Written by: Tommy
Compiled by: TechFlow
I spent a lot of time 1:1 with serious builders, VCs, and market makers during @EthCC. Here are some of my reflections on the current state of the industry:
1. Blame the rules of the game, not the players
“We like consumer apps, but 90% of the deals we’ve closed this year are infrastructure projects.” A lot of builders and VCs agree that we have too many people building infrastructure and not enough consumer apps with real users. Most VCs I talk to are interested in consumer decentralized apps (dApps). However, looking at recent funding announcements, it’s not hard to see that the market is still dominated by infrastructure projects.
It’s a vicious cycle that’s hard to pin on any single stakeholder:
Projects and venture capital firms want to be listed on large centralized exchanges (CEX) with good liquidity
Centralized exchanges want to list projects that are well incentivized through marketing campaigns (high fully diluted valuation, FDV) and top backers
Infrastructure projects carry a valuation premium due to the resources required to build them, so more capital is poured into these projects, creating a cycle.
2. VCs are less interested in investing in early-stage rounds with high fully diluted valuations (FDV)
Project valuations have risen significantly since the fourth quarter of last year. Many private financings or Series A rounds have project valuations in excess of $1 billion FDV, especially those related to AI.
On the other hand, most recent large-scale launches have been lackluster ($BLAST less than $2 billion; $ZK and $W at $3 billion; $ZRO at $4 billion). The overall altcoin market is weak, and many VC-backed projects are trading at FDVs below their last private round.
In the current market environment, the chances of VCs getting 50-100x returns are almost impossible. Not to mention, VCs are also subject to lock-up period restrictions (about 1 year lock-up + 2-3 years vesting period). These projects may need to survive the next bear market and compete with more new projects that are able to quickly attract users due to the short attention span of the industry.
Therefore, more VCs are looking for liquidity strategies (if their investment strategy allows), or over-the-counter (OTC) transactions at significant discounts relative to the last round valuation (or current FDV if the project is in the process of trading) . For VCs with more resources, they are incubating projects founded by former employees to ensure they are the earliest investors with higher return potential.
Many VC analysts and research partners are turning to join the emerging primary or secondary blockchain (L1/L2) ecosystems, or start their own projects. Direct participation in project development appears to be a higher expected value (EV) option than investing. One advantage is that they can use their experience and connections to raise funds for the projects they participate in, as they are well aware of VCs' concerns and needs.
In addition, the overall poor performance of altcoins has led to low returns on distributed capital (DPI) for limited partner (LP) funds. It is difficult to raise capital for new funds without a strong track record. Some of these funds have already spent most of their capital in the past year, and even if attractive investment opportunities arise now, they do not have remaining funds available.
3. Old wine in new bottles
Concepts that didn’t catch on as expected were repackaged into new forms. For example, Intent was a hot topic for a while, but was quickly replaced by concepts like Decentralized Autonomous Organizations (DA) and restaking.
Many projects are now rebranding themselves as "chain abstractions" or even "AI", especially those intent-driven projects that embed some large language model (LLM) or algorithmic elements.
In addition, most decentralized Internet of Things (DePin) projects have already added “AI” elements to their branding strategies to attract the attention of venture capital firms.
This phenomenon is similar to the last cycle where security tokenized projects became real world assets (RWAs) in this cycle.
I think there is nothing wrong with rebranding, and it is not easy to find a narrative that the market recognizes. However, the market is still waiting for the next brand new narrative, not a repackaging of the old concept.
4. Not all narratives are “investable”
There’s a difference between a hot narrative and a hot vertical.
Account Abstraction is a popular narrative that provides a better user experience. But this is not a vertical field, but a function that will be embedded in different application scenarios, such as from wallets to games, from decentralized finance (DeFi) to social finance (SocialFi). You still need a specific product to sell, that is, there will not be a project that just says "we do account abstraction", but "we created a wallet that supports account abstraction" or "a game with account abstraction function" and so on.
Simply chasing hot narratives without analyzing the vertical (product) they exist in is dangerous for VCs because you might invest in the hottest narratives in the wrong vertical.
5. Market makers are not immune
Market making can indeed be a lucrative business, but the field has become more competitive as some U.S. players exit the market due to regulatory issues and new players continue to enter.
Some market makers are willing to engage in price wars to win transactions. In the options model (the model preferred by most market makers), market makers borrow tokens from the project team for sell orders and need to invest stablecoins for buy orders. This either requires a lot of capital (if using own funds) or is costly (if borrowing from elsewhere and paying interest). Therefore, the options model is not "cost-free" for market makers.
To win deals, market makers need to have the following: i) good relationships and reputation, ii) attractive proposals, and iii) value-added services for their clients.
Project teams are also becoming more and more familiar with different market makers, so the information asymmetry advantage of market makers in negotiations is disappearing and market competition is becoming increasingly fierce.
6. Market Catalysts (ETFs, Elections, Interest Rates)
Most people are waiting for the ETH ETF to be listed, hoping that its price trend will rise like the BTC ETF did after its listing.
Unlike the BTC ETF, the hope is that the ETH ETF will be a strong catalyst for Ethereum-related tokens.
There are also expectations that after ETH, more altcoin ETFs will be approved (maybe the SOL ETF is next?).
If more altcoin ETFs are approved, the ultimate goal of the project will be to get ETF approval instead of listing on top centralized exchanges (CEX). This will completely change the market's perception of old tokens.
Another market catalyst is the U.S. election, where people hope to elect a crypto-friendly regime and favorable policymakers.
One rate cut is expected this year, with more likely to come in 2025. This will bring more liquidity to the cryptocurrency market.
Although the current market conditions are somewhat dull, most people are optimistic about the prospects for the next 2-3 quarters. The mood is to remain calm, not too impatient, but full of confidence and expectation.
