Interview: Arain, ChainCatcher

Guest: Eraser, Founding Partner of Seven X

_Organized by: Scof, _Arain, ChainCatcher

During the "DeInsight 2024" annual summit held by the Web3 asset data platform RootData in collaboration with ChainCatcher during Devcon in Bangkok, the "RootData: 2024 Web3 Industry Development Research Report and Annual List" was officially released (click the link to view the complete report and list).

This list is the second annual selection launched by RootData after its first release in 2023. This year's RootData List 2024 covers five categories: Top 50 Projects (completed TGE), Top 50 Projects (not yet conducted TGE), Crypto VC Top 50 Investment Institutions, Top 10 Angel Investors, and Top 20 Best CEOs.

ChainCatcher will publish a series of articles, engaging with the institutions listed in the RootData List 2024, seeking builders who navigate through bull and bear markets, and tracking the latest trends in Web3.

SevenX was successfully selected as a Crypto VC Top 50 and recently appeared on RootData Space to share its path to success.

Founded in 2020, SevenX launched its first fund in August of that year, with a scale of $5 million and an exit return rate of 700%. The dark horse projects it invested in include the asset issuance platform DAOMaker and the Web3 application Mask Network. SevenX Ventures currently manages three main funds and one FoF, with assets under management in the hundreds of millions of dollars. Notably, SevenX Ventures practices boutique investment rather than a track-based approach, thus proposing the "Three Drafts" theory + "CIVIC" model + industrial chain layout.

In this interview, Eraser, the founding partner of Seven X, shared the process of forming a Web3 investment system from the perspective of IT industry investment, pointing out two main investment lines currently present in the market: the enhancement of infrastructure and consumption-driven development, predicting an explosion of full-chain applications in the next 3-5 years.

"I personally do not have much confidence in the combination of Web3 projects and the real world," Eraser candidly stated about the areas he currently does not favor.

The following are the main contents of the Space:

My Computer Background Shapes a Systematic Investment Thinking Approach

Arain: Can you briefly introduce yourself and SevenX?

Eraser: My experience dates back to before I entered Crypto. I worked in Africa for six years, participating in the infrastructure construction and investment of the "Belt and Road" initiative. During my time in Africa, I witnessed multiple instances of currency devaluation and hyperinflation, especially in Nigeria and Angola. These experiences instilled in me a belief in Crypto. The economic collapse and livelihood crises made me deeply aware of the severity of the issues.

In 2017, my partner entered Crypto ahead of me and encouraged me to learn more about various industries. Subsequently, we joined one of the earliest funds in the country. In 2020, I co-founded Seven X with two partners.

Arain: **You mentioned you have a computer background, but your **first job** was in Africa working on the Belt and Road investment. **Why is that?

Eraser: Although I studied computer science at Nanjing University and pursued graduate studies at the University of Waterloo, I realized after returning to China that programming was not my strong suit. Initially, I joined the strategic consulting industry and later participated in the "Belt and Road" projects.

While I am not a technical expert, I hope to think about projects, industries, and investment strategies from a technical perspective. My computer background makes me more focused on logic and structure, which is reflected in our investment style, showcasing a relatively systematic way of thinking. This combination has helped me find my position in the investment industry.

Viewing Web3 Development Through the Lens of IT Industry Investment: Enhancements in Infrastructure and Consumption-Driven Development

Arain:* SevenX Ventures focuses on boutique investments, which differs from the early investment style that generally bets on tracks. You have created a theoretical system for this. How was this theoretical system formed?*

Eraser: At the end of the ICO era, a large number of VC investment funds emerged. At that time, people did not pay much attention to research and lacked investment logic; many simply followed the trend. As market returns were influenced by overall Beta, we realized that this approach was unsustainable, so we began to explore a methodology and logical framework to guide our investment philosophy. This framework has continuously evolved, including our theoretical drafts and judgment models. Recently, I believe there are two important themes in the market: enhancements in infrastructure and consumption-driven development. Infrastructure remains a branch of the computer industry, and we can draw on the development standards of the internet industry over the past 20-30 years to deduce the logic of the entire industry.

