Sigil Investment Thesis

The main disruptive features of blockchain are:

• decentralized governance (no single entity is in control)
• immutability (miners or stakers make sure the state of the network is irreversible)
• trustless computation (every party interacting with the network can trust that it will execute automatically as promised)
• open access (everyone can access the network and review the code without permission)
• public verifiability (data are public and transparent, lowering the costs for audits and proof of reserves)

Thanks to these features, we will start bypassing inefficient, rent-seeking trusted third parties. Decentralized crypto-networks (computer layer) will replace centralized authorities (human layer) with trustless, decentralized protocols. This will lead to much higher social scalability. Think human-powered bell towers being replaced by automatic mechanical clocks.

We define four blockchain segments, that will have the highest impact in the future. Please note that all of these are enabled only by open, public, borderless, neutral and censorship-resistant blockchain networks.

Stateless digital money

Cryptocurrencies, such as Bitcoin are the first and simplest use case of blockchain, while also utilizing other technologies like asymmetric cryptography or Proof of Work (mining).

Although still nascent and volatile, we believe that existence of open, digital, uncensorable, sometimes transparent and sometimes fully private cryptocurrencies is inevitable at this point. They do not necessarily need to overthrow our current monetary system. However, they provide a healthy experimentation ground for alternative monetary policies. They also provide non-sovereign safety belt — an alternative for people to escape to in case sovereign (government backed) money and monetary policies fail.

Unseizable, private cryptocurrencies could also provide a safe haven for capital from offshore and Swiss bank accounts, which are slowly losing their ability to protect the privacy of their clients. There is a popular comparison, saying that Bitcoin is comparable to "digital gold", but is more liquid and easier to store and transfer.

Sub-theses of this thesis are also "sound money thesis" (supported by Austrian economic school) and "ideal money thesis" (concept pioneered by inventor of Game Theory, John Nash). Arguably, both sound money and ideal money should be independent of central banks and individual nation states, acting as an alternative and reserve asset to fiat currency, in a similar way to how gold does.

Open, decentralized financial system (#DeFi)

DeFi means stack of technologies that allow transparent, open, programmable and decentralized financial services (apart from just money). Services such as the creation of assets and derivatives, lending, insurance, and exchanges are currently provided by institutions. Thanks to blockchains, they will be provided by decentralized protocols and smart contracts that are enforced by network incentives, rather than by law.

In order to get exposure to success of DeFi, we can invest in tokens of underlying smart contract protocols (such as Ethereum, Terra or Cosmos), if we believe that these bedrock protocols will accrue the most value.

Or we can invest in tokens of middleware protocols, that enable specific services, such as MakerDAO ("decentralized central bank") or Synthetix (decentralized protocol for creation and trading of synthetic assets).

Digital assets (tokens) of these protocols are designed to economically incentivize all participants in the network to act on its behalf. Thus, if designed correctly, they should accrue value and grow in price if the protocol/network becomes successful, even though there is no authority — state or private firm — to govern and manage them.

Last but not least, we can invest in equity (or tokenized equity) of companies, building centralized customer facing services on top, such as cryptocurrency wallets.

We at Sigil are looking to invest especially in decentralized tokens of underlying and middleware protocols, which we believe can accrue a lot of value from the new digital financial systems being created on top of them. In a couple of years, when the technology becomes more mature, it will make sense to look into tokenized equities of companies as well.

Web 3.0

This term indicates the evolution of the structure of the internet. Web 1.0 was the first simple HTML websites and communities fragmented among various discussion forums and chat boards. Web 2.0 is what we have now — the majority of online traffic and online commerce is increasingly under control of corporations such as Google, Facebook, Alibaba or Amazon. These corporations have access to all our data and can even influence our behavior (e.g. Google can alter our shopping habits and desires by showing us customized targeted ads), thus becoming increasingly powerful.

