The HBAR Foundation was announced as an over $2B fund launched near the end of 2021 to support the adoption and growth of the ecosystem around the Hedera cryptocurrency network. ¹
Since that time, our team has been focused on finalizing our funding strategy, setting up operations, and beginning to distribute incentives into the market. Our goal with this document is to outline that first piece, our strategy, in further detail.
The HBAR Foundation is unique in that, unlike other foundations in the cryptocurrency space, we are neither token issuers nor the network governors. Instead, we behave much more like a venture fund that is motivated not by profit, but by supporting growth of the ecosystem around Hedera.
With that in mind, this document will outline our view on the current state of the market and Hedera before diving into how we will be allocating our funds over the course of 2022. We treat this strategy as both our current philosophy, as well as one that will likely iterate over time as market dynamics change, lessons are learned, and our level of success is measured.
DeFi has led the charge for recent growth in the cryptocurrency industry. Applications, including decentralized exchanges, lending protocols, derivatives, and more have resulted in value being locked into this infrastructure (known as Total Value Locked, or TVL) as liquidity providers come in looking to earn yield. TVL has grown across the ecosystem as a result, currently up to nearly $200B in value. ²
This innovation, which began as a set of independent start ups building smart contracts based protocols, has translated to initial enterprise adoption as institutions look to participate in these new financial markets. ³
The DeFi boom over the course of 2020 and 2021 dovetailed directly into growth in the number and value of collectibles issued as Non-Fungible Tokens (NFTs). Market awareness was driven largely by blockbuster sales of digital art, issued and sold as NFTs. ⁴
More importantly, NFTs gained adoption as a signal of community participation. People who purchased NFTs like Bored Apes and Cryptopunks were able to signal early participation in crypto and attain a degree of status.
NFTs have also emerged as a source of fundraising for DAOs to acquire and own assets as a community. For example, LinksDAO sold NFTs representing golf club memberships, as a means to raise funding in its mission to acquire a golf course. ⁵
New sources of utility for NFTs have also been introduced through incorporation of digital assets, represented by NFTs, into games and metaverse applications. Players will be able to purchase and trade these virtual goods both in-game as well as in secondary markets, meaning assets are even transferable between different games. In fact, on-chain activity from gaming use cases has already begun to outpace that from other types of applications as seen in Table I-1.
Table I-1: Growing Adoption in Gaming
Institutional finance and tech interests have also been flocking to the industry after seeing the bottom-up innovation led by startups and developer communities around DeFi and NFTs.
Traditional financial institutions have been allocating capital into token investments as well as broader DeFi applications.⁶ Hedge funds, venture funds, and other asset managers have seen the upside in the crypto industry from both an investment return and inflation protection perspective. This new capital entrance has not been without its turbulence, but still has continued to increase inflows into the industry.
Tech giants are also becoming more active. Google, a Hedera Governing Council member, announced a new digital assets team focused on providing support for DLT, digital assets, and distributed applications through existing product lines like Google Cloud. ⁷
The three major trends we’ve outlined represent just a small, but notable, subset of the innovation happening in the cryptocurrency industry. Areas such as DAO formation, derivatives issuance, CBDCs, digital identity and more have also seen new entrants and product launches. In aggregate the open innovation enabled by distributed ledger technology across use cases and industries continues to prove the disruptive potential of our industry.
Hedera has been rapidly growing along with the broader cryptocurrency industry. They have recently added new members to the Governing Council, the decentralized organization governing the Hedera network. These include such names as DBS, Ubisoft, and Shinhan Bank. These new members bring in fresh access to industries like gaming, which represent high growth areas for the cryptocurrency market.
Adoption on Hedera has also continued to accelerate, making Hedera one of the most used public cryptocurrency networks.
