Open for business - Australia embracing digital assets Holon Global Investments  December 2021 Since Holon's beginnings in 2018, the digital asset conversation has evolved rapidly. Back then, Bitcoin was a dirty word, and the scandals of Initial Coin Offerings only demonstrated the 'wild west' attitude of an immature crypto-world. Skepticism by the traditionalists was strong. Now, with an estimated 100 million+ users (including leading payment companies and global corporates), and a market value of USD$1Trillion and growing, Bitcoin is no longer a dirty word, it's just a word. Institutions are quickly seeing Bitcoin (and other digital assets) as a valuable hedge against the volatility of the modern world. Investors (especially younger investors) are seeing that they have access to a store of value (wealth creation) opportunities as an alternative to the current financial system that has, and is, failing them. And to meet this demand, new banks are being established (for example Avanti Bank in Wyoming, USA) to specifically custody Bitcoin for customers - with this trend accelerating. It seems that cryptocurrencies and digital assets, more broadly, are becoming mainstreamed. How things have changed in just a few short years! But where is Australia in all this? Holon has worked with Australian governments to discuss the accelerating digital economy across the political divide, particularly as we believe that data generation and storage requirements, driving Web 3.0, are being vastly underestimated by the market. While there has always been interest and an acknowledgement of where things were heading, we saw little real action. Indeed, the major banks, and particularly the Reserve Bank of Australia, have been active 'resistors' - either attempting to delegitimize digital assets or dismissing them altogether, and even going to the extent of de-banking digital businesses. With all of this, there was a sense that Australia needed to be dragged kicking and screaming into the digital age. 2021 was different. In October, we were pleasantly surprised that the advice contained in Holon's submissions to the Australian Securities and Investments Commission's (ASIC) crypto-related financial products consultation paper and the Senate Select Committee on Australia as a Technology and Financial Centre was reflected in the Senate Select Committee's recommendations to the Australian Government enabling the Web 3.0 economy and ASIC's guidance to the financial services industry. Digital assets, and their custody and handling as financial products, were now being taken seriously. There was also acknowledgment that greater legal, business and investment certainty was needed to drive dollars into the Australian economy, rather than away from it. The underlying message was that we desperately needed to avoid the 'digital-desertion' that we had been seeing (not unlike the 'brain-drain') - where young, talented digital companies are forced to move off-shore because of the uncertainty (and hostility) they faced at home. However, this may just have come to an end. We have to thank the Chair of the Senate Select Committee, Senator Andrew Bragg, who led the charge to begin pushing for much needed regulation of digital assets in Australia and, as a consequence, helping to publicly legitimize them. From being 'well behind the eight-ball', Australia may have a chance to be a unique player on the global scene. As a bigger surprise, and a significant affirmation to the work of the Senate Select Committee, the Federal Treasurer announced on 8 December that the Australian Government has agreed in principle with several core tenets of Senator Andrew Bragg's report. The Treasurer said that the impending reforms would be 'fast-tracked' as they are the 'most significant' in 25 years and will progress in two phases - with the most urgent and immediately implementable changes being consulted upon in the first half of 2022, and the remainder by the end of 2022. The Treasurer stated that the Government will commence consultation on the feasibility of a retail Central Bank Digital Currency in Australia - a digital asset issued by a central bank and linked to a sovereign currency for better consumer protection and connection the global financial system - with advice to be provided by the end of 2022. In relation to payments, cryptocurrencies and digital assets, the Treasurer stated that, by mid-2022, the Government will have: Set out a strategic longer-term plan for the payments system, developed with industry and reviewed annually. Settled the details of additional powers for the Treasurer to set payment system policy. Determined the changes necessary to modernize payments system legislation to accommodate new and emerging payment systems, including consideration of BNPL and digital wallets. Completed consultation on the establishment of a licensing framework for Digital Currency Exchanges to provide greater confidence in the trading of crypto assets. Finalized consultation on a custody or depository regime for businesses that hold crypto assets on behalf of consumers so that investors have greater confidence in the safe keeping of these assets. Received advice from the Council of Financial Regulators, working with other relevant agencies, on the underlying causes and policy responses to the complex issue of de-banking.   By end-2022, the Treasurer indicated that the Government will have: Settled the framework to replace the current one-size-fits-all payment licensing arrangements with a functionally based framework adopting graduated, risk-based regulatory requirements. Received a report from the Board of Taxation on an appropriate framework for the taxation of digital transactions and assets. Undertaken a mapping exercise of existing crypto currencies and tokens to better inform consumers and others of the risks and benefits that arise. Examined the potential of so-called Decentralized Autonomous Organizations (DAOs) that is a type of decentralized corporation used to co-ordinate financial contributors from around the world through automated (smart) contracts.   Overall, the Australian Government's commitment to these reforms, based on the recommendations of the Senate Select Committee, are welcomed as they are advantageous to the future of Holon's Web 3.0 cloud storage operations and digital asset management business. However, there's still some way to go to enact any regulatory reforms, but this is the clearest signal from Government that Australia is now embracing digital assets and 'open for business' - and at Holon, we're proud that we were (and will continue to be) an active part of the policy making that is bringing it about! Luke Behncke, Executive Chair Funds operated by this manager: Holon Photon Fund

