Dear Partners,

Beyond the Federal Reserve’s rate increases, 2022 will be remembered as the year that crypto’s centralized finance integrations broke. The fraud and defaults committed by trusted parties overshadowed what should have been a very strong year for the industry, due to its significantly improved product offerings. We did not trust FTX, Genesis, or any of the other financial institutions who have collapsed, but failed to recognize the risk they had imbued onto the system. Nonetheless, we remain as convicted as ever in the future adoption, both technological and macroeconomic, of our portfolio.

10/1/2022 - 12/31/2022 (Fourth Quarter):

1/1/2022 - 12/31/2022 (2022):

1/1/2022 - 12/31/2022 (Inception):

A Misuse of Trust

Over the past two years, an environment in which everyone was a winner, both existing and new entrants ignored these core features of crypto. 1 These parties trusted unregulated financial services applications, whose lending and borrowing contracts existed not on a blockchain but on disperse, private databases. 2 With their unaudited power, these applications lent a substantial portion of their customers’ assets to crypto trading desks around the world, most of which borrowed against collateral of very correlated assets,3 leaving them vulnerable in the case of a default.4 Even more idiotically, several large, highly-levered trading desks invested heavily into Luna, an on-chain ponzi scheme which had grown to become Ethereum’s top competitor as a non-sovereign computing technology.

The entire event, from Luna’s collapse to FTX’s and DCG’s this quarter, took place from May to December.5 It truly was the story of crypto’s year, completely unrelated to the efficiency improvements that crypto affords the world both technologically and macroeconomically. The event itself was a hallmark advertisement for decentralized applications, but specifically those on Ethereum, whose fundamentals continued to grow as its competitors faltered alongside the institutions who fueled their adoption. The theses underlying our portfolio continue to hold true.

On Macro

A bet on crypto is a two-fold bet: it is both a bet on the growth of public blockchain technology as a computing technology and cryptocurrency as a non-sovereign store of value. The first is dependent on technological adoption, while the second is dependent on macroeconomic conditions. Macroeconomic conditions did not pose well for crypto in 2022, as the Federal Reserve’s interest rate hikes attracted capital globally away from risk assets and into societallyagreed safe havens.6

While the Federal Reserve may attempt to hold rates as high as possible for as long as possible, there are two barriers that they will inevitably face. First, foreign demand for US dollars will continue to、 fall,7 as 1) the United States has no viable path to a trade surplus;8 and 2) the majority of the global economy either faces their own debt problems or views the U.S. as a geopolitical rival.9 Second, the U.S. cannot end its deficit spending, with it likely maintaining at 4% USGDP, thus requiring new purchases of US government debt.10 These two forces render that the capital invested to finance America’s government’s operations will have to come from the American economy itself, consequently acting as a significant deflationary force on it.11 The contraction has already begun in America’s manufacturing sector, declining to its lowest usage in December since May of 2020.12

Geopolitical Tensions

As the global economy restructures its debt, both through defaults and resultant money printing, the Federal Reserve’s monetization efforts will become increasingly difficult. There will be continued momentum to restructure each country’s power held in the global financial system.13 In times of widespread currency and debt crises, every actor in the global economy has easily illustratable evidence that the last world order’s financial system failed. The resultant geopolitical tensions, between rising Eastern and incumbent Western powers, continued to escalate in the fourth quarter, as they have all year.14 We do not expect these tensions to subside anytime soon, as the current global financial system remains both over-levered and misrepresentative of the two leading world powers’ economic output.15 Both of the current global economy’s malfeatures—excess leverage and per-country misrepresentation—must be corrected for tensions to subside.

