LVC Series: Part 5 - Research Process

Disclaimer: This is not financial advice. Anything stated in this article is for informational purposes only and should not be relied upon as a basis for investment decisions. Triton may maintain positions in any of the assets or projects discussed on this website.

This is a multi-part series on Triton’s investment process for liquid crypto:

• The Origins of Triton Liquid
• Liquid Venture Capital
• Liquid Crypto Market Segmentation
• Data Dashboards for Liquid Crypto
• Research Process for Liquid Crypto

Research Process for Liquid Crypto

As discussed in a previous post, as liquid crypto investors, our goal is to take in the total investable landscape of crypto assets and output the best possible diversified portfolio of high-quality, early-stage crypto projects and protocols. 

Once we make an investment, we monitor these projects in real-time through a suite of proprietary dashboards and make changes to our portfolio based on persistent growth or contraction in these underlying metrics.

This process consists of three distinct phases:  

• Research (purple)
• Data Due Diligence (blue)
• Investment (green)

Full Resolution Picture Here

As outlined here, we segment the token landscape into high-level categories: 

• Ecosystem Tokens – Layer 0, Layer 1, Layer 2 assets that accrue value by selling blockspace
• App Tokens – Project-specific tokens that accrue value proportional to cash flows, buy and burn mechanisms, use, or governance

The feature importance for each category as derived from our modeling helps us determine what metrics to focus on when assessing projects in each category.

After identifying these metrics, we go a step deeper, and subdivide our high-level categories into distinct verticals we think will perform well on a 3-5 year time horizon, and around which we have an internal thesis. For example, if we are interested in exposure to DeFi DEXs (a subset of the App Token category), we will aggregate projects such as Uniswap, Curve, Sushiswap, Orca, Pancakeswap, and Balancer, amongst others. This vertical segmentation accomplishes two distinct goals:

• It lets us look at a vertical in aggregate, and select the most compelling projects in each vertical
• It provides the competitive landscape against which we can track the growth of specific projects, intra-vertical, using our dashboard suite

Once we have identified the verticals we think are important, and defined the metrics that matter for that vertical, we have a rough idea of which projects warrant a deep dive for each unique vertical and can commence with the research process. 

For each token, we conduct a ~20-page qualitative writeup that follows a formulaic template to comprehensively assess the project. To date, we have done over 100 of these comprehensive token write-ups. 

For our writeup process, we look at each token as an early-stage VC investment. Our deal memos consist of the below components.

We then take this qualitative write-up and assign quantitative scores using a research template. As qualitative aspects of the company change, e.g. a founding team member leaves and the strength of the team diminishes, we update our research scorecard accordingly. This also provides us an additional way to systematically backtest the qualitative factors that are most important to a project’s success.

Financial Model

Where appropriate, we then create a financial model for each project that has passed our research and data due diligence screens. As with VC investing, because many of these projects are less than one year old, we must make certain assumptions. Many of the metrics we are forming assumptions around - such as new users, revenue, and daily active wallets - can be tracked real time, and we are able to update our model at any point in order to generate a current snapshot of a project’s health.

Example Memo

By way of example, I have included a complete token writeup for Pendle Finance in the link below:

Example Deal Memo - Pendle Finance 

Investment Committee

After we conduct all writeups on a certain vertical, we organize them and pitch the most compelling projects to our Investment Committee. Since we assess all projects for a certain vertical together, we can more easily compare the merits of each. After debating the team, product, traction, value accrual mechanism, and token economics of these projects, we move toward a final decision by answering the following questions:

• Should we invest in this vertical?

• If yes, which project(s) in this vertical are most compelling?
• What are the unknowns and what further research (if any) must be done?
• What are the key metrics we should focus on to track the evolving dynamics for each vertical?
• What is a reasonable fair price for this asset (from both top down and bottom up)?
• Where should we be a buyer?
• Where should we be a seller?

During this process we attempt to construct a portfolio that is diversified across verticals, ecosystems, and narratives. Once our portfolio is live, we are able to compare the metrics on our data dashboards to our initial assumptions to understand:

• Whether our initial investment thesis is coming to fruition
• How our investments in a certain vertical compare with other projects in that same vertical
• Whether the price of our investments has deviated significantly from fundamentals 

Through our data dashboard building and tracking process discussed in our previous post, we are better able to construct and actively manage a liquid portfolio of crypto assets.