Opinion: Ethereum VC’s obsession with infrastructure is dragging down the entire industry

Original title: 《 Ethereum VCs have EBOLA for Infra》

Original author: Yash Agarwal, DeFi researcher
Original translation: Golem, Odaily Planet Daily

Summary of views

· Don’t listen to VCs forcing infrastructure narratives anymore;

· Now is the opportunity for liquidity funds to rise;

· Build products for users, embrace speculation, and pursue income;

· Due to the low startup cost, Solana is the best place to experiment.

“Let your opponents speak, and they will weave a web that will keep them safe.”

Two weeks ago on “The Chopping Block,” Haseeb and Tom of Dragonfly made a series of arguments in the Ethereum vs Solana segment, which are roughly as follows:

· Solana’s VC ecosystem is incomplete;

· The amount of capital on Solana is much lower than that on Ethereum, and there are few successful people in the Solana ecosystem except for memecoin;

· Solana is seen as a memecoin chain, perhaps a DePIN chain. Solana’s TVL is only $5 billion, limiting its TAM (total addressable market); · Starting on Ethereum is like “starting a business” in the US because it has a higher EV value; · Solana has a higher Gini coefficient (greater inequality).

We will revisit the above arguments in this article, highlighting the structural problems of large funds and how these problems push them towards infrastructure investments, while also trapping founders in the quagmire of bad advice. Finally, we will share advice on how to avoid falling into EBOLA (EVM Bags Over Logic Affliction). (Odaily Note: EBOLA was originally the name of a contagious virus, which means that Ethereum VC’s enthusiasm for infrastructure is like a disease and contagious.)

Ethereum VCs are stuck in EBOLA

As Lily Liu said, EBOLA (EVM Bags Over Logic Affliction) is a disease that affects Ethereum VCs, and it is a structural problem, especially for large "tier-one" VCs.

Take a large fund like Dragonfly, which raised $650 million from tier-one LPs like Tiger Global, KKR, and Sequoia in 2022, most likely because of an infrastructure-focused thesis.

Large funds like Dragonfly are structurally incentivized to deploy their capital within a specified period (such as two years). This means that they will gradually be willing to fund larger rounds and assign higher valuations. If they don't fund larger rounds, they will not be able to deploy capital and must return it to their LPs.

GPs (general partners) make money every year through management fees (2% of capital raised) and success fees on exit (20% of returns). Therefore, from a risk-adjusted perspective, funds have an incentive to raise more funds to "accumulate fees." Given that infrastructure projects (such as rollups/interoperability/re-hypothecation) can smoothly achieve FDVs of more than $1 billion, especially with billions of dollars of infrastructure successful exits in 2021-2022, the EV value of deploying funds to infrastructure projects is positive. However, this is a narrative of their own creation, driven by the capital and compliance engine of Silicon Valley.

Here is the narrative logic of infrastructure:

· Monetary networks exist to succeed in information networks. That’s why it’s called Web3;

· People would have “invested” in TCP/IP or HTTP in the 1990s if they could, and now we can invest in infrastructure through network tokens;

· Blockchain infrastructure is the “TCP/IP and HTTP protocols” of this generation, and people are betting on that.

This is a pretty attractive narrative, and there is some substance to this narrative. But the question is in 2024, when we see the birth of an EVM L2 that specifically increases TPS to support the NFT community to achieve super high market potential, have we strayed from the original intention of building TCP/IP facilities for global currency. Or whether this original intention is driven by the fund economics of large crypto funds (such as Paradigm/Polychain/a16z crypto).

EBOLA is making founders and LPs wrong

Because this infrastructure narrative drives high valuations, we have seen many mainstream EVM applications announce or launch L2 to drive up the valuation of the project. The market's pursuit of EVM infrastructure has been close to crazy, so much so that even top NFT projects like Pudgy Penguins have had to launch L2.

Take EigenLayer on Ethereum as an example. Even with $171 million in financing, it is still far from having any significant impact, let alone generating revenue, but it will make some VCs and insiders (holding 55% of the tokens) rich. Low circulation, high FDV projects have received reasonable criticism, what about the criticism of low impact, high FDV projects?

The infrastructure bubble has begun to burst, and many first-tier infrastructure projects have issued tokens below their private round valuations in this cycle. With major unlocks in 6-12 months, VCs will be in trouble and it will become a competition to see who can "run faster".

There is a reason for the new wave of anti-VC coin sentiment among retail investors, more VC = more high FDV, low circulation infrastructure.

Bad VC advice leads projects to grave

EBOLA also victimizes promising applications/protocols, VCs influence founders to build on chains that do not match their product vision. Many social applications, user-centric applications, or high-frequency DeFi applications will never be realized on the Ethereum mainnet due to its low performance and ridiculously high gas fees.

