EVM Bags Over Logic Affliction.
Written by Yash Agarwal
Compiled by: Luffy, Foresight News
"Let your opponents talk, and they will create a story that works for them."
Two weeks ago on The Chopping Block, Haseeb and Tom from Dragonfly raised a number of points in the Ethereum vs. Solana debate:
Solana’s VC ecosystem is incomplete.
The amount of capital on Solana is much lower than Ethereum, and aside from Memecoins, there are few winners in the Solana ecosystem.
Solana should be considered a Memecoin chain or a DePIN chain. Solana's TVL is only $5 billion, which limits its market size.
Building on Ethereum is like “starting a business” in the US, with a higher enterprise value (EV).
Solana has a higher Gini coefficient (meaning there is more inequality within the ecosystem).
I’ll review these ideas, explore structural issues at large VC firms and how they drive their infrastructure investments, and finally share tactical advice for avoiding EBOLA.
Ethereum VC gets infected with EBOLA
As Lily Liu said, EBOLA (EVM Bags Over Logic Affliction) is a disease that is prevalent among Ethereum venture capital firms. It is a structural problem, especially for those large "tier-one" venture capital firms.
Take a large fund like Dragonfly, which raised $650 million in 2022 from Tier 1 LPs (limited partners) such as Tiger Global, KKR, and Sequoia, for example. A heavy investment in infrastructure may be its investment thesis. Dragonfly may be required to deploy capital within a specified period (say, two years), which means they are willing to fund larger financing rounds and give higher valuations. If they don't do this, they will not be able to meet the capital deployment requirements and can only return the funds to the LPs. Think about the economic incentives of GPs (general partners): they receive management fees every year (2% of the funds raised) and receive a share of the proceeds (20% of the returns) when they exit. Therefore, the fund has an incentive to raise more funds.
Given that infrastructure projects (like Rollup/interoperability/re-staking) easily have FDVs of $1B+, and billions of dollars have been exited from the infrastructure space in 2021-2022, deploying capital to infrastructure is the best option for large VCs. But this is a narrative created by large VCs themselves, driven by Silicon Valley capital and legitimacy engines.
Here are the main elements of the infrastructure narrative:
The web of money will succeed the web of information. That’s why it’s called Web3.
If you had the opportunity to "invest" in TCP/IP or HTTP in the 1990s, you certainly didn't miss it.
Blockchain infrastructure is this generation’s “TCP/IP” investment opportunity.
It’s a pretty compelling narrative. But the question is, in 2024, as we look at the next EVM L2 specifically designed to scale TPS to support the massive NFT market size, have we strayed from the original story of TCP/IP becoming global currency? Or, is this rationale driven by the interests of large crypto funds (e.g. Paradigm/Polychain/a16z crypto).
EBOLA made founders and LPs sick
Given that the L2 narrative can drive up project valuations, we’ve seen many EVM applications announce the launch of L2 in the hope of achieving high valuations. The community’s pursuit of EVM infrastructure has become crazy, and even top consumer product founders such as Pudgy Penguins believe that it is necessary to launch L2.
Take EigenLayer on Ethereum, which has raised $171 million but is far from having any significant impact, let alone generating revenue. It will make a few venture capitalists and insiders (who hold 55% of the tokens) rich. People are right to criticize low circulation, high FDV projects, so what about low impact, high FDV projects?
The infrastructure bubble has already started to burst, and many infrastructure projects in this cycle have issued tokens below their private placement valuations. With major unlocks in the next 6-12 months, venture capital firms will be in trouble and it will be a game of "run fast".
There is a reason for retail investors’ anti-VC investment sentiment; they feel that well-funded VC = higher FDV, lower infrastructure for circulating tokens.
Bad VC Advice
EBOLA also claims that among its victims are promising applications/protocols, where venture capitalists influence founders to build applications/protocols on chains that cannot achieve their product vision. Many social applications, consumer-facing applications, or high-frequency DeFi applications will never be realized on the Ethereum mainnet because Ethereum's performance is bottlenecked and gas fees are ridiculously high. However, despite other options, these applications are still built on Ethereum, which leads to a large number of applications that are promising in concept but cannot go beyond the scope of "proof of concept" because the infrastructure they rely on has reached the end of its life. In my opinion, there are many such examples, from Enzyme Finance (2017) to more recent SocialFi applications such as Friend Tech, Fantasy Top, and Quail Finance (2024).
