Advanced Blockchain AG: Investor Letter Q2, 2022

Dear Investor(s),

The second quarter (Q2) of 2022 has come to a close. Advanced Blockchain AG had a very active second quarter, with numerous internal and external events taking place. First, some thoughts on the current state of the industry and the major events that occurred.

Update - market climate

The market capitalization of cryptocurrencies fell in Q2 from $2.1 trillion to approximately $930 billion (current figure). Besides macroeconomic events such as the Russia-Ukraine war, energy supply shortage, supply chain shock, and alarmingly rising global inflation, there have been three incidents in our industry that have made things even more challenging.

The collapse of the UST stablecoin

Stablecoins are pegged to fiat currencies like the US dollar (USD) and therefore prices are supposed to be stable, for example, $1 at all times. Algorithmic stablecoins are one such concept with which this peg can be maintained. What backs them is an on-chain algorithm that facilitates a change in supply and demand between them (the stablecoin) and another cryptocurrency that props them up. In the case of the Terra blockchain, this was performed by TerraUSD (UST), the stablecoin, and Terra (LUNA), Terra's native cryptocurrency that backed the stablecoin. Here is how the UST-LUNA mechanism worked:

When the UST supply was less than its demand, the price of UST went above $1 (to let's say $1.01). To bring UST back to its peg, the Terra protocol allowed users to trade 1 USD worth of LUNA for 1 UST. This trade burned 1 USD of LUNA and minted 1 UST so that users could sell for 1.01 USD and secure a profit of 0.01 UST. When the supply was higher than its demand, the opposite happened: the price of UST went below $1 (to let's say $0.99). Then the protocol permitted users to do the opposite: users could buy 1 UST for 0.99 USD and then trade 1 UST for 1 USD of LUNA - netting the arbitrage trader a profit of 0.01 UST.

One of the earliest signs that things were going wrong for the stablecoin appeared when UST deposits on Anchor Protocol (Anchor offered a yield of up to 20% for users who deposited their UST - this in itself seemed unsustainable from the start) started dropping. The massive drain of UST from Anchor onto the open market contributed to major selling pressure and the price of UST went down. Market participants started to sell UST for LUNA which then inflated the market with LUNA. Therefore, the price of LUNA plummeted.

Eventually, the market cap of LUNA flipped that of UST for the first time - which meant there was no longer $1 worth of LUNA for every $1 of UST. To shore up UST's price, the LUNA Foundation Guard (LFG), Terra's official peg defenders, deployed over $2 billion from its newly-formed Bitcoin (BTC) reserve. They started selling BTC to defend the peg which accelerated market pressure on BTC. This in turn made the whole market more insecure. Eventually, the collapse of LUNA and UST wiped out $60 billion in investor value.

Celsius Network withdrawals are on hold

Celsius Network, a CeFi company (a centralized provider that offers access to DeFi services), has stopped withdrawals for its customers. As of May 17, Celsius claimed that it had 1.7 million users and assets under management (AUM) of $11.7 billion. The company said that it had given out more than $8 billion in loans and until recently had offered high APYs of up to 18% on cryptocurrency deposits - which much like Anchor's yield offering on UST, seemed unsustainable from the get-go.

To generate these returns, on one hand, large portions of Celsius assets were firmly locked onto various DeFi applications for a significant period, which made them illiquid. On the other hand, probably, various leveraged positions were taken which could not be serviced (due to the latest market crash) and thus were liquidated. This again, like in the case of the Terra ecosystem, could have led to a downward spiral. Currently, it is not certain whether Celsius is insolvent and/or whether the company will find a buyer.