I believe the three fundamental pillars of the computer industry are computing, storage, and networking. From the development of the IT industry over the past few decades, the sequence of development for these three is clear. First, the evolution of computing speed and paradigms is fundamental. Initially, single-core computers, like Ethereum, had limited processing power; later, multi-core, multi-threaded, and parallel computing gradually became mainstream, and some current infrastructure projects emphasize this. In the development of computing, general computing gradually evolved into specialized computing, leading to the division of different computing tasks. For example, the central processing unit initially handled all computations, while graphical computations were later assigned to GPUs. In the future, we may see more changes in hardware architecture to meet the needs of different application scenarios. Storage has also evolved from small-capacity hard drives to large-capacity storage, giving rise to new concepts such as databases, data warehouses, and data markets.

In the past decade, the industry has primarily revolved around computing, while the future may evolve towards storage and data-related protocols. Regarding networking, I believe the Web3 industry can be roughly divided into two categories: one is cross-chain and single-chain connection protocols; the other is truly decentralized physical network connections. This involves many depin projects that achieve global connectivity through hardware. Overall, the process of technological evolution can refer to the history of the IT industry, but we need to be cautious about the pace, avoiding moving too fast or too slow. For example, investing in decentralized databases in 2017 may have been too far from actual market demand.

The changes in the IT industry over the past 30 years are evident, from the rise of SaaS to Web 1.0, Web 2.0, and the transition from fixed internet to mobile internet, all driven by the continuous increase in application scenarios, which in turn prompted upgrades and transformations in infrastructure. Before the widespread adoption of smartphones, people could not imagine how dependent they would become on mobile devices in the future. Today, we similarly find it difficult to foresee how the entire internet industry might be based on blockchain or Web3 in the next ten or twenty years. Although I am not fond of the term "Web3," such possibilities do exist. Currently, discussions about application scenarios are very active. The biggest pain point facing Web3 is the oversupply of infrastructure, especially in the past year, as the collapse of several venture capital firms has made everyone realize the need to focus more on the consumer side. However, to date, the Web3 field has not produced particularly successful projects, and industry enthusiasm seems to have refocused on the issuance of new assets.

In terms of consumer logic, we have conducted much thinking. However, we have yet to form a complete investment model that ensures the success of application investments. The success of applications often has an element of randomness and does not solely rely on a single idea or new user interaction method. We were early participants in Web3 social investments, including from Mask Network to CyberConnect, and recently invested in Blue Sky, a project incubated by the former Twitter team. In this process, we realized that current users are not focused on improving their experience or reducing costs through blockchain technology or Web3 services. Reflecting on the early days of the internet, it indeed helped people save many costs, such as the way information was communicated, which was very expensive at the time.

I believe the core of blockchain is not to reduce the cost of the internet but to introduce trust and immutability. These characteristics lead to higher costs, such as redundant storage and consensus mechanisms. Therefore, the transaction costs of blockchain are destined to be higher than the standards of Web 2. So what does Web 3 actually bring to users? I believe there are two key points. First is cross-border payment and settlement, especially with the emergence of stablecoins, which significantly reduces the complexity and cost of cross-border payments and currency exchanges. The second is the significantly lowered threshold for asset issuance. In a traditional environment, only publicly listed companies or institutions backed by the government are qualified to issue stocks or bonds. However, on the blockchain, individuals and small groups can easily issue NFTs, tokens, or publish their works, such as music, comics, or articles, through content platforms. Blockchain has significantly lowered the threshold for asset issuance, allowing anyone to publish and trade their assets at a very low cost. Thus, the real cost reduction brought by blockchain mainly occurs on the supply side, not the consumer side. It makes some previously difficult-to-achieve assets or transactions convenient, even allowing for permissionless asset issuance.