However, despite the availability of alternatives, these applications are still built on Ethereum, which results in them being conceptually promising but unable to make further progress due to the infrastructure they rely on failing to pass "proof of concept". There are many examples of this, from Enzyme Finance (2017) to more recent SocialFi applications such as Friend Tech, Fantasy Top, and Quail Finance (2024).

Take Lens Protocol, which raised $15M and runs on Polygon due to funding (now switching to zkSync due to another grant), while maintaining their L3. Infrastructure fragmentation led to the failure of Lens Protocol, which could have otherwise become a foundational social graph. In contrast, Farcaster took a light infrastructure approach, a path that is more biased towards Web2.

A recent example is "IP blockchain" Story Protocol, which raised a total of $140M in funding, led by a16z. Even when they have been pushed to the edge, Tier 1 VCs are still doubling down on infrastructure narratives. However, keen observers may have noticed new exit paths: the evolution of narratives from "infrastructure" to "specific application infrastructure", but they are often built on unproven EVM stacks (such as OP) rather than the proven Cosmos SDK.

Structurally Broken VC Market

The current VC market is not allocating capital efficiently. Crypto VCs manage billions of dollars in assets that, in aggregate, need to be deployed in specific rounds, from private seed rounds to Series A projects, within the next 24 months.

On the other hand, liquid capital allocators are highly sensitive to global opportunity costs, whether it is from "risk-free" treasuries to holding crypto assets. This means that liquid investors will be more efficient than venture investors.

Current Market Structure:

· Public Markets - Undersupply of Capital, Oversupply of Quality Projects

· Private Markets - Oversupply of Capital, Undersupply of Quality Projects

The undersupply of capital in the public market leads to poor price discovery, as evidenced by this year's token listings. High FDV issuance is a major issue in the first half of 2024. For example, the total FDV of all tokens issued in the first six months of 2024 is close to $100 billion, accounting for half of the total market value of all top 10 to 100 tokens.

The private venture capital market is already shrinking. Haseeb also admitted that these funds are smaller than the previous funds, and there must be a reason for this, otherwise if possible, Paradigm would raise the same size as its previous fund.

The structurally broken VC market is not just a crypto problem.

The crypto market clearly needs more liquidity funds as structural buyers in the public markets to solve the problem of the broken VC market.

How to fight EBOLA

Enough of the problems, now let’s talk about potential solutions and what we need to do as an industry – both for founders and investors.

For investors – adopt a liquidity strategy and expand by embracing the public markets, not fighting them

Liquidity funds are essentially investments or holdings in publicly traded liquid tokens.As Arthur of DeFiance points out, an efficient liquid crypto market requires the presence of active fundamental investors, which means there is plenty of room for liquid crypto funds to grow. To be clear, we are currently discussing “spot” liquidity funds; leveraged liquidity funds (or hedge funds) have performed poorly in the last cycle.

Tushar and Kyle of Multicoin seized on this concept 7 years ago when they founded Multicoin Capital. They believed that liquidity funds could achieve both venture capital economics (investing in early tokens for outsized returns) and public market liquidity.

This approach has several advantages, such as:

· Public market liquidity allows them to exit at any time based on changes in their thesis or investment strategy;

· The ability to invest in competing protocols to reduce risk. It is often easier to invest in trends than to pick specific winners within those trends, so liquidity funds can invest in multiple tokens within a particular trend.

While typical venture capital funds provide more than just capital, liquidity funds can also provide various forms of support. For example, liquidity support can help solve the cold start problem of DeFi protocols, and these liquidity funds can also play a practical role in protocol development by actively participating in governance and providing input on the strategic direction of the protocol or product.

In contrast to Ethereum, Solana has a smaller average round size in 2023-2024, with the exception of DePIN; according to rumors, almost all first major rounds are less than $5 million. Major investors include Frictionless Capital, 6MV, Multicoin, Anagram, and Big Brain Holdings, in addition to Colosseum, which runs Solana Hackathons and launched a $60 million fund to support founders building on Solana.

Opportunity for Solana Liquidity Fund

Compared to 2023, Solana now has a large number of liquidity tokens in the ecosystem, and people can easily start liquidity funds to invest in these tokens early. For example, on Solana, there are a bunch of tokens with a market cap of less than $20 million, each with their own characteristics, such as MetaDAO, ORE, SEND, and UpRock, etc. Solana DEX is now battle-tested, with even more trading volume than Ethereum, and has active token launch platforms and tools such as Jupiter LFG, Meteora Alpha Vault, Streamflow, Armada, etc.

As the liquidity market on Solana continues to develop, liquidity funds are a contrarian investment option for both individuals (looking for angel investment) and smaller institutions. Larger institutions should start looking at larger liquidity funds.

For founders — choose an ecosystem with low startup costs until you find product-market fit

As Naval Ravikant said, stay small until you find a business model that works. He said that entrepreneurship is about finding a scalable and repeatable business model. So what founders are really doing is finding work, staying very small and very, very low costs until you find a business model that can be repeated and scaled.

