2024 Annual Investor Letter

This below is an excerpt from ParaFi's 2024 Investor Letter (the "Letter"). The Letter was originally drafted for ParaFi investors and parts of this letter have been redacted and/or amended for public distribution. Please see Important Disclaimers at the end of the Letter for additional information.

Dear Investors,

The year is 2040.

Bitcoin reigns supreme as the planet's default store of value. Global assets are now denominated in BTC terms, making it the neutral and universal yardstick for measuring real wealth. Today, one share of Tesla is worth 0.00178737 BTC, while one US Dollar is worth 0.00000021 BTC. Gone are the days when we used to quote asset prices in US dollar terms.

This monetary paradigm shift was turbulent. In 2033, we narrowly avoided a Digital Cold War triggered by the weaponization of fiat currencies and competition over energy resources for Bitcoin mining. Governments were cornered into a game-theoretic capitulation: adopt Bitcoin or risk financial isolation. Today, a handful of authoritarian states still mandate their own fiat currencies — often linked to the US Dollar or the Chinese Yuan — but even they must settle external trade and sovereign debt in Bitcoin to remain competitive.

In the wake of these events, nation-states and corporates took drastic steps to control major on-chain economies. Over 25% of global GDP is now settled on blockchains with decentralized networks underpinning everything from global trade to healthcare. The Solana economy alone generates $10 trillion of GDP annually, ranking it among the top 10 economies globally, fueled by burgeoning industries in decentralized GPU networks and autonomous AI agents. In fact, by 2034, Solana's decentralized compute market eclipsed traditional cloud computing providers AWS, Azure and GoogleCloud combined. Robust capital markets for compute – along with storage, memory and bandwidth – are blossoming on Solana, allowing AI agents to autonomously trade resources in real time, optimize workloads, and coordinate complex economic operations without direct human oversight.

The Ethereum economy is also prospering, although it has not been a smooth journey. After struggling through a decade-long economic and technical recession due to competitive rivalry with Base, Arbitrum, and other Layer 2 EVM networks, Ethereum has established itself as the ledger of record for nearly 100% of the world's traditional assets. Stocks, bonds, commodities, derivatives, insurance policies, titles, mortgages — all are tokenized in ERC20/721 format and seamlessly settled 24/7/365, pushing traditional back-office functionality into technological obsolescence. The term "stablecoin" disappeared from everyday parlance over a decade ago. Stablecoins simply became dollars, with no distinction between on-chain dollars and bank deposits. Instead of moving funds via outdated systems like SWIFT or ACH (both of which were formally decommissioned in 2035), dollars settle on-chain with instantaneous finality.

For financial institutions, smart contract architecture is ubiquitous as the base layer for global capital markets with nearly 75% of all capital markets activities taking place on-chain. The building blocks of "DeFi" in the 2020s inspired this paradigm shift, although most of the original applications failed to survive. Global banks have diminished in societal significance with a smaller, leaner financial sector emerging, driven by less rent-seeking decentralized applications, unlocking material consumer surplus. JPMorgan, for example, now runs a private permissioned Layer 1 blockchain on Avalanche with seamless bridging to EVM and SVM environments. Payments, historically a profit center for banks, have evolved into a dynamic subsector of finance — streaming micropayments by the trillions, continuously settling across the globe. Long gone are the days when we used to receive a paycheck every 2 weeks or pay rent each month. Entire industries now operate in real-time.

After reaching artificial general intelligence in 2033, every human and corporation now utilizes a consortium of AI agents to control their financial assets and digital identity. Every query, message and digital interaction on the internet requires cryptographic signatures and micropayments that settle on-chain. Unsigned transactions or messages are as worthless and untrustworthy as spam, and any social media content or news requires proof of authenticity to be taken seriously. By 2037, zero-knowledge cryptography matured to the point where private data could be used in blockchain applications without ever being exposed. This led to disruption of legacy big tech incumbents and a new order where data has become one of the most fiercely sought after assets in history. By 2039, AI and corporations were bidding on private data in real-time auctions, used to further refine and recalibrate their algorithms. Prediction markets have been critical in this transition, serving as humanity's primary source of real-time news and high-fidelity data, with AI agents digesting content and market making insights in real time.

The corporate landscape has also been irrevocably changed. Today, every Fortune 500 company has tokenized a part of its capital structure, reflecting bespoke combinations of economic, governance and loyalty rights. Every major corporation now has active businesses built on-chain, competing for a piece of the blockchain economy. It is no longer enough to simply own a business; now, a company's ability to access and interact with decentralized finance ecosystems determines its survival...

Of course, it isn't really 2040.

It's 2025. My internet connection is spotty, I'm stuck on hold with my bank to process a wire, and to top it off, I just got asked to send in confirmation via postal mail.

To some of you, the future world of 2040 is a gleaming techno-utopia. For others, it's a hellscape. But either way, I imagine to most it reads as outlandish, unrealistic or radical SciFi. After all, 2040 is only 15 years away.