Currently, the problem we see is that the demand on the consumer side has not significantly expanded, but assets are continuously being issued in large quantities. Whether it is new token projects or NFTs, the supply of assets is rapidly increasing, and costs are decreasing, but demand is growing slowly, resulting in a "supply exceeds demand" situation. This leads to capital misallocation, with more suppliers than demanders, causing disappointment in the industry and difficulties in price increases.

• The areas where Web3 may reduce costs lie in incentive mechanisms. By reshaping the incentive environment, people can obtain corresponding assets or rights based on their contributions to the project or ecosystem, rather than just traditional employment relationships.

In summary, I believe the areas where Web3 truly reduces costs are mainly in cross-border payments, asset issuance, and incentive systems, while others are more difficult to reduce costs and may even increase costs. Therefore, I tend to support projects that genuinely bring cost optimization in these areas and will not invest in projects that increase costs on-chain.

Recently, I have observed an interesting phenomenon: the new generation of crypto consumers is blurring the lines between consumption and investment. In Web3, we see a reverse trend of "investment as consumption" similar to "consumption equals investment." For example, when people participate in meme coins, game tokens, and gambling activities, even though they invest little and most end up losing, they still find it enjoyable. These "investments" feel more like a form of entertainment consumption to them, satisfying psychological needs rather than economic returns. Therefore, in the current entrepreneurial and investment landscape, we may need to rethink how to break down the boundaries between consumption and investment, allowing the two to merge more seamlessly. By simplifying the investment decision-making process, we can make it feel more like a consumer experience, or even a form of entertainment. This way, investment is more likely to attract public participation and achieve broader adoption. These ideas are still in their early stages but are worth further exploration.

Arain:* I can hear the industrial logic you just mentioned; it is essentially a re-derivation of the IT industry. You mentioned that computation is still at the core; what do you see as the next step?*

Eraser: About two to three years ago, we began to lay out investments in storage and data fields. For example, we are one of the largest supporters of the Arweave ecosystem and have invested in several projects within the Arweave ecosystem. Additionally, we have supported early projects such as decentralized databases and decentralized data lakes, like Space and Time. We have also invested at the data protocol level, including RSS3 and Debank. As on-chain activities and transaction volumes increase, the demand for data storage is also rising, not just for transaction data but for various other types of information. For instance, permanent storage public chains like Arweave have already shown demand. However, early data protocol projects like Ocean Protocol, which initially aimed to promote data trading, have not made significant progress. I believe that while everyone emphasizes that data is the future and the "oil" of AI, the application and circulation of on-chain data still face many challenges.

I believe Web3 data is not rich enough; the volume of user data and the state of on-chain storage have not reached ideal standards. Furthermore, the industry itself is still in its early stages—if computational capabilities are not yet perfected, investing in databases may be premature. We should remain patient and observe industry trends from the perspective of entrepreneurs and VCs, looking ahead six months to a year rather than rushing to chase new technologies. It is also possible that the industry's focus may shift, such as a weakening demand for data while the combination of AI and finance becomes more important, ultimately bringing us back to the field of computation. Such changes in technological evolution are also reasonable.

Maturing Investment System: Post-Investment and Heavy Asset Management

Arain: Can you evaluate the current market and several hotspots using your investment system?

Eraser: Here are my personal views. I am not very confident about the integration of Web3 projects with the real world. I believe that in the next 3 to 5 years, the relationship between this industry and the traditional world will remain parallel and difficult to merge. This is because if these projects are too radical, they will face regulation, leading to centralized control, which contradicts their entrepreneurial intentions.

In our current investments, the only Depin project is IO.net. We do not view it as a typical Depin project but rather as a bilateral market project aimed at solving the matching problem between supply and demand, rather than simply reducing GPU costs.

Regarding the combination of AI and Web3, I take a wait-and-see approach. AI may become a tool, but its core concept does not align with Web3's solution to trust issues. Therefore, we are very cautious about investing in AI and Web3 projects. As for DePin, we believe that the most important thing right now is to connect everyone, so we have abandoned all DePin projects related to data sharing. We think the era of data sharing has not yet arrived, and establishing an internet connection service that is not influenced by centralization is key. Therefore, we have not invested in similar DePin data projects.

