How to Invest in DeFi Tokens Early for Huge Returns, Crypto VC Shares
- Vance Spencer is the co-founder of Framework Ventures, one of the largest DeFi investors in crypto.
- He told Insider about the firm’s investing strategy and two DeFi bets that have taken off.
- Spencer also shared his outlook on what he views as the next emerging trend in the crypto space.
Vance Spencer is, in his own words, really “not into bitcoin that much.”
For the 30-year-old venture capital investor, nothing is more exciting than exploring the decentralized finance applications built on top of the Ethereum blockchain.
“The ability to make an insurance company out of 20 lines of code and a bank out of 30 lines of code,” he said in an interview. “When I saw that, that was kind of the light bulb moment.”
The co-founder of Framework Ventures is not shy about his pro-Ethereum stance. In fact, he thinks many layer-one protocols including Solana, Polkadot, and Avalanche, which some crypto traders have dubbed as “ETH killers,” are only staging “ETH attempted murders.”
In his view, the vast majority of the “most interesting and novel concepts” are still happening on Ethereum, which is further boosted by layer-two scaling solutions and sidechains such as Optimism, Arbitrum, and Polygon.
“Materially, we see Ethereum as the long-term winner in the space in a way that really hasn’t been appreciated by the market yet,” he said.
The firm’s focus on Ethereum and DeFi has paid off handsomely. Along with his co-founder Michael Anderson, Spencer launched Framework in 2019 and raised a $15 million fund. In just two years, the firm has grown to manage more than $1 billion in assets after raising $100 million for a second fund in May, according to The Scoop.
Spencer attributes the team’s success to its unique investing strategy, which focuses on actively participating in the growth of pre-seed and seed-stage companies. They also size their ownership stakes in the projects to around 5%.
These early-stage companies can be risky to invest in and sometimes consist entirely of “two guys and a white paper,” but they are a bunch that’s been largely ignored by other VC investors, he said. That has given Framework an opportunity to dominate in the space.
By sizing their ownership stakes to around 5% of a network through multiple rounds, the team can focus on the projects with the most disruptive potential.
“What that means is that you are really not hunting for a billion-dollar outcome, that would only be a $50 million return if you own 5%,” he said. “You are really focusing on a $10 billion to $100 billion outcome for these networks.”
To achieve this exponential outcome, Framework Ventures also leverages the team of 20 mostly engineers from its sister company Framework Labs, which builds proprietary software to help grow the portfolio companies and push them forward.
2 early bets that have taken off exponentially
For the firm’s flagship DeFi fund, Spencer is looking for decentralized networks that will disrupt centralized crypto services and therefore accrue two to three times the amount of value. The firm’s second fund has opened up to emerging trends such as blockchain-based gaming, social tokens, and Web 3.0.
Aave (AAVE), an Ethereum-based borrow, lend, and money markets protocol whose token has surged 467.7% in the past year, is an example of the firm’s successful wagers. The protocol, which has about $27 billion of customers’ total value unlocked deposited in it, has become the bedrock of decentralized finance for both Ethereum and other chains, Spencer said.
His team was able to meet Aave through another portfolio company called Chainlink (LINK). Aave uses Chainlink’s decentralized oracles for the price feeds.
“We actually run a number of Chainlink oracles which keep Aave secure by telling them what the price of a given asset is at a given second,” he said, “so that they can properly calculate the amount of collateralization and liquidations that needs to happen.”
True to its “active participation” investing strategy, Spencer and his team helped restructure Aave’s token economics, sit on their multi-sig (which is similar to the board of a company), and continues to be one of its largest customers by building software on top of the protocol itself and utilizing it.
“That’s pretty much an unstoppable combo where we can exert a lot of our abilities on this project and help them win,” he said.
Another bet from Framework’s second fund is decentralized gaming studio Illuvium (ILV), whose token surged 44.9% in the past month. The project is launched by Kieran Warwick, the brother of the founder of derivatives
liquidity
protocol Synthetix (SNX) Kain Warwick. (Synthetix is also a Framework portfolio company.)
“They are building the first triple-A game of studio quality that’s on the Ethereum blockchain,” Spencer said. “You earn stakes of the governance token. You can earn cash flows from the game itself all while playing this really engaging game.”
As part of its “active participation” strategy, the Framework team is not only helping Illuvium build and structure its token economics but also starting to speculate on in-game land, create guilds of gamers, and fund the people who are coming in to play the game, he said.
The next emerging trend on his radar
Spencer thinks people will be predominantly playing blockchain-based games in three to five years.
Just like how free-to-play games such as Candy Crush and Boom Beats disrupted the traditional gaming industry, people will be buying blockchain games that give them ownership through governance tokens and non-fungible tokens, he said. Some of the gamers will also be able to achieve financial self-actualization as many of the Axie Infinity (AXS) players have done in the Philippines.
He explains that right now many indie game developers are struggling to find their footing in the gaming industry because they’ve been squeezed by the major game studios. As a result, many of them are coming into the blockchain space to build decentralized gaming studios, which could grow into far larger conglomerates than the major gaming studios operating in the traditional space.
“I think that’s probably my prediction … that most of the major gaming studios in 2025 will be built on blockchain and open-source,” he said.
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