Letter to shareholders, Q3 2020

Dear investors, let us recap the eventful Q3 2020 and offer some of our insights and opinions on what to expect next. So much has happened in crypto during the last three months that it is a real challenge to summarize it without getting long-winded.


We managed to generate net profit of 158% for our investors YTD. In Q3 alone we have gained 70% return:

We overperformed Bitcoin by almost 80% YTD, with the majority of gains (51%) in Q3:

This ROI was achieved despite our conservative plan to hold larger stablecoin reserves, thanks to the surge of DeFi part of our portfolio and yield generating assets.

You may notice that by the end of the quarter we see the upside curve breaking and getting more volatile. This was caused by our overexposure to more volatile DeFi assets that grew sharply in price and caused the overall portfolio to be less balanced and skewed towards a couple of bigger positions.

Since Sigil strategy focuses on liquid markets, we have the benefit of rebalancing. However if we rebalance too often, we may cut the winners in our portfolio too soon. Thus we are always trying to strike the right balance between rebalancing and taking profits and letting our winners run in order to capture the upside from big winners of the crypto revolution in the long run.

DeFi Summer

Decentralized Finance has always been one of core pillars of our investment thesis. This summer, we have seen a surge of DeFi projects, propelled by yield farming and liquidity mining.

Yield farming – harnessing yields from decentralized lending protocols where part, or majority of the yields consist of project tokens, which are being used as rewards to incentivize participation.

Liquidity mining is similar to yield farming; token rewards are used to incentivize providing liquidity for assets in decentralized (AMM) exchanges, such as Uniswap and Balancer. AMM liquidity providers earn fees and token incentives but run an additional risk of loss from trading counterparty roles (also known as “impermanent loss” in AMM jargon).

Such incentive schemes are not new, Synthetix was incentivizing liquidity of synths from 2019, most notably sETH:ETH liquidity pool on Uniswap and sUSD stablecoin pool on Curve. As early Synthetix investors, we were actively participating in these pools.

However, the real yield farming craze was started by Compound rewarding users of its lending platform with COMP token.

Many other projects started to copy Compound’s success and provide incentives for traction. Some of the reward tokens had such a limited float and high price that the APY (annualized percentage yields) from “farming” them counted in hundreds and even thousands of %, sparking a chase for extremely high yield. Farming itself turned into a meme, with many tokens adopting farming or food related names.

While definitely not sustainable, these high yields attracted a lot of attention. The amount of capital being utilized within DeFi protocols crossed $10 billion. 

Apart from high yields, foodcoin memes and inevitable copycats, we observed the new wave of innovation. Thanks to permissionless composability of DeFi apps crafty developers can create new financial products by combining existing DeFi protocols in new creative ways.

One of the most notable DeFi projects is yearn – yield strategy aggregator which released its own token YFI. YFI market cap went from zero to >$1 billion valuation in a matter of 1 month. This is probably a new record for achieving unicorn status.

Interestingly enough, yearn has no legal entity. It’s a pure DAO (Decentralized Autonomous Organisation) – a set of smart contracts with a community of contributors incentivized by its token, collaborating and improving the project. Sigil managed to participate in yearn yield farming early and build up a sizable position in YFI token. 

Despite the fact that yearn lost a lot of its value since the peak, it’s still one of the most valuable purely decentralized projects with an amazing community of contributors, a sizable treasury and an exciting roadmap. YFI is also one of the tokens with a direct claim on revenues generated by yearn strategies, consistently generating real cash flow to the token holders.

Not surprisingly, the DeFi hype boom went into an overdrive and ended with a rapid correction and subsequent decrease of yields. Some even compared it to ICO bubble of 2017, but in reality it was just a blip on the chart:

We firmly believe that DeFi adoption is only starting. Majority of DeFi apps are on Ethereum, and its lack of scalability is the main reason why DeFi hit a temporary ceiling.

The future of DeFi is extremely exciting. While the main drivers so far were composability, experimentation with incentives and rise of AMM DEXes, the main drivers in the future will be:

  • Decentralized derivatives: Projects such as Synthetix, Perp.fi and Hegic.co will offer trustless synthetic assets, leveraged and hedging products natively on DeFi, competing against centralized exchanges with composability and permissionless access.
  • Ethereum L2 scalability: Solutions such as Optimistic Rollups (will be used by Synthetix and Uniswap v3) and Zero Knowledge Proofs (used by Loopring.io, Deversifi, Curve.fi) will enable Ethereum based apps to increase their throughput by orders of magnitude.
  • Alternative blockchains: Apart from Ethereum, we are now seeing other blockchains offering different trade offs and design choices that may be attractive for some DeFi projects. Solana, Polkadot, Cosmos and other ecosystems, while seemingly without user traction, are humming with development activity below the surface.
  • Further innovation: DeFi is attracting a lot of brain power and new financial primitives are unlocking previously unimaginable ways to utilize capital, break barriers and solve problems.