But is this future really so far beyond reach? Rewind the clock 15 years to 2010. The Bitcoin white paper had been published in an obscure cryptography chat forum to an audience of mathematicians and anarchists (or "cypherpunks" as they called themselves). They had spent the past decade debating if there was a way to cryptographically send value on the internet. But very few people noticed or cared about bitcoin in the early days. There were only an estimated ~65k wallets that held bitcoin by the end of 2010 (and many people had multiple wallets).

Yet the world in 2025, in the eyes of a 2010 cypherpunk bitcoin holder, would sound like pure fantasy. What if I were to tell a 2010 cypherpunk that the US government was considering a Bitcoin Strategic Reserve? What if I were to tell them that a US president and his family would launch both a DeFi protocol and memecoin? Imagine telling them that stablecoins (digital dollars) now settle $59 trillion run-rate volume, greater than that of Visa. Or that Bitcoin ETFs were approved a year ago and generated $40bn+ inflows, making them the largest launch in history. What if I were to tell them that nearly $100bn of capital sits in DeFi smart contracts? What if I were to tell them that the US government determined that blockchain, along with AI, were two critical technological areas of strategic national focus?

Incredulity, shock and disbelief would ensue. Even the most optimistic cypherpunk would not have imagined the magnitude and scope of how this technology has evolved.

It's tough to blame them. Predicting the future is notoriously difficult. Humans often extrapolate linearly, imagining futures that resemble the present with minor upgrades, rather than accounting for transformative "zero-to-one" breakthroughs. But progress moves in unpredictable leaps – similar to how the internet existed for 20+ years prior to its "Netscape Moment" in 1995. Think "growth spurts" followed by linear plateaus.

That's why as investors in this asset class, we must remain humble and grounded when taking multi-decade views, acknowledging our innate shortcomings as long-term forecasters. For this reason, we are often obsessed with observing the present. By acutely observing the present – by focusing on the empirical data taking place today on-chain – we give ourselves the best chance of squinting through the fog into the future.

Which begs the question: what trends emerge when we analyze the raw data of blockchains today? Blockchain ecosystems are buzzing with economic activity: stablecoins are abundant, real-world assets are rapidly tokenizing, and DeFi adoption continues to grow. Prediction markets are reshaping how we consume news, AI agents are beginning to revolutionize decision-making, Bitcoin is solidifying its role as a non-sovereign store of value, and decentralized physical infrastructure networks are gaining traction. These are not theoretical concepts. Blockchains are being used today for real economic activity.

At ParaFi, we meet with hundreds of crypto entrepreneurs each year and have one of the largest portfolios of blockchain companies and protocols in the world. We therefore have the unique vantage point of not only observing and analyzing this data on public blockchains, but also in private board meetings and monthly updates with our portfolio companies and founders.

Throughout this letter, our goal is to share the empirical data with you to give you an appreciation for what verticals and to what magnitude we are seeing real GDP move onto blockchains. Below are some of the highlights and themes we'll touch on in more depth throughout this letter:

• Stablecoins – In 2024, stablecoins handled more transaction volume than Visa and American Express combined, totaling $27.6 trillion of transaction volume over the course of the year across 223mm active addresses. Remarkably, stablecoin activity accounts for 70-80% of settlement on public blockchains (despite stablecoin supply of $200bn accounting for only 7-8% of total crypto market cap). Said differently, the supermajority of blockchain transactions involve stablecoins in some way, shape or form! ParaFi has been an active investor in stablecoin issuers and infrastructure since the firm's inception and has doubled down in recent years, including Ethena M-Zero, Sky (fka MakerDAO), a DeFi protocol built on Ethereum that offers USDe and USDE, and others.
• Rapid Growth of non-Ethereum Blockchains. From 2018-2021, Ethereum dominated user and developer mindshare. Beginning in 2021, the emergence and rapid scalability advancements of Solana, Avalanche (a network of customizable L1s), and Sui as well as Aptos (written in the Move programming language) provided demonstrable evidence that we will be living in a multi-chain rather than a "one chain wins all" world. ParaFi has expressed this view across its portfolio with investments in the base and application layer across multiple ecosystems, including co-leading the Avalanche PIPT opportunity, Eclipse (a Solana Virtual machine that relies on Ethereum for network security), Hello Moon (a leading Solana infrastructure company), and many others.
• Real World Asset Tokenization – With an estimated ~$17bn of tokenized real world assets on-chain led by institutions such as BlackRock and Franklin Templeton, we are seeing growth at both the fat left (e.g. treasuries, credit) and long right tails (e.g. physical collectibles, esoteric assets) of the asset spectrum. ParaFi has been among the most active investors behind tokenization issuers and platforms, including leading the seed round of Superstate and Parfin, investing in Securitize, and leading bridge rounds in Courtyard and Kettle (tokenized cards and watches).
• Decentralized Finance – ParaFi was among the first institutional investors in "DeFi" before the term existed (we called it "crypto finance" back in 2019) including leading the first institutional round in Aave, Sky (fka MakerDAO), Uniswap and Lido. While DeFi has receded from the public narrative in recent years, the fundamentals have continued to compound with many core DeFi primitives at all-time highs in terms of on-chain usage, revenue, and earnings, along with a more sanguine regulatory landscape that enables protocols to funnel retained earnings back to tokenholders via buybacks or dividends. We'll cover our PIPT investment in Kamino, our seed investment behind the Bitcoin DeFi renaissance in Mezo, as well as general commentary on liquid positions in AAVE, MPL, and MKR.
• DePin – Decentralized Physical Infrastructure Networks are one of the best direct examples of links between the "real world" and blockchains. Helium pioneered a decentralized, peer-powered wireless network that incentivizes users to host hotspots and provides coverage using blockchain-based rewards, all while spending zero capex. Since Helium, we've seen this concept applied across a variety of verticals, including two ParaFi investments we'll highlight later, including Geodnet, a DePin powered high precision GPS network used by robotic companies, as well as Andrena, a decentralized wireless internet service provider.
• Prediction Markets – Polymarket, a longstanding ParaFi investment since 2020, was the breakout crypto application in 2024, facilitating $8.8bn of volume across ~645K wallets and serving as the de facto location of real time odds for the presidential election. In fact, Polymarket's app was #1 on Apple's US App Store for magazines and news, ahead of The New York Times, CNN, The Wall Street Journal, and The Washington Post. Not only did ParaFi double-down on our Polymarket investment in 2024, but we are actively in dialogue with many other early stage teams building tangential infrastructure for prediction markets, ranging from AI agent traders to interfaces. We believe prediction markets will disrupt traditional media in the coming years and are an example of an application uniquely suited for blockchain architecture.
• AI Agent Economy – The end state of artificial intelligence is not merely a large language model (LLM) in a call-and-response format; rather, it is an agent that anticipates your needs and can proactively act on your behalf. From first principles, blockchains are the ideal economic architecture for agents given their 24/7 run-time, global scope, programmable APIs, and enablement of micropayments. Blockchains enable agents to send a fraction of a penny on the internet, which is simply not economically practical with existing ACH, SWIFT and other traditional banking rails. We'll cover our recent investments in Pr0xy, a spin-out of Stripe Crypto, as well as the AI infrastructure that existing portfolio companies Spectral and Layer3 are building.

As we enter our eighth year since founding ParaFi, we believe there has never been a better fundamental backdrop for this technology and asset class. As a firm, we are locked-in and focused on capturing what we believe will be a golden period for digital asset investing (2025-2040). To prepare, we have doubled down on everything across ParaFi: growing our team (25 strong), enhancing our technology, upgrading our infrastructure, and refining our processes. We are humbled to partner with some of the largest institutions as they entrust us with their capital to navigate this frontier asset class, and we are honored to serve as your fiduciaries. Thank you for your trust and confidence.

Best Regards,

Ben Forman and the ParaFi Team

Important Disclaimers

This Letter is provided by ParaFi solely for informational purposes and is not financial, legal, tax or investment advice. Through this Letter, ParaFi is not recommending any particular security, protocol, token, financial instrument, or other tradeable asset (an "Asset") or any investment strategy and is not offering to sell, or soliciting to buy any Asset, including those of any investment fund advised by ParaFi. This Letter is not personalized for your particular circumstances or investment needs. You should independently evaluate and judge the matters referred to in this Letter.

Unless otherwise noted, the information and opinions contained in this Letter are provided as of the date given in this Letter and is subject to change without notice. ParaFi does not represent or warranty as to the accuracy or completeness of the information and opinions contained herein. ParaFi is under no obligation to update, revise, or correct any information contained herein. Specifically:

• Certain information contained herein is based on or derived from information provided by independent third-party sources. ParaFi believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.
• Opinions, beliefs, intentions, assessments, estimates, and projections, including, among other things, estimates of valuations, targeted characteristics of a Fund, and anticipated management of risks (collectively, "Statements") are subject to error, involve inherent risks and uncertainties, many of which cannot be predicted or quantified and that are beyond the control of ParaFi, and are based upon certain assumptions, which may not be reasonable or may not be likely to occur. Any price inferences presented in the Letter are for illustrative purposes only. Future evidence and actual results (including actual composition and investment characteristics of the investment portfolio) could differ materially from those set forth in, contemplated by, or underlying these Statements. Statements expressed herein may not necessarily be shared by all personnel of ParaFi.
• The links and related articles herein are provided as a convenience. The inclusion of any link does not constitute an endorsement, authorization, sponsorship, affiliation or monitoring by ParaFi with respect to such linked site or its owners. Accessing any linked sites is at the user's own risk.