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The Modular Sustainable Blockchain Strategy

Sustainability and cryptocurrencies are two dominant investment themes of our times and we believe they should be compatible.

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Background

Sustainability and cryptocurrencies are two dominant investment themes of our times and we believe they should be compatible.

 

We are testing a sustainable blockchain investment strategy using our partners’ personal capital. We hope to make this strategy available to outside investors in 2022, giving access to an institutional-grade cryptocurrency product that also meets sustainability objectives. This strategy is entirely separate from our flagship Modular Asian Macro fund.

 

Please click here to enquire about the Sustainable Blockchain Investment Strategy

 

Working with asset class specialist Daniel Liebau and his firm, Lightbulb Capital, our strategy integrates proprietary environmental, social and governance (ESG) metrics into the investment process for cryptocurrencies.

 
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Investment Thesis

The strategy’s core investment thesis is based on two pillars:

  • Sustainability/ESG considerations will be key drivers of capital allocation and technology adoption decisions over the medium term; and
     

  • Blockchain technology has enormous potential but a significant proportion of blockchain platforms are neither investable to ESG investors or adoptable for sustainability conscious users.
     

​We see a significant opportunity to build an investment product that focuses on the “ESG investable/adoptable” subset of cryptocurrencies – and believe this subset will outperform the broader asset class.

 

Investment Universe

We base our core belief in the potential of decentralised blockchain-based technologies on their ability to:

#1

Increase the efficiency of a wide range of economic transactions by removing the need for intermediaries. 

#2

Increase financial inclusion and stimulate economic growth by providing an efficient and accessible means of storing and transferring value to the underbanked.

#3

Enable simple mechanisms for proving ownership and transferring a wide range of assets ranging from intellectual property to health records to real estate, art, collectibles and financial securities.

#4

Enable a proliferation of valuable decentralised finance applications 

Three types of cryptocurrencies

We subcategorise crypto currencies into 3 basic buckets:

Payment tokens

that may or may not come with a “store of value” proposition, such as Bitcoin or Dogecoin. These have no programmability. Payment tokens currencies currently account for most of the market capitalisation among the top 100 existing cryptocurrencies.

Blockchain-based decentralized

smart-contract platforms

on which entrepreneurs and large corporations alike can
build applications. Examples include Ethereum (ETH) and Polkadot (DOT). These comprise the second largest category of cryptocurrencies.

Decentralized Applications (DApp) tokens

which power specific applications built on the platforms listed above. These are currently a significant but much smaller subset of the cryptocurrency market. Examples include Uniswap (UNI) and Basic Attention Token (BAT).

We believe that a significant portion of the economic potential to be derived from broader adoption of blockchain-based applications will accrue to Blockchain-based decentralized smart-contracts. 

These provide the platforms upon which entrepreneurs and large corporates will build a wide range of social and business applications. 

We view these as the operating systems required to exploit the power of blockchain – the "Microsoft Windows" of a more decentralised future economy that can scale fast because of network effects. This segment of the market offers investors a macro exposure to the proliferation of blockchain based technologies.

For this category of cryptocurrencies, we believe that ESG considerations will be an important driver of mass adoption and long-term success.

 

Investment Methodology

Modular adopts an approach based on a combination of investment filters and ESG modelling to asset selection to arrive at a portfolio construction.

Our investment filters include:

01

we filter out tokens with insufficient market capitalization.

Market Capitalization

02

based on average trading volume over a given period of time.

Liquidity

03

our top-tier custodian must be able to support the asset.

Investable

04

we will not invest in Proof of Work protocols without transition plans.

Proof of Work

05

we will not invest in unproven “new to market” tokens.

Unproven

Following this basic investment filter methodology, Modular will apply its proprietary ESG screening process.

Our model, created in collaboration with Lightbulb Capital and third party advisors, includes ESG characteristics to assess the likelihood of long-term success of each smart contract platform token. Tokens are reviewed and scored on both qualitative and quantitative factors such as (but not limited to):

Characteristic
ESG Lens
Energy utilization/efficiency

Environmental

Extent of adoption

Social

Speed and volume of transaction capability

Social

Inequality

Social

AML Background / history

Social

Integrity of transaction confirmation mechanism (Consensus)

Governance

Transparency of ownership structure and control

Governance

We have developed proprietary metrics to score and monitor our universe of investible assets against these measures.

 

Portfolio construction, rebalancing and trading

Based on the scores generated by our model, we will invest in a concentrated, long-only, basket of the most promising assets within the eligible token universe. With rigorous investment research in collaboration with the academic advisors retained by Modular, we continually seek to identify assets with the most potential. 

 

Portfolio rebalancing will be conducted regularly and we will seek to add alpha in periods of market volatility with opportunistic trading.