new ways to engage our community with them" - The Olympus Team

We believe that Layer3 is going to become a core building block of the emerging DAO economy. It represents the appropriate tool to lower the barrier to meaningful contribution.

If you're interested in contributing to DAO but not sure where to start, check out Layer3's live bounties. Also, be sure to join their discord and follow them on twitter for exciting updates in the coming weeks!

We're excited to announce that we've co-led a $2M round into xToken, alongside their existing investors. xToken is an on-chain asset management platform that offers passive and composable DEFi strategies. Their initial product focused on liquid staking derivatives of popular ERC20 tokens, but they've since expanded into Uniswap V3 LP strategies (and so much more!)

We believe that xToken is on the path to becoming a fully integrated DeFi Protocol that will allow people to leverage their assets in the most liquid and flexible way possible. I've known Michael, xToken's founder and Project Lead, for more than a year and a half and have been blown away by how much the project has grown since then. We're excited to get even more deeply involved in the community.

As DeFi has grown 100x in size over the last two years, it has also grown in complexity. Users can stake popular DeFi tokens like AAVE and KNC to help manage risk and govern those networks, but the staking process is not always straightforward. Users often to have manually claim (and re-stake) staking rewards, and staked tokens tend to be illiquid and not composable. Meanwhile, xToken's staking strategies like xAAVE and xKNC are set-and-forget, auto-compounding solutions that are liquid and composable.

xToken is in the early innings of building an ecosystem around their staking strategies, but we believe that the ultimate output will be a platform that gives people maximum liquidity and flexibility for staked ERC20 tokens. As an example, xToken Lending (launching soon!) will be the only place that users can earn both staking yield and interest from lending out AAVE (while also being able to borrow against it).

xToken's journey has not always been a smooth path - xToken has had a major hack and is still in the process of rebuilding trust in the product. However, the community and team have been incredibly resilient and we believe that this solidarity will provide a meaningful moat for xToken going forward.

We're thrilled to partner with Michael and the xToken team and community on the path to building the next great DeFi Platform.

There are hundreds of Web2 apps and games with more than 10M monthly active users - Metamask is the only Web3 app at this scale. We believe that the nascency of Web3 growth strategies are the main reason that these apps have struggled to scale. Web2 companies have a decade of successful growth strategies to build off of and a rich ecosystem of platforms to leverage. Web3 projects are starting from scratch.

Web3 applications embrace a decentralized architecture, pseudonymity, and user-owned data. Web3's core tenets break every mainstream growth strategy. The leading Web2 consumer applications hit massive scale by leveraging centralized platforms like Facebook, bringing identity online to engender trust, and having massive proprietary datasets. Web3 applications have no app store, do not know who their users are, and have no method to communicate with them.

If Web3 is going to succeed in building an internet governed by open, community-controlled services, then entrepreneurs need new growth strategies. Web3 needs a new growth playbook.

Web3 Growth Challenges & Opportunities

Web3 applications face three foundational challenges in growing and engaging their user base.

Identity

Most Web2 growth strategies start from the assumption that (potential) customers are known. Viral growth generally happens on platforms that build social graphs based on IRL identity. Paid growth requires knowing information about your users so you can build targeting profiles. Many, many billion dollar companies have been built in helping companies do this effectively. Web3 breaks this assumption as the vast majority of on-chain activity is currently pseudonymous.

There are a number of teams working on defining what identity means in Web3. The Ethereum Name Service is growing quickly and makes Ethereum wallets - currently the primary 'account' in crypto - much more human readable. Ceramic and other DID providers are also working on building coherent account models for Web3.

Simultaneously, regulatory pressure and institutional interest is helping to drive adoption of 'whitelisted' DeFi products that are less anonymous than their predecessors. Maple recently launched a 'permissioned' lending pool that required participants to go through KYC. Violet is tackling this problem in a more generalized problem by building an identity protocol to bring off-chain identities onto Ethereum.

