At Viola Ventures, we’ve been following crypto, blockchain and web 3.0 for a while now, tracking market maturity, regulation readiness, business models and opportunities in the Israeli market. We view our recently announced $250M fund, focused on seed investments, as an opportunity to enter the Web 3.0/blockchain space, and partner with entrepreneurs in growing the next global category leaders.
Like our VC colleagues globally, we now strongly believe the Israeli crypto market is ripe for institutional VCs – and we are excited to tap into Web 3.0 / blockchain in a meaningful way.
As in previous cases, we thought sharing our investment thesis might be helpful for founders:
Blockchain: From the Wild, Wild West to the Mainstream
While the words “crypto” or “blockchain” may still sound niche to some, this is about evolution.
Blockchain has been around for a while, yet several issues have impeded its progress and raised questions about its potential. Like the adoption of other technologies, it’s not only a technology barrier but rather a social and educational challenge. Bitcoin and Ether, the two largest cryptocurrencies, have suffered from highly limited scalability. People who programmed on Ethereum, the most used blockchain in the world, encountered severe problems – low speed, high latency, and very expensive fees. Even if you ignored the technical problems of blockchain technology and you wanted to go all in, you would have found that financial institutions would not endorse your path. And on top of that, you had a regulatory cloud of uncertainty that impeded your GTM execution.
So, what changed recently? A lot.
Scaling solutions are far beyond the proof of concept. Around the world, regulators have begun addressing blockchain in one way or another. Some have legislated crypto-specific acts, while others have applied their existing rules to crypto. One country, El-Salvador, has even adopted Bitcoin as legal tender, though with dubious impact. Some countries, like Russia and China have banned certain activities related to cryptocurrencies. But one thing is sure, the regulators cannot and do not ignore crypto anymore.
The regulatory progress, paired with security breakthroughs, have given a push to financial institutions. This has resulted in more than 10 banks in Europe and the US offering crypto-related services, and many more exploring this field. Naturally, the fintech players have not fallen behind, and many of them, such as Paypal and Stripe, are now offering access to crypto payments. Current studies show that over 10% of Americans own crypto currencies – a percentage that increases significantly amongst Millennials and Gen Z.
It does not mean that everything is now plain and simple. We are still facing an uphill climb. The vast majority of financial institutions have yet to make their first step in the crypto world, regulations are lagging far behind the technology, quantum computing raises serious questions regarding the security of blockchain and most potential use cases are still at the idea stage.
However, we believe that blockchain has achieved critical maturity and that its progress and adoption will accelerate much faster from this point.
How We See the Web 3.0/Blockchain Tech Stack
When you look at blockchain, it’s easy to miss the forest for the trees. The crypto world is infinite and blockchain innovations are all over the place. That’s why, as we double down on this world, we mapped the blockchain ecosystem and analyzed the innovation stack.
Viola’s blockchain/web 3.0 map enables founders and investors to understand the different layers ripe for disruption and innovation. It can also help stakeholders identify which startup belongs to which category, assess companies’ TAM, understand the competition, crystalize startups’ value propositions and more.
Infrastructure layer – similar to the “traditional” tech stack, the basic layer includes infrastructure innovation. But, where we’re used to seeing chips, servers, and storage solutions – in the blockchain stack, the categories include the required building blocks that every blockchain application will need.
It starts with the layer 1 protocols which are the blockchains themselves. After that, we have layer 2 / layer n solutions and side chains, which correspond with layer 1 protocols and add scalability and other features that significantly expand the use cases of layer 1 protocols. Cross-chains allow for interoperability between different blockchain networks and oracles connect blockchains to the outside world. In parallel, we have mining and staking (including the hardware required for that purpose) which make the blockchain what it is: decentralized and secure. While cryptocurrency may be eventually used as a very general title, we decided to treat it as a separate category which includes cryptocurrencies that are aimed to serve as a currency, like Bitcoin and stablecoins.
The application layer – demonstrates the 3 different categories we identified as high-traction, high-potential for innovation – DeFi<>CeFi , NFTs, and other applications such as Data and BI which are of general/horizontal usage.
As prominent fintech investors with vast experience in the space, we see the transition between CeFi to DeFi as a massive opportunity. We believe that at the first stage we will see crypto companies scale rapidly while converging between the two worlds of CeFi and DeFi. Later on, we expect further growth in crypto-native companies, often established as DAOs, offering on-chain financial services similar to the traditional world.
In-between the infrastructure layer and the application layer, we put several categories that serve as a middle layer / enablers on top of the infrastructure and below the applications, based on their specific attributes and uses. For example, the first and maybe the most important feature of wallets is to store your private key, a feature that we think belongs to the infrastructure layer. However, wallets today have expanded their features, and may be used to borrow money from DeFi projects.
Like any other technology stack – blockchain innovation can be embedded in specific verticals, as indicated by the top layer – from finance to mobility to gaming and more, as well as in different business models as indicated by the column on the right. In blockchain, we added a D2D bucket (DAO to DAO) as a new business model.
While we hope that any blockchain/web 3.0 project will find its spot within our map, we are aware that many projects may spread over several categories. This map will also be updated periodically, and we welcome your feedback.
We are Looking for You
This is an exciting time to be a blockchain/web 3.0 entrepreneur and we believe Israel can create the next global category leaders in this space.
Stay tuned, In our next blog post we’ll announce our first investment and share a more detailed view on our investment theses in this stack.
If you’re building something in this category, come meet us.