Layer-2 blockchains and infrastructure projects are among the big winners as blockchain venture capital (VC) spending rose to $2.7 billion in the second quarter of 2024.
Decentralized social media, decentralized physical infrastructure networks and decentralized science are some of the hot areas currently gaining traction.
However, some big-name VCs are starting to cool on artificial intelligence after revenue and demand failed to materialize.
Olaf Hannemann, co-founder and chief investment officer of CV VC — a company that invests in equity and tokens — tells Cointelegraph that the firm has been investing in picks and shovels.
“Infrastructure topics such as decentralized social, physical infrastructure networks and decentralized science and health are exciting for us,” Hannemann told Cointelegraph. “Decentralized business models still offer a lot of potential, with really good infrastructure solutions being crucial in the long term to develop good applications.”
VC funding in Q2 rose by 2.5% over the previous three months, with layer-1 platform Monad, decentralized finance protocol BeraChain and Bitcoin restaking platform Babylon securing investments of $225 million, $100 million and $70 million, respectively.
Many opportunities
Anirudh Pai, partner at VC firm Dragonfly, said that Ethereum layer-2 scaling was broadly viewed as “one of the biggest opportunities in the industry,” but the roadmap also creates fresh challenges.
He points to liquidity fragmentation as one such issue, as the value that was once on the Ethereum network alone is now spread across multiple chains such as Polygon and Arbitrum. But that means interoperability solutions such as AggLayer and Matter Labs One present a clear and distinct opportunity.
“Caldera, one of our portfolio companies, has done a great job here as they address the liquidity fragmentation issue that currently exists on Ethereum,” Pai said. “Their upcoming Metalayer will connect the universe of disparate rollups that exist on Ethereum today.”
Recent: DeFi market stages a comeback as derivatives surge
The Metalayer is a unified rollup ecosystem platform that aims to allow ultra-swift rollup deployment on layer-2s, including Optimism, Arbitrum, ZKsync and Polygon.
Caldera is not the only Ethereum-related project that caught Dragongfly and Pai’s attention.
In June, Dragonfly participated in a $20 million seed funding round for MegaETH, a real-time Ethereum Virtual Machine (EVM) project with a nine-figure valuation. Ethereum creator Vitalik Buterin and Consensys founder Joseph Lubin also invested in the project.
MegaETH promises to turbocharge EVM smart contracts by processing 100,000 transactions per second — a hundred times faster than Ethereum’s native EVM.
But Pai said Dragonfly views the crypto and AI sector with greater skepticism.
“Investor fervor for AI has been intense, and we don’t fully buy into the hype since demand, as shown by revenue, for applications writ large appears to have lagged.”
Hannemann said the main focus of their investment thesis was on “trust and decentralization capability.”
Recent investments from CV VC include Provably, which is building zero-knowledge infrastructure for big data ecosystems in both Web2 and Web3, as well as Lawyerd, an automated blockchain-based brand protection agency.
George McDonaugh, co-founder and co-managing director of KR1 — a VC focused on blockchain technology and digital assets — told Cointelegraph that investors should look beyond the top cryptocurrency for opportunities. “While Bitcoin remains digital gold, distinct from speculative memecoins, we foresee a major shift toward broader adoption of crypto.”
US elections and the wider outlook
McDonaugh said that events in the United States would be highly influential this year, influencing the wider economic outlook.
“In the short term, we’re at a critical juncture. Potential US Federal Reserve rate cuts and the upcoming elections could significantly influence the market,” he said.
“A Trump victory, with his support for a strategic Bitcoin reserve, might lead to more favorable conditions for crypto. We expect these events to have a strong impact on prices.”
McDonaugh also pointed to the typical post-halving Bitcoin (BTC) lull as a significant factor for the market, but he expects the usual cycle uptick to follow.
“Following the Bitcoin halving in April, the market has entered a phase of sideways chop, where price movements are relatively flat as miners adjust to reduced rewards. Historically, this period can precede significant market moves as the supply shock begins to take effect,” he said.
“With Bitcoin and Ethereum ETFs now available in the US, institutional capital is well-positioned to flow into the crypto space, and we believe these channels will be fully utilized as market conditions evolve.”
Reasons for optimism
The VCs Cointelegraph spoke with remained bullish on the blockchain industry, especially when taking the long-term view.
Recent: Clicker games and more: 6 projects growing on TON blockchain
“The market is optimistic but cautious,” said Hannemann. “Despite the chill of recent years, overall global blockchain venturing in H1 2024 saw only a 9% year-over-year decline, indicating a warming rebound for 2024.”
Pai pointed to increased global liquidity and the prospect of reduced interest rates in multiple countries as noteworthy factors in 2024.
“Nothing is guaranteed, but the optimism of this year is markedly different to the period post-FTX,” he said.