Crypto remains perfectly positioned in this environment, even though the market did not reflect that in 2022.16 Significant macroeconomic changes happen slowly, due to the large network effects of the current system—everyone in the world participates in the macroeconomy. However, like all systems predicated on network effects, when their network effects end, they do so incredibly quickly. We would much rather be early than late in that scenario.17

We do not know when the Federal Reserve will pivot, but the pressure it will soon face from the global economy will be immense. Domestically, American manufacturing experienced a contraction in the fourth quarter for the first time since May of 2020, while America’s trade deficit continues to increase. As the American economy continues to contract, the American economy will still require deficit spending to operate. Foreigners are very likely to continue to be net sellers of US Treasuries, thus leaving the American economy as the buyer of America’s debt. However, requiring American citizens to buy further US government debt removes capital from the private American economy, and thus worsens America’s economic contraction at a time of domestically and globally high debt burdens. The Federal Reserve will have no choice but to resume debt monetization, if it wishes to survive as an institution.18

Greeting to 2023! We had expected the crypto markets in 2022 to be more range-bound in price action, but we drastically underestimated the magnitude of the broader market meltdown and related crypto contingencies. The most important thing that our team took going into 2022 was the mindset that the markets were not going to be as growth orientated as 2020-2021. This thesis exceeded our original expectations, for our focus on profit protection enabled us to outperform both ETH and BTC for the year. There are still many positives to be taken away in the crypto landscape for the year, including the resiliency of major stablecoins and the successful transition of Ethereum to Proof of Stake. The writings on the wall include major percentage increases y/y in stablecoin settlements, as well as the growing Layer 2 (L2) economy that is designed around the Ethereum protocol. My thoughts today in this annual report will reflect a lot about this latter trend of environment consciousness, where crypto (specifically Ethereum) now truly has a precedent in an ESG driven investment mandate. I truly believe that the next wave of crypto innovation will happen in the form of sustainable yields, where the strongest use case will come in the form of Regenerative Finance (ReFi).

Building real product and value in bear markets is the age old saying that truly resonates now. With the “noise” essentially gone in market conditions today, we are seeing the next generation of builders and developers consolidate themselves around crypto. I am seeing a new class of quality emerge in crypto known as ReFi, which seeks to turn the flow of value from extractive to regenerative. ReFi saw significant traction growth in 2022, where top tier projects such as Celo raised around 70 million USD in new funding. Andreesen Horowitz led a 70million USD + round for Flowcarbon. It is estimated that the ecosystem raised around $120 to $160 million in funding capacity.

Currently, carbon credits are the most effective method of environmental preservation through market incentives. The voluntary carbon markets (VCM) are considered the industry standards for broader carbon credit interactions and can be delegated as a web 2.0 framework registry. Verra stands as the most dominant player in the voluntary carbon markets where it has issued close to over 1 billion tonnes of carbon credits. A single carbon credit equates to one tonne of carbon that is sequestered or removed permanently from the atmosphere. To keep global warming below 1.5C, The World must remove around an additional 10 gigatons of carbon dioxide from the atmosphere each year by mid-century. What we are seeing in ReFi is the potential for web 3.0 technologies (on-chain bridging, on-chain credits, etc.) to better interact with web 2.0 logistics and transition in a more efficient flow of value. Toucan and KlimaDAO are the two most prominent companies in ReFi, as they kickstarted the ReFi movement on a global scale and for the first time showed these kind of market infrastructures are possible. That is, on-chain carbon credits are possible and potentially make for a more transparent and decentralized marketplace. Tokenization of these credits is creating a more liquid and transparent market for them. 500,000 tonnes have been retired, ensuring 107,725 car emissions are removed permanently from the atmosphere. At just a global volume of 1 billion USD in 2021, The voluntary carbon market (VCM) is growing rapidly and still has plenty of potential for growth. Yet, the VCM still only covers about 1% of global CO2 emissions, and there are multiple challenges in scaling and further user participation. ReFi has an extraordinary opportunity to better and expand this market.

I take this timeline from my friends at ReFi DAO, where I had the opportunity to write a weekly roundup that generates the best content and events happening in the space. We are seeing a renaissance in the creation of impact projects centered around blockchain/crypto. If investments can be made to initiate max impact on a global scale, then investments can also be designed to address potentially the biggest issue that society faces which is climate change. For ReFi to grow in 2023, we need key objective to happen such as the confirmation from traditional VCMs on the exact proceedings they like to take with on-chain carbon credits. Further guidance on this matter could see on-chain carbon trading larger than off-chain volumes in 2023. We also need to see continued narrative improvements for ReFi, where the message of sustainability and impact is actually practical in the capital markets. If blockchains can become the settlement layer of carbon credits, then ReFi will have won.

