In this TechNode Global Q&A with the Co-Founders of Fracton Ventures, we learn how the Japanese Web3 incubator supports innovative projects in the DAO and Web3 space. According to 亀井聡彦 (Toshihiko Kamei), 鈴木雄大  (Yudai Suzuki), and 赤澤直樹 (Naoki Akazawa), who is also the incubator’s CTO, Fracton Ventures has supported 18 teams so far, including InsureDAO, IZUMO, UXD Protocol, and Yay!. Fracton Ventures focuses on long-term growth strategies for projects, emphasizing the importance of composability and ideology.

Challenges faced by DAOs and Web3 projects include sustainability and short-termism. Fracton advises projects to have a long-term vision and focus on unique Web3 growth strategies. The incubator sees potential in DeFi and Web3 technologies to transform traditional finance and banking, offering faster, more secure transactions, higher liquidity, and broader access to financial services.

Emerging areas of interest for Fracton include Impact DAOs, which focus on sustainable initiatives such as DeSci, ReFi, and Retroactive Public Goods Funding. Fracton evaluates potential investments based on growth potential, team skills, composability, and on-chain user experience.

Fracton Ventures aims to contribute to the growth and development of the DAO and Web3 ecosystem by expanding its incubation program globally, providing support for DAOs and Public Goods projects, and hosting DAO Tokyo, a conference to bridge the gap between DAO communities in the East and West.

Here is the edited TechNode Global Q&A.

Can you share some examples of portfolio companies that are leveraging DAOs and web3 technologies in innovative ways? What benefits do these technologies bring to these companies, and how do they differentiate themselves in their respective markets?

Fracton Ventures primarily operates as an incubator, so we do not financially invest in projects. As an incubator, we invest in knowledge, know-how, and networks which we then apply to our incubated projects.

To date, we have supported a total of 18 teams through the Fracton Incubation Program aimed at Web3 entrepreneurs who are looking to launch their Web3 protocols. We also incubate existing projects that aim to form DAOs (Decentralised Autonomous Organizations). Prior incubated projects include InsureDAO, a DeFi insurance company, IZUMO, an NFT project representing Otaku culture in Japan, and UXD Protocol, a decentralized stablecoin whose value is 100 percent guaranteed by delta-neutral positions. Overall, we support a wide range of projects not limited to a specific genre within Web3 – we recently incubated Yay!, which is creating a metaverse for Generation Z.

As the first Web3 incubator in Japan, we have operated our incubation specifically in Japan in order to increase the number of Web3 entrepreneurs in Japan and to help foster growth domestically, to help it reach international standards. As a result, many successful projects have been launched off the back of both Japan and Fracton’s strengths.

Finally, we are seeing an increasing number of projects emerging in the Fracton community that focuses on maximizing the user experience of DAOs and exploring the potential of DeFi 3.0. Through our incubation programs, we aim to continue supporting innovative projects and help entrepreneurs bring their ideas to life.

What are some of the biggest challenges facing DAOs and web3 projects today, and how are you advising your portfolio companies to navigate these challenges? How do these challenges differ between Asia and the rest of the world?

One of the biggest challenges facing DAOs and the broader Web3 ecosystem is the sustainability of Web3 projects based around Public Goods.

While the development of token economies (token economics is how digital tokens work in a given system, including their creation, distribution, and use) has provided new ways of funding and gaining liquidity, it has also led to short-termism amongst project leaders. While short-term cycles fuel innovation and industry growth, projects especially in the Public Goods space struggle to progress in a sustainable way under this current environment.

To address this challenge, we encourage our incubated projects and any entrepreneur in this space to have a long-term vision and to focus on growth strategies unique to Web3, such as composability (how different decentralized applications can be combined to create new and more powerful applications)and ideology. Overall, building a more robust and sustainable ecosystem requires long-term thinking.

We also believe that these issues are not unique to Asia and are relevant across the world. Our hope is to see more projects and players from Asia and beyond that are committed to promoting Public Goods and are responsive to the unique opportunities and challenges of the Web3 landscape.

How do you see DAOs and web3 technologies making an impact on traditional finance and banking in the coming years? What opportunities and challenges do you anticipate, and how are you positioning your portfolio to take advantage of these shifts?

In the coming years, the financial and banking industries are expected to undergo significant changes due to the emergence of decentralized finance (DeFi) and Web3 technologies including highly complex derivative instruments and credit markets.

These technologies offer a more decentralized, transparent, and reliable structure than the traditional financial industry. Key advantages include faster and more secure transactions, higher levels of liquidity at lower costs, and more comprehensive access to financial services.