Web 3.0 Adoption - the incentives are coming! Holon Global Investments  30 November 2021 The radical world of play-to-earn. How can a game that doesn't exist be worth $US10 billion? In recent months I have been down yet another crypto rabbit hole, trying to understand the 'play-to-earn' space which, on the surface, can seem bizarre but is actually a revolution in capital formation and Web 3.0 adoption. Crypto-native businesses are starting to use their coin, not just as a means to raise capital, but as an incentive mechanism to create community, build engagement, and provide feedback to products in development. They effectively distribute 'rewards' to early adopters of the products. This has been most successful in the gaming space where users earn rewards for playing a game. 'Play-to-earn' highlights how Web 3.0 companies are utilising behavioral and financial economics to spur on Web 3.0 adoption of products and, in turn, create 'traction' and 'network effects'. What many traditional investors are missing is that these 'rewards' resemble something close to equity, and significant value is being captured by early adopters. A 'Pokemon remake' One example that has caught my eye recently is Illuvium. Their website describes Illuvium as: "a collectible NFT [non-fungible token] RPG [role-playing] game and auto-battler rolled into one. There is an open-world RPG experience in the overworld, where you mine, harvest, capture, and fight Illuvials." In simpler words, Illuvium is a remake of the incredibly popular 'Pokemon', only with much better graphics and NFTs that enable you to actually own parts of the game, including the creatures. Illuvium's aim is to be the first 'Triple A' rated game on Ethereum. The founders also want the game to run autonomously with holders of ILV (Illuvium's token) governing the project via voting and a council. Ambitious, yes, impossible, no. Typically, in early-stage investments, liquidity is non-existent. Illuvium, however, (amongst many other crypto projects) are incentivizing users to provide liquidity on decentralized exchanges. Users are paid in more ILV for taking on the risk of providing this liquidity. Thus, solving the illiquidity problem up front. The next step for Illuvium is then to incentivize the buying of their native currency ILV. But with no game available (remember this is a start-up) and little funding ($US5m pre-seed) that's a huge challenge. A US$10 billion market cap despite no game Again, the exact mechanics here are somewhat irrelevant, but Illuvium has introduced an in-game currency 'sILV' that users can earn by 'staking' the real currency ILV. 'sILV' gives users the ability to progress through the game quicker. The value to players is they can accelerate their journey in the game (potentially finding the rarest creatures worth a lot of value both in the game and on secondary markets too). This creates demand for ILV on the exchanges. But this has an interesting indirect affect. Illuvium have only released a small percentage of their tokens. That means a minor increase in demand significantly increases the price of the token that unlocks a huge amount of value on their balance sheet. To appreciate this, the current fully diluted market cap of Illuvium is over US$10 billion. Not bad for a game that doesn't exist yet. It really is a revolutionary way of capital formation and spurring on Web 3.0 adoption. The incentives that people are earning are now worth much more as ILV increases in price, and Illuvium can then start to attract real talent in the form of developers and marketers to advance the project. The users at this stage are really just testers that, in turn, de-risks the ambitious vision that they initially had. It also creates a feedback loop that attracts even more investors and users competing for the now more valuable 'play-to-earn" rewards. As a practical example, Illuvium recently released a 'Cinematic game-play trailer' which cost around $US2m. Raising $5m and telling traditional equity investors that you were going to use 40% of funds to release a trailer would be tough (impossible almost). But in Web 3.0, the company formation process is changing, which is enabling these projects to do much more with much less and set their sights on much more ambitious targets. Filecoin, a cloud storage decentralized network has a similarly ambitious vision - to change the way we store and move data across the globe. With a US$250m raise, Filecoin has 'build-to-earn' incentives that total over US$70 billion, which could turn into the trillions as the network develops. The numbers are extraordinary but so too is the capital expenditure required to build out the infrastructure for our data obsessed economy (see Figure 1). Figure 1: Filecoin Capital Expenditure Incentives Early adopters capture the value To many traditional investors this can be difficult to grasp. A game that doesn't exists worth US$10 Billion?? A Cloud network in its infancy having trillions on its balance sheet?? Chris Dixon, a well-known internet entrepreneur summarized the network effect in Figure 2 and how token incentives are solving the Bootstrapping problem. In return, much of the value is caught by early adopters of the product. Figure 2: Network Effect This is why we are seeing such a rapid adoption of Web 3.0. Web 3.0 users and investors are being blurred, value is being pushed to those providing the value to these companies. For Illuvium, it is those that are most excited about the game. For Filecoin, it is those building the infrastructure. Even Bitcoin is rewarding those providing security to the network. Figure 3 gives some insight to impact this is having for Web 3.0 adoption. Many of the Mega-Caps today (such as Google, Amazon, Microsoft) were formed at the start of the internet, roughly 10-15 years before these digital assets. The growth arc of digital assets is much steeper. Figure 3: Mega Caps v Digital Assets - Total Market Capitalisation We are at the very start of a hugely transformative period. Web 3.0 is going to come at an incredibly fast speed, and as an investor you need to understand why, which means understanding the incentives involved. Many projects will fail, and that's ok. Not every business in Web 2.0 is successful either, but the ones that get the formula right will drive an immense amount of value, and that will mostly fall to their earliest adopters. My concern is that so few traditional investors will have the ability to access these opportunities because their intermediaries are not set up for this disruptive change. Funds operated by this manager: Holon Photon Fund