Meanwhile, other projects are working on building on-chain identity in a bottoms up approach rather than bringing offline data on-chain. Galaxy is building a crypto-native identity solution that leverages a users' on-chain behavior to build their profile. ARCx has introduced a 'DeFi Passport' that gives users' a credit score based on their on-chain activity.

Communication

Web2 companies use Facebook ads to reach new users, email to reactivate churned customers, and push notifications to tell users about new products. There are currently no widely used crypto-native growth tools which presents a major blocker to teams building effective growth loops.

Web3 communication tools are more nascent than identity ones, but there are a number of teams building crypto-native solutions. Ethereum Push Notification Service is working on a protocol that will generate mobile push notifications based on on-chain activity. CyberConnect and other companies are working on decentralized social graphs that can power user-owned social networks.

Other companies are taking a different approach by integrating Web3 into existing communication tools. Collab Land allows Discord servers to be gated based on token balances in a users' Ethereum wallet. Lit Protocol is building a decentralized access control platform to gate content, software, and data using tokens or NFTs.

Platform constraints

Crypto often gets compared to mobile in the context of large paradigm shifts in the internet. We think that the comparison can also be helpful in thinking about market size. All products on mobile have platform dependencies - for example if you're making a mobile meditation app, your addressable market is constrained by the install base of Android and iOS phones. Given that nearly every adult on earth has a smartphone this 'constraint' is largely theoretical.

Web3 products have much more tangible constraints in that they're gated by the install base of crypto wallets. If you're building a DeFi app on Ethereum, your immediately addressable market is defined by the ~25M people actively using Ethereum wallets (although this is growing quickly).

We're starting to see products that can expand the market beyond this current install base. Some do this by abstracting away the wallet experience and so can reach an audience that may not care about controlling their private keys. Dapper has built NBA Top Shot into one of the most widely used Web3 apps by abstracting away any notion of a blockchain. Everbloom is using a similar approach for a mobile first NFT experience and we believe that this sets them up well to reach true mainstream adoption.

Other products are getting around current platform constraints by getting a new audience excited about blockchain based products. For example, Helium has reached an install base of 350K+ by getting people excited about mesh networking and their hotspot's revenue potential (rather than the fact that it runs on a blockchain). We believe that DIMO will onboard a similarly large audience of auto enthusiasts into Web3.

There are a final category of products that are designed to get a broader audience excited about crypto itself. CoinList and Coinbase offer centralized products that incentive people to try out Web3 products. Rabbithole has done a great job of onboarding new users into Web3 in a crypto-native fashion, while Galaxy has done an amazing job of getting communities to use new products. Meanwhile, applications like Layer3 are making it easier to start earning in Web3.

Web3 Growth Strategies

Partnerships & Integrations

Software companies growing through large BD deals is nothing new and many Web3 projects have adopted this strategy. For example, ChainLink executed on a strategy of closing partnerships during the 2018-2019 bear market and $LINK outperformed as a result.

However, business development can look very different in Web3 when these partnerships are negotiated transparently in governance forums rather than behind boardroom doors. Given that these integrations often do not require permission from one of the two parties, they are not always mutually beneficial. For example, a number of platforms have integrated Curve in ways that do not necessarily benefit Curve itself.

A few examples of Web3 partnership categories:

• Token utility - projects that have a native token want to make it as useful as possible. This could include exchange listings, collateral listings (eg adding $LINK to Compound), or a partnership with a DEX to drive additional liquidity.

• Distribution - all users interact with DeFi protocols through wallets (Metamask, Rainbow) and increasingly aggregators (Zapper, Zerion). These frontend interfaces control which protocols they show to users and so getting your yield aggregator integrated with wallets can be a big deal.

• Lego building - leveraging another DeFi primitive to bring additional utility to your product. For example, Notional leverages Compound to increase its effective yield.

• Mergers - the recognition of two teams building in similar directions and no longer making sense to compete has led to protocol mergers, notable Keep & NuCypher and Fei & Rari.

We're starting to see times prioritize hiring a partnerships/BD lead given its increased importance .

