Technology

Crypto skeptics rejoice! A new way to short the cryptocurrency market is coming from dYdX, a decentralized financial derivatives startup. In two months it will launch its protocol for creating short and leverage positions for Ethereum and other ERC20 tokens that allow investors to amp up their bets for or against these currencies.

To get the startup there, dYdX recently closed a $2 million seed round led by Andreessen Horowitz and Polychain, and joined by Kindred and Abstract plus angels, including Coinbase CEO Brian Armstrong and co-founder Fred Ehrsam, and serial investor EladGil.

&The main use for cryptocurrency so far has been trading and speculation — buying and holding. Thatnot how sophisticated financial institutions trade,& says dYdX founder Antonio Juliano. &The derivatives market is usually an order of magnitude bigger than the spot trading or buy/sell market. The cryptocurrency market is probably on the order of $5 billion to $10 billion in volume, so you&d expect the derivatives market would be 10X bigger. I think therea really big opportunity there.&

How dYdX works

The idea is that you buy the short Ethereum token with ETH or a stable coin from an exchange or dYdX. The short Ethereumtoken price is inversely pegged to ETH, so it goes up in value when ETH goes down and vice versa. You can then sell the short Ethereum token for a profit if you correctly predicted an ETH price drop.

On the backend, lenders earn an interest rate by providing ETH as collateral locked into smart contracts that back up the short Ethereum tokens. Only a small number of actors have to work with the smart contract to mint or close the short Tokens. Meanwhile, dYdX also offers leveraged Ethereum tokens that let investors borrow to boost their profits if ETHprice goes up.

The plan is to offer short and leveraged tokens for any ERC20 currency in the future. dYdX is building its own user-facing application for buying the tokens, but is also partnering with exchanges to offer the margin tokens &where people are already trading,& says Juliano.

&We think of it as more than just shorting your favorite shitcoin. We think of them as mature financial products.&

Infrastructure to lure big funds into crypto

Coinbase has proven to be an incredible incubator for blockchain startup founders. Juliano was employed there as a software engineer after briefly working at Uber and graduating in computer science from Princeton in 2015. &The first thing I started was a search engine for decentralized apps. I worked for months on it full-time, but nobody was building decentralized apps so no one was searching for them. It was too early,& Juliano explains.

But along the way he noticed the lack of financial instruments for decentralized derivatives despite exploding consumer interest in buying and selling cryptocurrencies. He figured the big hedge funds would eventually come knocking if someone built them a bridge into the blockchain world.

Juliano built dYdX to create a protocol to first begin offering margin tokens. Itopen source, so technically anyone can fork it to issue tokens themselves. But dYdX plans to be the standard-bearer, with its version offering the maximum liquidity to investors trying to buy or sell the margin tokens. His five-person team in San Francisco with experience from Google, Bloomberg, Goldman Sachs, NerdWallet and ConsenSysis working to find as many investors as possible to collateralize the tokens and exchanges to trade them. &Ita race to build liquidity faster than anyone else,& says Juliano.

So how will dYdX make money As is common in crypto, Juliano isn&t exactly sure, and just wants to build up usage first. &We plan to capture value at the protocol level in the future likely through a value adding token,& the founder says. &It would&ve been easy for us to rush into adding a questionable token as we&ve seen many other protocols do; however, we believe itworth thinking deeply about the best way to integrate a token in our ecosystem in a way that creates rather than destroys value for end users.&

&Antonio and his team are among the top engineers in the crypto ecosystem building a novel software system for peer-to-peer financial contracts. We believe this will be immensely valuable and used by millions of people,& says Polychain partner Olaf Carlson-Wee. &I am not concerned with short-term revenue models but rather the opportunity to permanently improve global financial markets.&

Timing the decentralized revolution

With the launch less than two months away, Juliano is also racing to safeguard the protocol from attacks. &You have to take smart contract security extremely seriously. We&re almost done with the second independent security audit,& he tells me.

The security provided by decentralization is one of dYdXselling points versus centralized competitors like Poloniex that offer margin trading opportunities. There, investors have to lock up ETH as collateral for extended periods of time, putting it at risk if the exchange gets hacked, and they don&t benefit from shared liquidity like dYdX will.

It also could compete for crypto haters with the CBOE that now offers Bitcoin futures and margin trading, though it doesn&t handle Ethereum yet. Juliano hopes that since dYdXprotocol can mint short tokens for other ERC20 tokens, you could bet for or against a certain cryptocurrency relative to the whole crypto market by mixing and matching. dYdX will have to nail the user experience and proper partnerships if itgoing to beat the convenience of centralized exchanges and the institutional futures market.

If all goes well, dYdX wants to move into offering options or swaps. &Those derivatives are more often traded by sophisticated traders. We don&t think there are too many traders like that in the market right now,& Juliano explains. &The other types of derivatives that we&ll move to in the future will be really big once the market matures.& That &once the market matures& refrain is one sung by plenty of blockchain projects. The question is who&ll survive long enough to see that future, if it ever arrives.

