dYdX Venture Capital Investment Memo

Tl;dr: 1confirmation invested in dydx in the $2m seed round alongside Andreessen Horowitz and Polychain. They shared their investment memo on Twitter. Read to understand how a venture capital investor thinks about investing in a company and how they communicate it to their partners and potentially their limited partners.

About the VC investment memo

Nick Tomaino shared it on Twitter with “Our @dydxprotocol investment memo (December 2017)” I’ve nothing else to tell you!

About dYdX

dYdX is a leading decentralized exchange built by developers on a mission to build open, secure, and powerful financial products. dYdX runs on audited smart contracts on Ethereum, which eliminates the need to trust a central exchange while trading. We combine the security and transparency of a decentralized exchange, with the speed and usability of a centralized exchange. Founded back in 2017 from ex-Coinbase and Uber engineer, Antonio Juliano, dYdX is a leading decentralized exchange offering Perpetual, Margin, & Spot trading, as well as borrow / lend pools on Ethereum. Users can earn interest or take loans for a nominal fee as well as trade on margin with custom leverage.

About 1confirmation

Founded by Nick Tomaino and backed by individuals like Peter Thiel, Marc Andreessen, and Mark Cuban and institutions like Horsley Bridge and Runa Capital, 1confirmation is a venture fund that supports exceptional founders fueling the decentralization of the web and society.

Usual caveats

No investment memo made voluntarily public will ever be 100% as it was. The pressure is just too high for VCs to look smarter, and not make founders uncomfortable, etc. I highly praise the VCs that share their thought leadership so we can all learn. If you’re learning to make a VC investment memo, don’t assume the memos are what you exactly need to do. Information will be redacted. Assume anything “delicate” or sensitive is not in the memos. The only memo that is 1 to 1 is the Youtube memo because it was in a lawsuit.

dYdX Venture Capital Investment Memo

Summary:

dYdX is building a decentralized exchange protocol that enables the trustless exchange of digital asset derivatives. The team is building a protocol as well as a relayer on top of the 0x protocol, which will serve as a UI that enables people to trade digital assets in a trustless manner. There is no token underlying this project and the company seeks to build a transaction-based business model into the relayer although a token is possible in the future. We are extremely bullish on decentralized exchange and view this as the best pure decentralized exchange opportunity to date. We’ve evaluated several other 0x relayers and feel dYdX is the best player in the space. We invested [redacted] at [redacted].

Key assumptions for dYdX:

1.) Decentralized exchange will play a major role in the future of digital asset trading. This is obviously a big bet on DEX’s and to date there is not much of a market for DEX’s. We believe the market will grow significantly in the future and one day dominate crypto-crypto trading. 2.) Creating a protocol for derivatives and shorting will be a competitive moat for the 0x relayer. This is going to be a highly competitive market; the barrier to entry for relayers is low (unlike centralized exchange, where the regulatory barriers are quite significant). dYdX has the advantage of actually building the protocol to facilitate decentralized exchange, and that must be a differentiator that allows it to gain liquidity and network effects.

Team (8/10):

Founder Antonio Juliano

Antonio is the best founder working on decentralized exchange we have seen to date. He was one of the most productive engineers at Coinbase and shipped a beta product for dYdX in less than 2 months. Prior to Coinbase, he majored in CS at Princeton and graduated in 2015.

Product (9/10):

99%+ of digital asset trading is currently done on centralized exchanges, but we believe that will change in the coming years. One catalyst for liquidity shifting to DEX’s may be the fact that there’s shorting and derivatives uniquely enabled on dYdX’s exchange that traders simply wouldn’t have access to otherwise. Here’s the best version of the product live, currently on the Ethereum test net. The team is targeting a mainnet launch by mid-2018.

Community (7/10):

There’s no community yet, but this is the type of product that the Ethereum community wants and needs and if the team delivers a product I believe there will be a strong community that forms around it.

Token mechanics (NA):

Key Risks: 1.) This is a highly competitive category with relatively low barriers to entry. If Antonio doesn’t hire quickly, deliver a product and build a strong brand, could be hard to catch up. 2.) First-time founder. Antonio is fantastic but first-time founders can be unpredictable. Timing is great so risk worth taking, but we’ll see

Recap (Team + Product + Community + Token mechanics: 8):

Overall, this is an important product that has a chance to be foundational middleware for digital assets and Antonio is the best founder to date working on it. Execution over the next year will be important and if the team does deliver there’s tremendous upside to this opportunity.

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