Liquidity Mining & Tokenomics

Growth hacking has become incredibly popular over the past decade as marketing has become more analytical and engineering driven. While growth hacking in Web2 has historically been on building affordable, repeatable growth loops, the focus in crypto has been on leveraging a project's native token to drive growth loops.

Liquidity mining is a "a network participation strategy in which a user provides capital to a protocol in return for that protocol’s native token." Just as VC funds helped subsidize marketplaces until they reached scale, Web3 protocols can bootstrap their growth using their native token.

Crypto projects that have grown through token incentives have faced similar challenges to Web2 startups that burned through piles of venture funding. The data is quite clear that most subsidized liquidity is highly mercenary. Hence, we're starting to see more thought out liquidity mining products including OHM and Rift.

Community

If Web2 companies have focused on driving loyalty amongst their uses in the form of engagement and retention, Web3 companies are focused on driving user ownership. One of the most exciting and unique features of Web3 is that "users...fund the products, information, and services that they consume." We're still very early in understanding all of the downstream implications of this innovation.

We think community is critical in a network growth context because engaged communities will give networks leverage in everything they do. This is evident if you look at the Twitter feeds of projects with engaged communities - every announcement sees a ton of engagement and retweets.

Communities can substitute or complement key stakeholders in Web3 projects:

• Early customers (and cheerleaders) - having a small group of fanatical customers is crucial for any startup. Community members can serve this role (and then some) because they're both early customers and have meaningful upside

• Leverage core team - community members can help with hiring, token design, fundraising (things investors historically helped with)

• Extend core team - community members can provide both technical and non-technical support to the core team. Sometimes they step up and join core team, other times this happens more ad-hoc.

• Distribution - upstart token projects want to partner with other projects with large communities, just like new products look for distribution in channels with a large footprint

Introducing Lattice: an early-stage venture fund that helps founders build defensible moats

We've been working in the trenches with crypto projects for over four years and launched Lattice because we wanted to build the venture fund that we would've wanted to work with. Our journey together started near the top of the last bull market as the early chills of crypto winter were starting to blow in. While working together we endured a prolonged bear market where the general public forgot about crypto and crypto forgot about token sales.

As crypto Twitter and the crypto markets often distracted by the latest shiny toy, we've been impressed with the teams & communities that continue to build even when the spotlight turns off. We've seen firsthand how some of the biggest successes in the industry did not happen overnight. Teams like Audius, Dune Analytics, OpenSea, and Terra worked for years before the spotlight fell on them. We want to work with founders that share that same level of determination.

In an industry built on open-source interoperable software, we believe that partnerships and community are the only sustainable moat. We've spent years helping to drive growth initiatives at leading companies in the space including Aztec, Celo, CoinList, Index Coop, and Solana. Seeing the challenges of growing crypto projects firsthand is what inspired us to build Lattice.

Lattice invests in early-stage companies and help founders build repeatable growth playbooks. If you have the commitment to see a vision through another bear market and are looking for a long-term partner, come say hi: hi[at]latticecap.co

Lattice holds positions in CyberConnect, DIMO, Galaxy, Layer3, Lit, Maple, Rift, and Violet. Lattice employees' hold personal positions in ARCx, Audius, Dune Analytics, EPNS, LUNA, INDEX, Notional, Rabbithole, and OpenSea.

Background

Growth in Web3 is a challenge; Web3 has no app stores, no targeted Facebook ads, no email marketing, no re-marketing, no affiliate marketing...yeah, you get it. The tools relied upon by Silicon Valley growth marketers over the past decade have largely evaporated in our industry, and we've been left with only a couple arrows in the quiver. Beyond meme contests and an active Twitter account, Web3 teams have relied mainly on token incentives for early adopters. Using tokens as an incentive, while successful in some instances, is more recently being called into question as it has trained parasitic behavior as users rush into projects with liquidity to earn tokens only to dump them and when the incentives dry up, say goodbye to those users.