Leading stablecoin USDC was issued natively to Hedera and has been used to support payments in traditional finance and DeFi. ⁸ The network is also hosting solutions that provide the full suite of payment tools, including Dropp which is helping to support real time payments for merchants. ⁹
Outside of payments, DLA Piper, another Hedera Governing Council member, continues to support tokenization of securities and non-traditional asset classes on the network through its Toko Platform. ¹⁰
Calaxy has launched a protocol and application which supports tokenization for influencers, media personalities, athletes, and more. This provides an opportunity for fans to directly engage with the personalities they enjoy, creating a more decentralized, accessible and robust creator economy. ¹¹
Other areas of consumer engagement have also been jump-started on Hedera, including Tune.FM, an audio streaming platform supporting direct to musician monetization opportunities to increase revenues for artists themselves. ¹²
In addition to progress made in adoption, the Hedera product roadmap has also continued to deliver on valuable features which make more decentralized and scalable application deployment possible. Most importantly, Hedera recently updated the Smart Contract Service to support the deployment of Solidity smart contracts. ¹³ This makes it easier for Ethereum applications, as well as others across the DeFi environment, to be deployed to Hedera.
That being said, there are still gaps that exist in the current ecosystem. These include native staking, the distribution of incentives to builders, increasing consumer and retail awareness, and more. The developers who are working to solve these problems need an entity that can provide the financial, technical, and marketing support in order to help them build and scale their solutions.
The HBAR Foundation was created to provide incentives to fill in these gaps.
A core objective for Shayne and I when launching the Foundation was to clearly define the vision we shared for the crypto industry and the role we wanted our organization to fill in making that world a reality.
We believe that the core innovation of cryptocurrency is how it impacts two fundamental things: incentives and communities.
The core innovation of Bitcoin was to establish a self-executing system that incentivized node operators to jointly managea shared financial system in the absence of trust or hierarchy. Said another way, Bitcoin incentivized proper node operation in spite of malicious actors. This innovation in incentives has created a global, decentralized, currency that has continued to proliferate despite attempts to shut it down by state actors. ¹⁴
The incentive innovation that enabled the Bitcoin network was then furthered by Ethereum, with its addition of smart contracts powered by gas to incentivize the execution of applications on a world computer. This opened the door for new dApps which could now operate with censorship resistance, even despite facing challenges with high cost and network congestion.
Next, DeFi applications took this a step further by creating new incentives that enabled individuals to participate in and operate financial markets without intermediaries. These markets rewarded contributors of liquidity, collateral, governance and more so they could operate in a distributed manner.
You can see the trend emerging.
The second core innovation of cryptocurrency is how it changes community formation.
Public distributed ledger networks enable anyone across the globe to connect to a shared infrastructure where they control their own identity (address) and assets (tokens). Individuals who want to hold anything from Bitcoin to the newest NFT can choose in which of these communities they want to participate.
Many of these communities have formalized through DAOs where the hodlers of a given token can vote on changes to their community. DAOs are now being applied to financial markets, sports teams, art communities and more. This represents a fundamental change in how individuals can interact with one another across borders with themselves in control.
The impact of incentives and communities through crypto is the core of our vision:
Groups of individuals and institutions will form digitally-native communities controlling their own assets, identities, data, marketplaces, economies, and more.
Our mission is to support the creation of these communities by empowering the builders that make them happen. We want to enable communities to form through distributed applications which allow individuals and institutions to create their own economies, in which they control their own assets and identities.
We believe that the Hedera network provides the open, scalable, and decentralized infrastructure for supporting these communities.
The HBAR Foundation will achieve this mission by targeting three primary goals:
Our “product” delivered to achieve these goals is the roll out of incentives to the ecosystem around Hedera. We provide financial, technical, and marketing incentives to projects building in the Hedera platform.
The core metric we use to measure our success across these goals is Total Value Locked (TVL). TVL measures the value of assets deposited in DeFi protocols and cryptocurrency applications. ¹⁵ TVL represents a measure of the aggregate value of a given protocol similar to how assets under management (AUM) represents the value of a given fund or bank. TVL can be increased through the staking of HBAR, the provision of liquidity on decentralized exchanges, the provision of collateral for derivatives issuance, and more.
We also measure core metrics including the creation and activity of accounts, transactions per second, as well as overall community growth. These metrics are used to measure success of specific activities carried out by the team as well as the overall performance and adoption of the Hedera network.