I am confident about the markets for the second half of 2023, particularly with the potential opening up of Asian markets which will likely provide strong growth opportunities. Our investment strategies will remain cautious but will be on the lookout for potential opportunities in the form of strong builders and high quality projects. The Ethereum ecosystem will continue to strengthen, as the Ethereum Virtual Machine (EVM) has proven to be the most popular choice for web 3.0 developers. Though retail participation has dropped in the crypto markets, the remaining investors are likely to be in it for the long haul.

It's possible that we could see the total market capitalization of crypto reach $2T again this year, although it might be too optimistic in the near term to expect new all-time highs. Regardless of cyclical market developments, our focus for this year will be on high-quality investments and careful analysis.

Sincerely,

The Federal Reserve raised interest rates 7 times in 2022 in order to tame inflation. This created a bear market environment for all risk assets including crypto and stocks. Inflation rose to a peak of 9.1% with the June 2022 data before consistently decreasing in the following months to the December rate of 6.5%.

We were able to navigate this environment relatively well by keeping capital away from long positions during the beginning of the year when markets were getting blitzed by the cycle of monumental rate hikes announced with worsening inflation data reported in between each hike. I believe that the main risks going forward are:

1. The possibility of inflation being more sustained then expected through the high rate environment

2. The productivity destruction occurring from tightening. (low GDP growth, possible recession)

3. Worsening geopolitical conflict which can contribute to the aforementioned inflation.

At the same time, I believe that there are some potential catalysts to markets in 2023:

1. Inflation has overall responded well to rate hikes, showing that the strategy can work and may result in a soft landing.

2. China reopening is positive for global economic health and can contribute to the easing of inflation worldwide, as China is arguably the most influential superpower in many global supply chains

3. Geopolitical conflict can be resolved in 2023. We are witnessing increased communication between China and the US, and the potential for China to be a peacebroker between Russia and the west.

Sincerely,

Yours Truly,

The Bizantine Team

Appendix

On Decentralized Science

Decentralized science is founded on the innovation of tokenizing intellectual property (IP), thus rendering a liquid, hyper-efficient asset class.19 It poses to disrupt the pharmaceutical industry to the same extent that decentralized finance disrupts the financial services industry, removing intermediaries wherever possible. Decentralized science connects patients directly with researchers through tokenized IP, driving the economic rent of all of the pharmaceutical industry’s middlemen to zero—from the technology transfer offices at universities, to clinical trial placement marketplaces, to the marketing spend of drug distributors. As healthcare is among the largest industries in the world, decentralized science’s widespread disruption poses to be extremely impactful on the global economy. We have not been this excited about a subsector of crypto since we first realized that decentralized finance would end the oligopoly of the financial services industry—from the commercial banks, to the payment processors, to the APIs built on top.

On Regenerative Finance

Regenerative finance is founded on the tokenization of Carbon credits, thus turning Carbon into a liquid commodity. ReFi saw significant growth in 2022, with projects in the ecosystem raising over $100 million in funding.20 2023’s growth will largely depend on the decisions of incumbent market players, as the incumbents hold the tokenized rights to the off-chain Carbon credits and thus determine the on-chain industry’s legitimacy. Should incumbents accept public blockchain technology as their technology stack, regenerative finance will likely experience a boom in 2023. Due to Ethereum’s successful upgrade of its consensus algorithm in September, Ethereum’s annualized Carbon emissions have dropped from 22mn to 8.8k tons, an over 99% reduction.21 Crypto-native projects, such as Polygon, RocketPool, and Celo, have already agreed to bring their projects’ emissions to zero using on-chain Carbon credits. As decentralized autonomous organizations and on-chain payments grow, tokenized Carbon credits should continue to as well, due to their demand from retail consumers. Additionally, crypto native energy projects—both singular Carbon capture projects and collective networks of those projects22 —pose to integrate on-chain Carbon as a revenue source. Regenerative finance has an extraordinary opportunity to create a unified, free market for Carbon, at a time where climate change poses extreme risks to the global economy.