Introducing Project Galaxy

Project Galaxy is building permissionless infrastructure for web3 projects that powers on-chain credentials with plug-and-play NFT modules. An on-chain credential system provides protocols and DAOs with actionable data to more effectively acquire and retain users. Protocols can build customized campaigns with plug & play modules to issue credential-based NFTs achieving all types of objectives: promote community engagement and retention, reward most active contributors, or allow users to stake in any designated tokens to mint NFTs that represent one’s contribution in the community.

Introducing Hashflow

At Lattice, we spend a lot of time monitoring community sentiment to understand how portfolio companies are tracking and how they can improve. Before launching Lattice, we invested in the Seed round of Hashflow. Hashflow is a new decentralized exchange that launched into Private Alpha in early August. The Hashflow protocol is unique in that it connects users on-chain directly to leading crypto market makers. It makes swapping tokens both:

• Gas-efficient (~50% cheaper than Uniswap) - even with Uniswap v3, AMMs still offer high fees, frontrunning, sandwich attacks, gas inefficiency, and frequent failed transactions. It is still unclear if any AMM will be able to solve these problems fundamentally.

• Capital-efficient - as highlighted by Pranay, the baseline measure of capital efficiency is the utilization rate of assets. In the context of decentralized exchanges, we measure utilization in a slightly different way than for lending protocols: Utilization Rate = Daily Trading Volume / TVL. During Open Alpha and Open Beta phases, Hashflow showed impressive metrics: market makers increased TVL to $1.2M, while the average daily trading volume during the Open Alpha phase was around $3.2M.

Despite those compelling advantages, growing trading volume can be a challenge as crypto traders have many other options, both centralized and decentralized, and it is especially challenging when you don't have a governance token to juice activity.

The Hashflow <> Galaxy Story

Hashflow not having a token early led to some questioning from early community members. Even months before the release of their closed alpha product, most of them tended to be skeptical about the advantages of being an early user, even if the core team ensured they were having discussions about potential mechanics to reward early contributors.

Then, we introduced Charles from Project Galaxy to the Hashflow team because it seemed pretty evident that it could lead to a great collaboration to incentivize and reward early community members with NFTs.

In September, Hashflow and Project Galaxy announced a partnership to utilize the credential-based NFT infrastructure and launched the Hashbot Genesis campaign. They also activated an exclusive, one-of-a-kind NFT that personifies the badass tech powering Hashflow called The Hashbot. This 1st issue was claimable by all Private Alpha users. Since that first drop, Hashflow has been incentivizing its users’ thanks to the infrastructure provided by Project Galaxy:

• Hashflow used Project Galaxy to reward the HashMatic Trading Competition winners by offering a Diwali-inspired, MATIC-themed Hashbot poster.

• For Halloween, Hashflow released a special Hashbot art for the most loyal #hashgang members who continue to grow and strengthen the community.

With ten drops and more than 20,850 NFTs minted, Project Galaxy has been a great tool to show the community-driven growth of Hashflow truly its most loyal users own Hashflow. The goal has always been to distribute rewards fairly to ensure that Hashflow is owned by its most loyal users.

“ We have seen explosive demand around on-chain credentialing and on-chain marketing in the Web3 space. Hashflow's campaigns demonstrated how projects and DAOs can leverage the combination of on-chain credentials and achievement-based NFTs to bring the community engagement to the next level.”

Charles Wayn, Co-Founder Project Galaxy

On October 6th, Hashflow tweeted that they crossed $250M trading volume. Metrics have been growing tremendously since then.

"We believe that NFTs are a great way to do brand acquisition and build the cult following. Project Galaxy understood this thesis extremely well and have done an amazing job at catering to our needs and feedback and executed flawlessly despite the pressure.  Can't wait for many more collaborations that lie ahead!"

Varun Kumar, CEO Hashflow

That is why we got so excited when we met the Project Galaxy team this past summer; they are changing how truly Web3 companies grow, putting more growth arrows in the quiver. Project Galaxy is building an on-chain credential system using NFTs, providing protocols and DAOs with actionable data to acquire and retain users more effectively. Protocols can then leverage these indexed and curated data sets to set up various reward systems for their most loyal users. With the explosion in popularity of NFTs this year, the token is no longer the only game in town to incentivize positive user behavior.