In the May edition, we spoke with Thomas Leach, Research & Technology expert at DCAP. Thomas graduated with a PhD in Financial Technologies from the University of Pavia, where he focused on the topics of cyber risk and stablecoins. Prior to this, he worked at R3 and the European Central Bank focusing on blockchain and DLT solutions in the payments and settlements landscape. In this interview, he shares his insights on the crucial balance between risk and reward when investing in digital assets, as well as emerging trends that could shape the future of this exciting market.

What are some of the key factors to consider when selecting which digital assets to invest in?

There is a vast universe of investable digital assets; for example, CoinMarketCap lists over 9’000 digital assets, which would be unmanageable to analyse every potential asset in detail. So, it is crucial to identify key factors that narrow down the scope of investable assets. While there are many factors to consider, some key ones include Community and Adoption. The level of adoption and community support for a digital asset can be a good indicator of its potential for growth. It can signal the demand for a digital asset. Tokenomics are also a key factor. Tokenomics refers to the economic model and mechanics of a digital asset or token. It captures various aspects such as the token supply, distribution, and incentives within an ecosystem. These factors can affect price stability and the potential for value creation.

When it comes to investing in different digital assets, how do you balance potential risks and rewards?

Well, in the past 10 years, digital assets have produced higher returns compared to traditional assets. But as the risk-return trade-off states, potential returns increase with higher risk. To assess the potential risks and returns of an asset, it's crucial to conduct due diligence and research into the associated application or protocol with it.

Can you tell me more about what you consider when conducting due diligence and research?

Of course. When it comes to evaluating an asset, we consider several factors. Firstly, the technology. Is the underlying technology of the protocol associated with a particular digital asset easy to understand? As software complexity increases, the number of possible entry points, interactions, and dependencies also tends to increase, thereby expanding the attack surface to a malicious actor. Therefore, complex protocols that are untried and untested could be best avoided.

Secondly, Tokenomics. Ultimately, when considering an asset for investment, we are concerned with the potential for price appreciation. The economic model that underpins an asset and protocol is what will attract future investors, users, and developers, thereby increasing the value and demand for the asset.

Lastly, we consider the team behind the development of the protocol. Several protocols have resulted in 'rug-pulls' or turned out to be a scam, so assessing the quality of the team behind the projects is an integral part of our research strategy.

Once you've identified assets with potential, how do you construct a portfolio of assets?

Having identified assets that show a potential for price appreciation comes with the challenge of constructing a portfolio of assets. Risk in the portfolio can be raised by having an excessive amount of exposure to a single asset or assets with comparable characteristics. To minimise the risk of losses, diversifying across various risk factors can be beneficial.

For instance, sectors within the digital assets ecosystem, such as the Decentralised Finance sector, may have similar risk profiles. Blockchains that are built on similar technologies – for example, EVM-compatible chains – are all can be susceptible to any vulnerabilities in EVM technology. Lastly, it's beneficial to diversify across different asset classes. An alternative way to gain exposure to Web3 technologies is by exploring the listed and private equities market.

What emerging trends do you see in the digital asset space, and how do you think they will impact the market in the future?

Zero-knowledge proofs (ZKP) are a cryptographic method^[1] that enables one party to prove to another party that a given statement is true without revealing any information apart from the fact that the statement is true. Applications that require privacy and confidentiality, are not suitable for permissionless, or public blockchains. However, ZKPs could change this since transactions can be validated without disclosing the actual transaction details. This can also improve the security of blockchain systems. Sensitive information can be kept private and confidential, reducing the risk of data breaches and unauthorised access. Lastly, ZKPs are forming an integral solution to the blockchain scalability problem. ZKPs can address these issues by enabling the aggregation of multiple transactions into a single proof, reducing the computational burden, and improving overall scalability. We are already beginning to see such applications being rolled out such as Polygon’s zkEVM.

How do you stay informed about new technologies and innovations in the crypto industry?

The digital asset space is fast evolving, and there is a lot of noise and hype that needs filtering out to identify protocols and technologies that have credible staying power and the real potential to create value for Web3. For a researcher, enterprise tools like Messari and Nansen are useful for detecting relevant information but there are also free resources such as DefiLlama that are very powerful for staying up to date with trends. Twitter is also a very useful tool for spotting trending topics in Web3. Finally, to monitor developments in the local space, we often attend meetups and conferences that allow us to meet developers and individuals working on projects in the local web3 ecosystem.

Lastly, we like to ask a personal question to wrap up our conversation. What additional interests do you have, and how do you keep a "work-life balance"?

Maintaining a work-life balance is important for me. It plays a crucial role in ensuring long-term productivity and preventing burnout. Engaging in regular exercise and pursuing hobbies like running and playing football helps me unwind. Since relocating to Switzerland, I have been fortunate to explore some of its stunning nature and landscapes, which also provide a disconnect from work and city life. Being close to the mountains has another added benefit during the winter season of being so close to the ski slopes!

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^[1] Aleksander Berentsen, Jeremias Lenzi, and Remo Nyffenegger, "An Introduction to Zero-KnowledgeProofs in Blockchains and Economics," Federal Reserve Bank of St. Louis Review,Forthcoming 2023.

Aleksander Berentsen, the co-authorof this article, is part of the Research and Technology team at DCAP.