From a DAO perspective, there has been a surge in investment and research-related DAOs who collectively and collaboratively conduct research on market trends and projects whilst also having their own investment vehicle: these bodies allow anyone to join and contribute to the DAO to gain access to investment opportunities that are traditionally not available to the retail market.

For instance, Investment and research DAOs can gain access to private and seed round investments in which the community can be involved – In traditional finance, such investment opportunities are simply not available to the general public.

Alternatively, many major protocols in the DeFi space have begun forming DAOs, allowing token holders to vote on key proposals and changes to the platform and for them to be rewarded for contributing to the protocol. This environment of collaborative and collective voting allows for constant improvement of a project both from a technical standpoint and also from a user/community standpoint. A simple example would be a trading platform’s DAO voting on lowering trading fees or commissions to improve the user experience – this allows for a much more equitable structure and distribution between stakeholders of a protocol.

Regarding challenges, the Web3 ecosystem and more specifically the DeFi space is constantly under regulatory pressure, technical challenges, and security concerns which include hacks and exploits of protocols. Despite these challenges, the potential of DeFi and Web3 is too significant to ignore, and they are poised to transform the financial industry in ways that were previously unimaginable.

As an incubator, Fracton Ventures is well positioned to support projects that aim to build DeFi protocols by guiding them on appropriate diversification whilst keeping in mind their objectives and risk tolerance. By partnering with innovative entrepreneurs and supporting the development of this cutting-edge technology, we can help drive the adoption and growth of DeFi and Web3, and ultimately shape the future of finance.

What are some of the most exciting emerging areas of DAOs and web3 that you’re currently monitoring or investing in? What makes these areas particularly compelling, and what potential impact do you think they could have on the broader blockchain ecosystem?

The most notable emerging area is the more public interest-focused areas around Web3 as a whole, called Impact DAOs.

This includes sustainable initiatives such as DeSci (Decentralised Science), ReFi (Regenerative Finance), research into DAO governance, and new funding methods such as Retroactive Public Goods Funding. Blockchain technology itself is a technological innovation that can be applied to a variety of organizations and institutions, but one of our key objectives at Fracton is to help generate growth in the digital public goods space.

With the application of blockchain, we are able to arrange digital public goods for the first time in human history. The activity of setting up public goods including permanent and unstoppable infrastructure will go down in history as one of the great transformations of society.

How do you approach risk management and due diligence when evaluating potential investments in DAOs and web3 projects? What factors do you consider, and how do you balance the potential for high returns with the inherent volatility and uncertainty of these emerging technologies?

At Fracton, we have a particular focus on early-stage projects that align with our investment hypothesis. We believe that a project’s growth potential, combined with the skill set and personalities of the team behind it, are critical factors to consider. Our support typically begins during the early incubation stages, which means that we don’t usually get involved in token design, and we don’t place too much emphasis on the number of users or the size of the market.

Instead, we look for projects that offer composability across different blockchains and protocols. In short, projects that offer a real use case or a problem to a solution whilst being able to seamlessly integrate and interact with protocols around it like a network are crucial for the ecosystem – something that can be plugged into the ecosystem and connected with other protocols.

We believe this is crucial for building a strong and resilient Web3 ecosystem. We also place a high value on projects that offer a more on-chain driven user experience. In the future, we anticipate that being on-chain native will become even more important than it is now, and we want to support projects that are well-positioned to take advantage of this trend. Overall, our goal is to identify and support projects that have the potential to become key players in the Web3 landscape.

How do you see Fraction Ventures contributing to the growth and development of the DAO and web3 ecosystem in the years to come? What are your long-term goals and aspirations for the firm and its portfolio companies, and how do you plan to achieve them?

As we continue our annual incubation program into this year, we’re looking to take a more global approach and welcome projects from across the globe to participate in this program, where previously it was limited to only Japanese projects.

With our expertise and global network continuing to grow year by year, we’re now in a position to support even more projects by providing advisory in a variety of product development stages, connecting projects and their teams with key innovators across the globe, and also help them gain access to funding.

Alongside this, we’re taking on a new initiative to provide support for DAOs and Public Goods related projects, which have traditionally struggled to align with existing investment models, by creating a new vehicle specialized in this sector.

To kick-off this new journey for Fracton, we’re planning to hold DAO Tokyo, a DAO-related conference where experts from around the world can gather to share their knowledge and experience within this space, with the primary goal of strengthening the community, knowledge, and support surrounding DAOs in Asia.

A significant gap exists between DAO east and DAO west in terms of knowledge, support, and community. Also, DAO progression is quite concentrated in the western regions. Our objective is to help bridge the gap between DAO east and DAO west, and to encourage the creation of DAOs while simultaneously facilitating this process.

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