Three Arrows Capital is struggling

Three Arrows Capital (3AC) is a crypto-focused hedge fund with roughly $3 billion in AUM. In April 2022, 3AC had failed to meet margin calls on several of its undercollateralized loans from crypto lenders such as BlockFi and Genesis. In addition to the leveraged positions that could not be serviced and led to liquidation, 3AC was also an investor in the Terra ecosystem. During Terra's last investment round, the hedge fund invested $200 million in the project. It is uncertain how many 3AC assets in the form of UST had been locked on Anchor, how quickly they were converted, and therefore how high additional losses were. Furthermore, 3AC holds illiquid assets which were locked onto various DeFi applications for a significant period. The Terra investment and numerous illiquid assets may have led to 3AC not being able to meet its margin calls. It is currently still unclear what the future holds for 3AC.

The blockchain industry will continue to develop

Our industry is still at a nascent stage and gradually, through these turbulent cycles, coming to maturity. In general, such phases often help reduce leverage (for example, as described above) and constitute a natural selection in favor of fundamentally strong projects. However, market maturity cycles are not linked to product innovation cycles. For example, in 2007-2009, Uber, Venmo, Snapchat, and Instagram were created amid the then financial crisis. During this period, there was a blend of technological advancement, talent, and capital amidst financial turmoil - innovation never rests. The blockchain industry today has many fundamental issues/market opportunities that should be solved at the earliest/explored.

The industry certainly does not lack talent and capital. Digital currencies, DeFi, and NFTs were the first "it" applications of blockchain technology that continue to evolve. Countless more use cases, regardless of the market situation, will find their product-market fit and thus, due to their massive value adds, turn industries upside down. No one can exactly say what the next "it" application in our industry will be, but we are closely monitoring developments across all fields of application to identify trends as they emerge and thus invest and build products accordingly. Furthermore, we will continue to support and carefully expand our current investments and projects to cater to current and future needs and market requirements.

Internal Updates

• Advanced Blockchain AG released a statement that addressed shareholder concerns after the negative feedback towards the ad hoc news:
• Simon Telian will overtake Advanced Blockchain AG as CEO and the group will cut down costs to prepare for the next growth period.
• On Friday, Jun. 24, Micheal Geike purchased three tranches of Advanced Blockchain AG shares worth 25.000,00 EUR, 2546,10 EUR, and 1881,90 EUR respectively, to show his ongoing support for the company.
• Michael Geike will remain closely affiliated with Advanced Blockchain AG and take on an advisory role.
  
  
• Advanced Blockchain AG released a profit warning and changes in leadership ad hoc announcement via EQS:
• Due to recent market setbacks, ABAG announced a legally required profit warning.
• CEO Micheal Geike and CSO Robin Davids will no longer work in their management positions moving forward.
  
  
• Advanced Blockchain AG announced that they led the investment round of the Backd liquidity protocol with a total investment of $3.5 million:
• Backd is a trustless, reactive liquidity protocol where users can earn yield and register actions with their liquidity. Through Backd, users can make their assets autonomously reactive to market conditions.
  
  
• Composable Finance, an Advanced Blockchain AG incubation and investment, raised $32 million, at a $400 million total token valuation:
• Composable closed its Series A funding round and raised over $32 million at a total token valuation of $400 million.
• The round included prominent blockchain investors such as GSR, Tendermint, Coinbase, Jump Capital, and Spartan Group.
• Composable Finance positioned itself as a successful player in the DeFi space.
• This new financing round represents a notable increase in the value of the token position held within the company. (ABAG holds 5.7% of the total token supply).
  
• Advanced Blockchain AG's portfolio company FINPRO AG entered into an NFT cooperation agreement with leading photo agency group, action press AG:
• The subject of the contract is a non-exclusive cooperation agreement regarding the realization of art projects in the NFT sector.
• Under the artistic direction of world-class creators, innovative NFT projects are to be implemented based on material from the action press AG catalog of over 150 million images.
  
• GBC Research published initial coverage of Advanced Blockchain AG:
• GBC's valuation is based on a NAV approach and values the broadly diversified portfolio of Advanced Blockchain AG and its subsidiaries at an enterprise value of 88 million EUR.
• GBC will accompany Advanced Blockchain AG with their continued research and therefore oversee further operational as well as strategic development of the organization.
• The initial research report is available under this link: http://www.more-ir.de/d/23899.pdf.
  