Take the largest protocol, Aave’s Lens Protocol, which raised $15 million and launched on Polygon thanks to a large grant (and now another grant to support zkSync). The fragmentation caused by the infrastructure “three-card game” led to the failure of Lens Protocol, which could have otherwise become a foundational social graph.
Recently, Story Protocol received $140 million in financing led by a16z to build an "intellectual property blockchain." Despite being cornered, first-tier VCs are still doubling down on the infrastructure narrative. As a result, keen observers may notice some changes: this narrative has evolved from "infrastructure" to "application-specific infrastructure", but they are often based on unproven EVM stacks (such as OP) rather than the proven Cosmos SDK.
The structurally collapsed venture capital market
The current venture capital market does not allocate capital efficiently. Crypto VCs manage billions of dollars in funds that need to be deployed to specific projects within the next 24 months.
Liquid capital allocators, on the other hand, are highly sensitive to global opportunity costs, from “risk-free” treasuries to holding crypto assets. This means that liquid investors will be more efficiently priced than risky investors.
The current market structure is as follows:
Public market: insufficient capital supply and oversupply of high-quality projects
Private market: excess capital supply, insufficient supply of quality projects
Insufficient public market capital supply leads to poor price discovery, as evidenced by this year’s token listings. High FDV 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 capitalization of all tokens ranked in the top 10 to top 100.
The private venture capital market has shrunk. Haseeb acknowledged that, and for some reason, these funds are smaller than previous funds. If it could, Paradigm would raise a fund of the same size as its previous ones.
A structurally broken venture capital market isn’t just a cryptocurrency problem.
The cryptocurrency market clearly needs more liquidity to act as structural buyers in the public market to address the collapse of the venture capital market.
How to prevent EBOLA
Enough of that, let’s talk about potential solutions and what founders and investors need to do.
For investors: Shift to liquidity strategies and gain scale by embracing public markets rather than fighting them.
Liquidity funds are essentially investments or holdings in publicly traded liquidity tokens. As Arthur from DeFiance points out, an efficient and liquid cryptocurrency market requires active fundamental investors, which means there is plenty of room for cryptocurrency liquidity funds to grow. It should be noted that we are specifically talking about "spot" liquidity funds, and leveraged liquidity funds (or hedge funds) have performed poorly in the last cycle.
Tushar and Kyle of Multicoin latched onto this concept when they founded Multicoin Capital seven years ago. They believed that a liquidity fund could provide the best of both worlds: venture capital combined with public market liquidity.
This approach has two advantages:
The liquidity of the public market allows them to exit at any time based on changes in their investment philosophy or investment strategy.
Invest in competing protocols to balance risk. It is often easier to spot trends than to pick winners within them, so a liquidity fund can invest in multiple tokens in a clear trend.
While typical venture capital funds provide more than just capital, liquidity funds can still 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 opinions on the strategic direction of the protocol or product.
In contrast to Ethereum, Solana's funding rounds in 2023-2024 are quite small, with the exception of DePIN. Rumor has it that almost all first major rounds are below $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 Solana ecosystem projects.
Solana Liquidity Opportunity: It’s time to make money with liquidity strategies. As opposed to 2023, Solana now has a large number of liquidity tokens in the ecosystem, and people can easily start liquidity funds to bid on these tokens early. On Solana, there are many FDV tokens with a value of less than $20 million, each with a unique theme, such as MetaDAO, ORE, SEND, and UpRock, etc. Solana DEX is now battle-tested, with trading volume exceeding even Ethereum, and has vibrant token launch launchpads and tools, such as Jupiter LFG, Meteora Alpha Vault, Streamflow, Armada, etc.
As the liquidity market on Solana continues to grow, Liquidity Funds can be a contrarian bet for both individuals (those seeking angel investment) and small institutions. Large institutions should start targeting larger and larger Liquidity Funds.
For founders: Choose an ecosystem with low startup costs until you find product-market fit.
As Naval Ravikant said, try to stay small until you find something that works. Entrepreneurship is about finding a scalable and repeatable business model. So what you are really doing is looking for, until you find a repeatable and scalable business model, you should stay very, very small and low-cost.
Solana’s Low Startup Costs
As Tarun Chitra said, Ethereum has much higher startup costs than Solana. He pointed out that in order to gain enough novelty and ensure a good valuation, projects usually need a lot of infrastructure development (e.g., the RollApp craze). Infrastructure developments inherently require more resources because they are largely research-driven, requiring the hiring of a research and development team, as well as a BD team to convince the few Ethereum applications to integrate.