Solana’s Low Startup Cost

As Tarun Chitra pointed out, Ethereum’s startup costs are much higher than Solana’s. He pointed out that in order to be innovative enough and ensure a good valuation, a lot of infrastructure development is usually required (e.g., the entire application becomes a rollapp fan). Infrastructure projects are inherently more resource-intensive because they are highly research-dependent and need to hire a team of researchers and developers, as well as numerous ecosystem/BD experts to convince a small number of Ethereum applications to integrate.

But applications on Solana don’t need to care too much about infrastructure, which is taken care of by Solana infrastructure startups such as Helius/Jito/Triton or other protocol integrations. Generally speaking, applications don’t need a lot of capital to start, such as Uniswap, Pump.fun, and Polymarket.

Pump.fun is a perfect example of Solana’s low transaction fees opening up the “fat application theory”; a single application Pump.fun has surpassed Solana in revenue in the past 30 days, and even exceeded Ethereum in 24-hour revenue on some days. Pump.fun originally started on Blast and Base, but soon realized that Solana had better capital velocity. As Alon of Pump.fun said, both Solana and Pump.fun are committed to reducing costs and barriers to entry.

As Mert points out, Solana is the best place to build a startup due to community/ecosystem support, scalable infrastructure, and a philosophy of fast delivery. With the rise of successful user-oriented applications like Pump.fun, we have seen more and more new entrepreneurs (especially user-oriented founders) leaning towards Solana.

Solana is not just for Memecoins

"Solana is only for memecoins" has been the biggest controversy about Solana by ETH maximalists in the past few months. Memecoins do dominate Solana's activities, and Pump.fun is officially the core. Many believe DeFi on Solana is dead, with blue-chip tokens like Orca and Solend underperforming on Solana, but statistics suggest otherwise: · Solana’s DEX volume is comparable to Ethereum, and most of the top 5 trading pairs on Jupiter 7 D volume are not memecoins. In fact, memecoins only account for about 25% of DEX volume on Solana (as of August 12), while Pump.fun accounts for 3.5% of daily volume on Solana. · Solana’s TVL ($4.8 billion) is 10x smaller than Ethereum ($48 billion), and Ethereum still enjoys higher capital leverage with its 5x market cap, deeper DeFi penetration, and a proven protocol. However, this does not limit the TAM of new projects on Solana. Two of the best examples are:

1. Kamino Lend, which grew to $1.4 billion in just 4 months.

2. PayPal USD, which reached $450 million in 3 months, surpassing Ethereum’s $360 million supply despite having existed on Ethereum for a year.

With many EVM blue-chip tokens deployed on Solana, TVL is only a matter of time.

While some may say that the price of the Solana DeFi token has fallen sharply, so have Ethereum’s DeFi blue-chip tokens, which is essentially a structural problem with the accumulation of governance token value.

Solana is the clear leader in DePIN, with over 80% of major DePIN projects built on Solana. Perhaps it can be concluded that all emerging metas (DePIN, Memecoins, Consumer) are being developed on Solana, while Ethereum remains the leader in the 2020-2021 meta (Money Markets, Liquidity Mining).

Advice for App Founders

For founders, the bigger the fund, the less you should listen to them. They will incentivize you to financialize your product before you achieve product-market fit. Uber’s Travis does a great job explaining why you should stop listening to big VCs. While pursuing Tier 1 VCs and high-credibility valuations is certainly lucrative, you don’t necessarily need a large VC to launch. Especially before you’ve found product-market fit, this approach can lead to valuation burdens that keep you in a cycle of needing to raise money and launch at higher FDVs. Poor performance when you do launch makes it harder to truly build a distributed community around your project.

Raising Funds — Small Rounds, More Community Oriented

· Raising money from angel investor groups through platforms like Echo is an underrated way to go: you trade valuation for distribution and a strong launch. Find relevant founders and influencers and work to bring them on board. This way, you build an early community/network of supporters who are high-quality builders and influencers who are fully behind you. Prioritize community over Tier 2/3 VCs. Shoutout to some of the Solana angel investors like Santiago, Santiago, Nom, Tarun, Joe McCann, Ansem, R89 Capital, Mert, and Chad Dev.

· Choose an accelerator like AllianceDAO (best for consumer projects) or Colosseum (Solana native fund) that is non-predatory and more aligned with your vision. Leverage Superteam for all your startup needs; it’s a shortcut.

Go Consumer — Embrace Speculation, Attract Attention

· Attention Theory: Jupiter’s $8B FDV on the public market is strong evidence that the market has begun to value frontends and aggregators. The point is that they are not funded by any VC, but are still the largest applications in the entire crypto space.

· The rise of application-focused VCs: When VCs see billion-dollar exits here, they will likely follow the same infrastructure playbook for consumer applications. We’ve already seen many applications with $100 million ARR.

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