• Advanced Blockchain AG announced its incubation of Panoptic:
• Panoptic will serve as a perpetual, oracle-free options protocol on the Ethereum mainnet. It enables the trading of options on top of any asset pool in the Uniswap V3 ecosystem - trustless and permissionless.
• Advanced Blockchain AG will develop, run, and scale Panoptic in line with the vision conceived by Professor Guillaume Lambert.
• Please visit our blog or read Panoptic's whitepaper for in-depth information, where we elaborate on our involvement and the technical details of the project.
  
  
• Advanced Blockchain AG released pre-audited annual accounts:
• According to unaudited figures in the consolidated financial statement for the year 2021, Advanced Blockchain AG was able to close the year 2021 as expected with a significantly improved consolidated net profit of more than 5 million EUR.
• The consolidated sales amounts to 17,862 thousand EUR (previous year: 1,547 thousand EUR) were generated in the 2021 financial year.
• The consolidated net income amounts to 5,317 thousand EUR (previous year: 9 thousand EUR).
• The reported consolidated equity increased to 12,047 thousand EUR (previous year: 2,121 thousand EUR).
  
  
• Advanced Blockchain AG's Portfolio Company, Alluo, successfully closed its financing round:
• Our investment, and incubation - Alluo, closed its token auction on a total token valuation basis of $50 million (May 6).
• We received 10 million ALLUO tokens for the early-stage investment made and incubation services. This represents 5% of the total ALLUO token supply and thus holds an approximate value of $2.5 million.
• We think Alluo has the potential to make DeFi services more accessible to everyone.
  
• Advanced Blockchain AG invested $250,000 in MYSO Finance:
• 'MYSO' is an abbreviation for a Million Yield Structuring Opportunities. It aims to combine concepts from DeFi with TradFi to build game-changing financial products, starting with the IKARUS Protocol as its first product.
• IKARUS is a zero-liquidation loan protocol and has successfully closed its $2.4 million seed financing round. Advanced Blockchain AG invested alongside other renowned venture funds such as Nexo and Hashkey.

How we will proceed moving forward as a company

For the next two quarters until the end of the year, we have set several guidelines according to which we will act. As already announced and partially implemented, we will downsize our organization to essential responsibilities and roles. As personnel costs are our biggest cost driver, we have already taken steps to reduce costs extensively, in the short term. However, deep industry- and development-expertise remains within the company, ensuring that we do not lose our leading role in the industry, as a Web3 enabler.

Since this is a tough time for the industry as a whole, including for some of our investments, we want to make sure that they receive sufficient support. Therefore, we are in extensive contact with their founders to identify current problems and develop solutions accordingly. We will also reduce our investment activity and focus on projects that precisely fit our investment thesis and have a resilient team in place.

For the time being, no new incubation effort will be made, and if so, only those that can be covered internally with manageable effort will be birthed. We have a strong portfolio of incubations with a variety of different use cases, each solving a specific problem in the market. Now, more than ever, the focus is on developing these projects, securing further rounds of funding, and ultimately building profitable and scalable businesses in the long term.

Overall Market Outlook

As already mentioned, market and product development cycles differ. It is uncertain how and when the macroeconomic situation will change. However, Advanced Blockchain AG has various valuable assets, ranging from software code, to IP, and rare licenses. These internal resources are being utilized to develop disruptive technology and empower entrepreneurs. Therefore, the inherent and added values of our projects and investments are steadily increasing. Once the market regains momentum and our scaling solutions, essential infrastructure, and talent and capital are advanced enough, these product innovations will unfold their appropriate values.

We will take all necessary measures to protect our company and shareholders in these difficult times and emerge even stronger from this crisis.

Further information on Advanced Blockchain and our other projects and investments can be found at https://www.advancedblockchain.com/.

Thank you for your trust!

The Advanced Blockchain AG Team