Geopolitics in 2023

Those whose positions in the global financial system are significantly underrepresented, namely China, will continue to use the decline of the current financial system to create new trade deals that are denominated in their own currency.23Those whose currencies are overrepresented in the current financial system, namely the United States, will continue to utilize the overvaluation of their currencies to domesticate crucial features of the supply chain, attempting to simultaneously mitigate the demand for their competitors’ manufacturing.24 The result, regardless of who the winner is, is a continuation of the trend of the divide between the Eastern and Western economies and financial systems. Our vision for Bizantine as bridge between the United States and China remains more relevant than ever, as those with view into both countries’ economies maintain the best vantage point as actors in the global economy.

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• 1.Prominent crypto funds and media channels had actively promoted FTX, BlockFi, Celsius, Voyager, and Genesis. Gemini, self-acclaimed to be the most trustworthy crypto company, saw its Earn program collapse with Genesis.
• 2.The only auditors who saw their books were auditors employed by those entities.
• 3.The majority of collateral was held in crypto-native assets, namely Bitcoin and Ether.
• 4.The defaults cascaded quickly, as they forced the continued selling of others’ collateral.
• 5.As Luna crashed, so did crypto’s centralized finance industry. We are just now learning that FTX and DCG, this quarter’s most recent bankruptcies, likely went underwater in May.
• 6.What is an agreed safe haven today may not be an agreed safe haven tomorrow.
• 7.In aggregate, foreign holdings of US Treasuries decreased by 6% in 2022. Source: United States Treasury.
• 8.The US’s only path to a trade surplus is the significant devaluation of its currency.
• 9.Both factors, debt distress and geopolitical competition, leave foreigners more incentivized to support their own currency over the dollar. For example, Japan sold 18% of its dollar holdings this year, primarily to buy back and support the yen. China decreased their dollar holdings by 10%, likely due to both support the RMB and continue their economic battle with the United States. Source: United States Treasury.
• 10.Source: United States Congressional Budget Office.
• 11.Rendering matters worse, newly issued debt bears significantly higher interest payments, which acts as an even more powerful deflationary force.
• 12.Source: Institute for Supply Chain Management.
• 13.The dollar remains significantly overrepresented in the global financial system when compared to the US economy’s output, by two to three times dependent on the metrics used.
• 14.This quarter, the United States made its most significant ban yet to China’s semiconductor industry, whose performance is essential across nearly all technologies. Meanwhile, China continued to grow international relations with key countries—Russia, Saudi Arabia, Argentina, and others—in an attempt to strengthen the Chinese economy and broaden the RMB’s adoption.
• 15.China remains significantly underrepresented in the global financial system, as its accounts for a small fraction of its economy’s proportion of global output.
• 16.Gold and silver remained nearly flat this year, signaling that scarce non-sovereign commodities were viewed neutrally over the year.
• 17.The market’s large macroeconomic changes, historically, happen over a very short time period, once a realization of the new paradigm has occurred and spread.
• 18.As America’s and the global economy’s debt remains unserviceable otherwise, money printing will be the Federal Reserve’s only chance at survival. A default by the US government would immediately send the world to a new monetary system. The Federal Reserve continues to run into difficulties, as it is trying to solve problems that have compounded for five decades, since the Nixon shock of 1971.
• 19.Due to the multi deca-trillion dollar size and extreme lack of liquidity of today’s current IP asset class, we are extremely confident in its continued on-chain growth.
• 20.Combined, FlowCarbon and Celo raised $140mn.
• 21.The drop is equivalent to 4,729,550 to 1,896 gas power cars driven annually.
• 22.A network of carbon capture projects, such as React, is created through a singular DAO structure.
• 23.Public blockchain technology further enables frictionless fiat currency conversions, thus further increasing fiat currency competition.
• 24.The United States’ goal is to widen the difference between its own economy and its competitors’.