Our strategy for 2022 is to target specific high growth areas where we both build awareness of Hedera and HBAR while also supporting projects, resulting in increased activity on the network. As part of this strategy, we organized our team into four funding groups aligned with each of these high growth areas.
Our goal for 2022 across these four funds is to allocate over $500M to the market in the form of user, developer, and market incentives on the Hedera network. This value will be split across each to support aggressive incentives in highly competitive parts of the market, while also being able to make bets on where growth is likely to accelerate in the next year.
We have intentionally preserved the ability to spin funds up and down over time as market dynamics change and progress is made in facilitating adoption of Hedera in these target areas.
The four primary funds for 2022 are:
The Crypto Economy Fund will focus on opportunities supporting the adoption of HBAR and DeFi applications built on Hedera.
The nature of DeFi and cryptocurrency networks is the integration of multiple distinct services into a composable application architecture. This fund will focus on supporting development of these services on top of Hedera like those outlined in Table V-1.
Table V-1: The Crypto Economy Stack
During the first half of 2022, the Crypto Economy Fund will focus on supporting adoption of HBAR via major US retail listing channels, emergence of new yield opportunities through staking infrastructure, and creation of native DeFi applications on Hedera.
The Metaverse Fund represents one of the most competitive spaces in crypto in 2022. Consumer brands in industries ranging from gaming and sports, to music and consumer products, are looking towards tokenization as the strategy which can enable them to better engage their fan and customer bases and facilitate community growth.
These consumer brands are leveraging DLT networks and ecosystems for use cases including issuing NFT collectibles, game items, and brand tokenized loyalty points to incentivize brand growth, in-game assets, and engagement. Much like DeFi, these applications rely on a composable set of distinct services to support their delivery.
Cryptocurrency will enable these new digital assets, issued by these consumer brands, to be distributed and traded within and between distinct applications such as games, social networks and more to better achieve a vision of the Metaverse.
The Metaverse fund will pursue both major consumer brands building in the Hedera ecosystem as well as supporting value added services and tools which make Metaverse applications in a decentralized way. These focus areas are outlined in Table V-2.
Table V-2: The Metaverse Stack
The Metaverse Fund will focus on accelerating opportunities with mainstream consumer brands, gaming platforms, and loyalty points platforms over the first half of 2022.
The Sustainable Impact Fund focuses on addressing the need for greater transparency in environmental and nature based markets. The fund will tackle issues around how organizations, governments, and the broader environment interact, by working with and investing in applications, exchanges, and infrastructure providers that focus on fully auditable-high quality tokenized assets. These can include carbon offsets/removals, renewable energy certificates, and carbon emission tokens.
The HBAR Foundation and Hedera support the creation and adoption of open source frameworks, specifically the Guardian, to accelerate the issuance of these assets as well as their exchange in a decentralized manner. The Guardian open source framework enables the issuance and discovery of tokens tied to verifiable data on Hedera. ¹⁶
The Sustainable Impact Fund will focus on facilitating the adoption of the Guardian model via applications tokenizing real world assets, creation of complimentary core infrastructure to accelerate adoption, and the creation of decentralized infrastructure for trading tokens issued via Guardians.
Hedera’s core competency to date has been to work with large financial institutions to adopt tokenized solutions for everything from cross-border payments with stablecoins, Central Bank Digital Currencies (CBDCs), and securities issued as tokens.
The Fintech Fund will focus on supporting platforms and institutions seeking to accelerate the use of cryptocurrency in traditional finance and fintech applications. This area of focus will benefit from the investments made in the Crypto Economy Fund as more institutions adopt these decentralized solutions into their core businesses.
The HBAR Foundation will work with existing Council Members, including Shinhan Bank, Standard Bank, DLA Piper, and more, as well as independent start ups over the course of 2022 in order to support the adoption of cryptocurrency and tokenized solutions across these industries.
We will continue to release more details on each fund over the course of the coming weeks including fund amounts, key focus areas, and more. Our hope is that this model will enable Hedera to grow awareness, access, and adoption in what we believe will be some of the highest growth areas in the market over the coming year.
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