Web 3.0 is a pushback against increased surveillance and centralization of internet and online commerce. Paraphrasing Peter Thiel — when the pendulum swings too much in one direction (centralisation), an over-correction in the opposite direction (decentralisation) is imminent. Web 3.0 consists of technologies that enable users to reclaim control of their data and possibly monetize them on their own terms. Web 3.0 will be powered by decentralized protocols and crypto-networks, using technologies such as cryptocurrencies, smart contracts and encryption anonymization tools.

In other words, Web 3.0 will become a more decentralized, privacy oriented and open version of the internet. We can invest in the Web 3.0 thesis by betting on alternative decentralized networks such as FOAM protocol (decentralized community built GPS competitor) or NYM (privacy infrastructure). Many of these projects also employ tokens to align incentives of their decentralized networks.

Decentralized governance

The term "Governance" is an umbrella term that covers the ways and processes by which we coordinate at scale; how we organize our societies, define and enforce rules, and make collective decisions. Today our coordination relies mostly on governments and private companies protected by enforceable laws.

Decentralized networks enable us to create new ways of governance on a large scale (as Nick Szabo argues) by transferring some of the rules and processes from our current systems (backed by lawyers and manual administration) to automated, trust minimized protocols, which are aligning economic incentives of participants.

It turns out that by utilizing crypto-economic incentives in blockchains, we can experiment with:

• governing decentralized protocols and networks
• optimizing decentralized protocols and networks to boost human cooperation.
• creating new types of organisations and entities such as DAOs, COs
• testing and implementing of alternative governance models (such as Futarchy, Liquid democracy or Radical markets)

We believe that decentralized digital networks will accrue significant value if they succeed in creating new types of governance and tie the governing system into usage of their native crypto assets (as Decred). These assets (tokens) can then become a vehicle capturing and utilizing political influence within entire ecosystems and can also help us to implement better processes and align incentives in our current political systems.

We recommend our research for further reading on this topic.

Combining our theses together – Open Digital Economies

These are the main four theses that we are currently covering in our investment portfolio and approach. They are not contradictory; they are complementary. If at least some of these visions materialize and get mass adoption, we should think about them as whole new open digital economies with their own currencies, markets, rules, decision makers and services.

Open Digital Economies will be built on top of unbundled financial and political primitives and allow for frictionless digital markets, more transparent governance and permission-less financial services. Enabled by open blockchains open digital economies will emerge globally without borders and create new ways in which value is created and captured, disrupting many nation-states in the process. Read about the first principles — heterodox economics — from which we try to extrapolate this turn of events.

In conclusion, decentralized crypto-networks will change the way how we transfer value, conduct contracts, and deal with data, creating unstoppable protocols, which are solving some of the most pressing issues of digital age (such as centralization of digital services, surveillance, censorship, and data ownership).

Our Investment Strategy

We are on the mission to seek and invest in the best opportunities in the crypto space, which provide an asymmetric high-risk, high-yield dynamic. However, current cryptocurrency and blockchain markets are full of noise. Therefore we believe that through careful analysis, we can find undervalued projects with long-term growth potential.

We do not know which particular technology and decentralized network will succeed in the end (no one does). We are building our investment portfolio in a way that lets us profit from almost all possible outcomes through smart diversification.

The majority of our capital is allocated in a balanced portfolio of long positions for various cryptocurrencies, tokens and other digital assets. Part of our portfolio may also be allocated to equity shares of companies from the crypto/blockchain industry (public stock or private equity). In rare cases, we may also hold short positions if we conclude that a given asset is strongly overvalued by the market and a correction is imminent.

The investment horizon for our positions is usually 2 – 10 years. However, we adjust the size of our positions more often by rebalancing the portfolio. From time to time, we may decide to take short-term trading opportunities as they emerge based on our data analysis.

Fundamental analysis

We believe that this approach will help us capture the maximum upside from emerging crypto-asset markets while mitigating the downside, by focusing only on projects with a high chance of success and value-capture properties.