Of course such rapid innovation is not without risks. DeFi is still a nascent industry and we have seen many economical exploits and hacks that led to loss of funds of early users. These are inevitable bumps on the road. In the long run, though, the benefits of non custodial, open and transparent financial services are obvious.

To illustrate the importance of open Decentralised Finance, we don’t need to go far. The centralized custodian financial services continued to fail due to their weaknesses by design like reliance on a central party or the risk of regulatory clampdowns. In Q3 alone we have witnessed prominent centralized exchanges facing a lot of troubles:

We are confident that with composability, better industry standards, adoption of best security practices and open auditability of the code, DeFi will offer not only more convenient but also more secure financial infrastructure, rendering current centralized services obsolete in the long run.


During Q3 BTC underperformed DeFi assets. Now it seems to be making a powerful comeback. We are observing a huge narrative shift in public perception of Bitcoin:

  • Paul Tudor Jones is publicly endorsing his BTC investment thesis. Jones is thus breaking a taboo among reputable institutional investors and we can expect others to follow him, especially if the Bitcoin price continues to rally.
  • Microstrategy and Square announced they are buying BTC – both companies are publicly traded and their BTC allocation is a treasury management decision, not speculation. Having a small % of treasury in BTC could become a new narrative, propelling fresh non-speculative demand from companies that aim to diversify their risks from fiat exposure.
  • PayPal recently announced supporting crypto payments, enabling 26 million merchants seamlessly accept cryptocurrencies in early 2021. PayPal has 346 million active accounts around the world and processed $222 billion in payments in Q2 2020.

In ten years Bitcoin went from being perceived as a hackers gimmick, drug money and financial bubble to being perceived as an alternative asset class, sound money and hedging against inflation and macro-economic turmoil.

How does BTC fit in the DeFi ecosystem? Bitcoin itself deliberately doesn’t allow to build complex smart contracts using its codebase. However now there are multiple ways (such as Ren)  to bridge BTC to the Ethereum ecosystem by tokenizing it. Thanks to these interoperability bridges Sigil has been earning additional yield utilizing our Bitcoin positions within the DeFi ecosystem.

Brief macro commentary

With the second wave of COVID-19 pandemics hitting the western world and US elections behind the corner, the macroeconomic situation is very volatile. It would be futile trying to predict what happens next, it’s better to refer our readers to our previous letters where we cover our general macro view more extensively.

One new interesting development to keep an eye on is the debate around Central Bank Digital Currencies (CBDC) – basically a centrally controlled digital “stablecoins” managed directly by Central Banks. We are already seeing the first glimpses in China with their DCEP. We believe that this trend could vastly undermine power of commercial banks and increase the financial control of almighty central banks and governments. However it would also further legitimize cryptocurrencies as voluntary alternatives against such centralization of power.

What to expect next

In recent weeks we have observed first signs of Bitcoin decoupling from macro markets. If this trend holds and the “BTC as a hedge and sound treasury management” narrative takes roots, we can expect BTC to overperform the rest of the crypto market in the near future.

While Sigil is not trying to time the market, we have reacted to these signs by increasing our portfolio allocation to BTC. We also expect DeFi to keep being the biggest driver of native crypto activity. As we speak the developers are focusing on solving the DeFi scaling problem. We are monitoring the L2 scaling solutions as well as alternative L1 solutions to scaling very closely. 

As per our broader Web3 thesis we are watching other crypto segments being established as well, such as NFTs and Decentralized Storage (with recent listing of long awaited Filecoin). However, we do not see any other segment being as attractive as Decentralized Finance in the foreseeable future. Total Addressable Market for a new natively digital financial infrastructure is vast by itself.

In the near future we will also probably see a continuing trend of using stablecoins such as USDT and USDC in crypto native apps. They reduce the volatility and make crypto more usable for average users. But it’s a double edged sword, attracting regulatory scrutiny more than native cryptocurrencies.

Current blockchains are transparent and public. Many DeFi whales found themselves doxxed and their actions are closely followed on-chain. Because of this we may see an increasing trend of using privacy solutions. While transparency brings many benefits, selective privacy is necessary for permission-less use of financial services. Current privacy solutions are lagging behind demand. That’s why we are increasingly looking to invest in privacy enhancing decentralized projects.

As a crypto long hedge fund, our plan is to keep investing in fundamentally sound crypto assets and using them to earn yield and staking rewards. With crypto derivatives becoming more liquid and accessible, we are also beginning to experiment with dynamic hedging to selectively decrease our downside risk in case of negative tail events.

We wish you a successful and healthy 4th quarter of 2020 and thank you for your support.

Mato Galvanek and Pavel Stehno
Directors, Sigil LTD

Sigil LTD and authors are invested in some of the projects mentioned above. This content piece is performed by Sigil LTD for information and entertainment purposes only and is not to be taken as an investment or financial advice. 

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