Arain: From the data perspective, SevenX Ventures has invested in hundreds of projects, making it an active investment institution in the market. Can you talk about whether it is easy to implement this boutique investment theoretical system? What challenges and temptations have we encountered in the process?

Eraser: This is a sharp question. As an active VC in the industry, it is difficult for us to completely ignore the noise of the industry and the commonly followed schemes, but we insist on not investing in competitors within the same niche or rarely doing so.

For example, we were among the first investors in YGG, and after that, we did not invest in other popular competing projects. We only invested in MerritCircle after it improved and transformed, no longer being in the same track. Therefore, our only steadfast principle is not to invest in directly competing projects, ensuring that our user base does not overlap with that of our competitors. However, we may consider investing in projects within similar tracks or those with overlapping users.

Arain:* This year, the projects we have invested in and the frequency of our investments have changed compared to previous years. Can you talk about the reasons behind these changes?*

Eraser: I believe the biggest change is that our decision-making speed has slowed down, but the amount of each investment has increased. Previously, we typically invested between $800,000 and $1 million, while now the investment amounts often reach $1.5 million or even over $2 million. This is because we have more investment opportunities, leading to longer decision cycles, and the overall number of projects has decreased, but the equity stake in each project is higher.

The reason for this change is that we realized we had made mistakes in the past. First, as the fund size expanded, we adopted a post-investment service-based model. If there are too many invested projects, it becomes impossible to devote enough energy to manage them. Second, we have gained a clearer understanding of the projects we want to invest in and those we do not, rather than trying randomly as we did before. In the past, the industry lacked a clear vision and theoretical framework, leading everyone to adopt an experimental investment approach. However, we have now established some clear frameworks, so while the number of projects has decreased, the investment amount for each project has increased.

From an industry perspective, the total number of projects the market can accommodate will gradually decrease in the future. Now, almost everyone can issue tokens or assets, leading to diluted attention. The future market will stratify, with the top tier consisting of a dozen competitive projects, the middle tier comprising some short-lived projects, and the bottom tier consisting of low-quality projects that only have a few days of popularity.

Arain: You just mentioned that this is a natural growth process for the fund, and at this stage, we should do the corresponding things. Could you share the future planning and layout of the fund products?

Eraser: Our layout emphasizes infrastructure in Europe and the U.S. and applications in Asia. European and American entrepreneurial teams focus on values and concepts, such as decentralization and community, while also having strict technical requirements, but this leads to longer cycles and neglect of growth. In contrast, Asian entrepreneurs are more skilled in growth and user operations. China's Web2 applications excel in user experience compared to many European and American products, which reinforces our belief in this strategy.

At the same time, we are also exploring more community-oriented projects rather than solely relying on traditional VC investment methods. Over the past year, opinions on VC tokens have changed, and many people have begun to question the influence of VCs. Therefore, we hope to find better development methods, such as leveraging community power or co-creation models, rather than merely relying on traditional investment models. This traditional VC business model has clearly reached its end.

Investment Rhythm Application of the "Pendulum Theory"

Arain: How do you control the investment rhythm? Is there a corresponding evaluation system?

Eraser: This is a good question because we have also made similar mistakes in our investment process. For example, in our second fund, we were too focused on chasing so-called innovation points, especially in the NFT and metaverse fields, believing that anything novel was worth investing in. As a result, many projects seemed too ahead of their time. For instance, in 2021, we invested in dynamic NFTs, possibly the first of its kind globally, but the NFT market itself was not yet mature, making it harder for dynamic NFTs to gain attention, and ultimately, it did not succeed. Similarly, at that time, the industry was still discussing infrastructure construction, while we invested in some applications hoping to change the status quo, such as decentralized music streaming platforms. However, due to insufficient infrastructure and market conditions, this project also failed.

When investing in Web3 projects, we have also faced issues of timing and cycles. For example, when technologies like AA wallets and Paymaster were not mature, we attempted to invest in decentralized music streaming projects but failed due to insufficient infrastructure. In response, we proposed the "Pendulum Theory": the blockchain industry constantly swings between centralization and decentralization, much like a pendulum clock oscillating back and forth on the train towards decentralization.