[Featured Image via Nuzuand Bryce Durbin]

Foundry Group, the Boulder, Colo.-based venture firm co-founded 11 years ago by startup whispererBrad Feld,has raised a $750 million seventh fund to target early-stage and growth-stage companies, as well as to invest in other venture funds.

It sounds like — and is — alotof money, though the firm notes that it encompasses all of its various investment strategies, whereas its last fund, a$500 millionvehicle that it closed in 2016, was used to invest in other venture funds and growth-stage companies alone; Foundry was separately managing its early-stage bets in a different fund.

Ita little confusing, but if you really want to know the details, Feld breaks them out in a post:

For historical reference, our early-stage funds (FG 2007, FG 2010, FG 2013, and FG 2016) are all $225 million in size. Our first early growth fund raised in 2013, Foundry Group Select, is also $225m in size. In 2016, when we raised Foundry Group Next, we approximately doubled the size of that fund to $500 million since 30% of it was going to be invested in partner funds and 70% in early growth. So, at the beginning of 2016, we effectively raised $725 million (FG 2016 and Foundry Group Next). Foundry Group Next 2018 is simply the combination of those two funds rounded up slightly.

Foundry was founded by Feld,Ryan McIntyre, Jason Mendelson and Seth Levine — &four equal partners,& as Feld describes them.

With this newest fund, he says, Foundry now has &seven equal partners,& meaning each receives the same amount of carry — or profits from the firmsuccessful investments — no matter that three of the partners are newer to the table.

Foundrynewer partners include Lindel Eakman, who joined in 2015 to help Foundry identify venture funds in which to invest. (Very meta, we know.) Eakman had previously spent 13 years with the University of Texas Investment Management Company (or UTIMCO), which was Foundry Grouplargest investor.

The firm last year also added Chris Moody, who&d been the CEO of Twitter data reseller Gnip before Twitter acquired the company in 2014 and made Moody a GM and VP of its data and enterprise business. (Foundry was an investor in Gnip.)

The firmnewest partner is Jamey Sperans, who was as an early member and managing director of Morgan Stanley Alternative Investment Partners, where he served on the global investment and executive committees. Sperans, who joined earlier this year, has also founded five companies over the years.

In case you are wondering, yes, that is seven men. (Just remarking.)

Foundry has had at least 44 exits over the years, according to Crunchbase. Among its most recent wins: the email service provider SendGrid, which staged a successful IPO last November; and the 2015 IPO of Fitbit, the wearable device company, whose shares are trading at roughly $5.50 apiece right now but were as high as $47 in the months after the offering.

Among Foundrynewest investments isChowbotics, a four-year-old, Redwood City, Calif.-based company that makes a salad-making robot and raised $11 million in Series A-1 funding last month; and Sensu, a year-old, Portland, Ore.-based full-stack monitoring platform that raised $10 million in Series A funding back in April.

It has also re-upped in plenty of its portfolio companies in recent months, includingUrban Airship, an eight-year-old, Portland, Ore.-based company behind a digital customer engagement platform. In June, it raised $25 million in Series F funding led by Foundry, which had also led the companySeries B round in 2010.

Even as the wealth of Jeff Bezos balloons and Amazon eats everyoneonline retail lunch, there are still a few other e-commerce entrepreneurs faring rather well.

In 2011, eBay purchased GSI Commerce for $2.4 billion, at the same time divesting wholly from the sports merchandise business in Fanatics and significantly from the sitesShopRunner and Rue La La, which together were set up under a new holding company named Kynetic that was put under the control of GSI CEO Michael Rubin.

Seven years later, Rubin isworth an estimated $3 billion from his online shopping empire that has dialed in on key niches thanks to high-profile partnerships rather than a spiderweb network of other retailers, a strategy the company is hoping will protect it from Amazongrowing land grab.

Today, Fanatics helps leagues and teams sell their official sports merchandise directly to consumers.

The sports merchandising space relies heavily on partnerships with major organizations, and the MLB and NFL have both directly invested in Fanatics as a direct avenue for getting jerseys onto fans. In addition to selling gear, Fanatics is manufacturing much of it itself. The company acquired Majestic sportswear early last year, which has been behind much of the MLBmerchandise for years, as it strikes to build out these operations.

How big of a business is all of this Well, the company was valued at $4.5 billion one year ago, raising $1 billion from Softbank which, after betting big on Alibaba, is placing Fanatics as one of its strongest Vision Fund bets to be the next commerce hit.

Rubin will be joining us onstage at TechCrunch Disrupt to discuss his path as an entrepreneur and whatnext for his commerce empire. He will join other commerce-focused speakers, including executives from Glossier, Warby Parker and Adidas.

Thefull agenda ishere. You can purchase tickets here.