Applications on Solana do not need to pay too much attention to infrastructure, which is handled by some reliable Solana infrastructure startups (such as Helius/Jito/Triton or protocol integration). Generally speaking, applications do not require too much capital to start, such as Uniswap, Pump/fun, and Polymarket.
Pump.fun is a perfect example of how Solana's low transaction fees unlock the "fat application theory". Pump.fun has surpassed Solana in revenue over the past 30 days, and even had a few days with daily revenue exceeding Ethereum. Pump.fun was originally on Blast and Base, but quickly realized that Solana's capital efficiency is unmatched. Alon of Pump.fun said that both Solana and Pump.fun are focused on reducing costs and barriers to entry.
As Mert said, Solana is the best choice for startups because it has community/ecosystem support and scalable infrastructure. We are already seeing new entrepreneurs (especially consumer product founders) prefer Solana due to the rise of successful consumer applications such as Pump.fun.
Solana Is Not Just For Memecoin
“Solana is only for Memecoins” has been the core argument of Ethereum maximalists over the past few months. Yes, Memecoins dominate Solana activity, and Pump.fun is at the heart of it. Many may say that DeFi on Solana is dead and that Solana blue chips are underperforming Orca and Solend, but the statistics say otherwise:
Solana’s DEX volume is comparable to Ethereum’s, and most of Jupiter’s top 5 trading pairs by 7-day volume are not Memecoin. In fact, Memecoin activity only accounts for about 25% of DEX volume on Solana (as of August 12), and Pump.fun only accounts for 3.5% of daily volume on Solana.
Solana’s TVL ($4.8 billion) is only 1/10 of Ethereum’s ($48 billion) due to Ethereum’s higher market cap, deeper penetration of DeFi, and the fact that established protocols still have higher capital leverage. However, this will not limit the market size of new projects forever. Two of the best examples are: Kamino Lend grew to $1.4 billion in just 4 months; PayPal’s stablecoin on Solana reached $450 million in just 3 months, surpassing the $360 million on Ethereum, which has been on Ethereum for a year.
As more EVM blue chips are deployed on Solana, TVL is only a matter of time.
While one could argue that the massive price drop in the Solana DeFi token, and indeed Ethereum’s DeFi blue chips, is a structural problem with the value accumulation of governance tokens.
Solana is undoubtedly the leader in the DePIN space, with over 80% of major DePIN projects being built on Solana. We can also conclude that all emerging primitives (DePIN, Memecoins, consumer applications) are being developed on Solana, while Ethereum still dominates the old-time primitives (money markets, liquidity mining) in 2020-2021.
Advice for App Creators
The bigger the fund, the less you should listen to them. They will encourage you to raise money before you have product market fit. Uber's Travis does a great job explaining why you shouldn't listen to big VCs. While it's certainly profitable to go after top VCs and high valuations, you don't necessarily need big VCs. Especially before you have product market fit, raising money can lead to valuation burdens, trapping you in a cycle of needing to keep raising money and launching at higher FDVs.
Recommendation 1: Small-scale financing, community-oriented
Raise money from angel investors through platforms like Echo. Echo is underrated and allows you to find relevant founders and influencers and get them on board. This way you can build a community/network of evangelists of quality builders and influencers. Prioritize community over tier 2/3 VCs. Shout out to some of the Solana Angels like Santiago, Nom, Tarun, Joe McCann, Ansem, R89Capital, Mert, and Chad Dev.
Choose an accelerator like AllianceDAO (best for consumer projects) or Colosseum (Solana native fund) that is not predatory and better aligned with your vision. Leverage Superteam for all your startup needs.
Recommendation 2: Consumer-oriented: Embrace speculation and attract attention
Attention Theory: Jupiter has $8 billion in FDV on the public market, which is a strong proof that the market has begun to value front-ends and aggregators. They have not received any venture capital funding, but have still become one of the largest applications in the entire cryptocurrency space.
The rise of app-focused VCs: Yes, when VCs see billion-dollar exits, they will likely follow the same strategy as infrastructure to invest in consumer apps. We’ve already seen many apps reach $100 million ARR.
Summarize
Stop listening to VCs selling the infrastructure narrative;
The time has come for working capital to flourish;
Built for consumers: embracing speculation and chasing yield;
Solana is the best place to experiment due to its low startup costs.