Looking back at history, the ICO era emphasized complete decentralization, but this led to frequent project failures and a lack of regulation. Subsequently, centralized exchanges rose and determined the rules for asset issuance. As centralized exchanges exposed various drawbacks, the DeFi Summer of 2020 brought people back on-chain. However, the excessive derivation of DeFi led to problems, with too many projects like food tokens and farm tokens losing regulation, ultimately prompting a return to centralized exchanges. Recently, interest in centralized VC investment tokens has waned, while there is a renewed pursuit of on-chain assets like memes, once again leaning towards decentralization. The other end of the pendulum also involves the pursuit of use value versus the void. At times, the application scenarios of tokens are highly praised, while at other times, purely meme tokens dominate. Ethereum has also experienced a shift from single-chain dominance to multi-chain competition. I believe this industry will progress through continuous cycles and oscillations.

Arain: The Pendulum Theory can provide us with direction for the next steps. We are currently in a few intertwined states, and investing in the future should be approached in reverse, right?

Eraser: The decentralization of Web3 is not only reflected in technology but also in a distrust of authority. In the past, whether it was listing tokens on Binance, statements from Vitalik, or investments from institutions like a16z, they were seen as authoritative. However, people have gradually realized that these authorities do not always yield good results, leading to a decline in blind obedience. Yet, long-term de-authoritization can lead to chaos, ultimately creating new authorities, forming a cycle.

Expected Explosion of Full-Chain Applications in the Next 3-5 Years

Arain: Most of the projects SevenX has invested in belong to Infra, while we have made fewer investments in application types. What is our current investment rhythm regarding Infra and applications? How do we judge the timing and act regarding the future of applications?

Eraser: In our previous discussion, I mentioned that we started to focus on and invest in some applications over a year ago. In fact, even earlier during our second phase, we invested in some less successful applications. I admit that we were too early at that time because the entire industry's infrastructure was not yet complete, many L2s had not yet launched, and L1s were not functioning as they should. Therefore, the focus at that time should have been on solving the bottlenecks in computation and infrastructure, rather than promoting application development.

As time goes on, it is expected that large-scale on-chain applications will emerge in the next one to two years. Recently, many projects have surfaced, but these applications often do not fully operate on-chain; instead, they partially rely on on-chain or Web3 functionalities, with the user experience still primarily based on Web2 models. For example, the Blue Sky project we invested in, while entering the Web3 social and content creation space, still offers a native Web2 user experience, merely utilizing some Web3 assets or philosophical concepts to operate in a more decentralized manner.

I believe that in 3 to 5 years, the earliest batch of fully on-chain applications will begin to emerge. We have invested in some fully on-chain games, which I am personally very enthusiastic about and support their development. However, it must be pointed out that, based on current data, the number of users for fully on-chain games is indeed less than that of Web2.5 games.

Arain: You just mentioned that when you invest in consumer applications, you do not support projects that claim to reduce consumer costs but ultimately end up increasing them. How do we judge whether a project is a "pseudo-reduction of consumer" cost project?

Eraser: The reason for our failure in investing in music streaming was mainly that we only considered the needs of creators while neglecting the consumer experience. As consumers, Web2 platforms have made listening to music convenient and inexpensive, such as NetEase Cloud and Spotify, where users can enjoy unlimited listening for a monthly fee. In contrast, the Web3 model requires users to pay for each song, as well as pay on-chain gas fees and install wallets, which is too burdensome for users.

Our original intention was to help long-tail creators through decentralized recommendations and pay-per-use models, but from the consumer's perspective, this model is neither convenient nor cost-effective. The music industry also lacks stickiness; users can easily switch platforms, and there is little difference in where they listen to the same song. Therefore, merely changing the supply side cannot solve the problem. Unless we find a way for Web3 to genuinely enhance the consumer experience, the Web3 transformation of the music industry is unlikely to succeed.

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