Ethereum VCs have EBOLA for Infra
Author: Yash Agarwal, researcher at Superteam.fun; Translated by: 0xjs@Golden Finance
“Let your opponents talk, and they will weave a web that will keep them safe.”
Two weeks ago on “ The Chopping Block ”, Haseeb and Tom from Dragonfly presented a series of arguments in the Ethereum vs. Solana segment. They outlined the following:
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 is seen as a memecoin chain and perhaps a DePIN chain. Solana’s TVL is only $5 billion, limiting its TAM.
Starting a business on Ethereum is like “starting a business” in the United States, because its expected value is more positive.
Solana has a higher Gini coefficient (higher inequality).
We’ll review these arguments — highlighting structural issues with large VC funds and how they drive them to make infrastructure investments — or worse, trap founders in bad advice. Finally, we’ll share tactical advice on how to avoid contracting EBOLA (EVM Bags Over Logic Affliction).
Ethereum VC’s highly contagious EBOLA
As Lily Liu of the Solana Foundation put it, EBOLA (EVM Bags Over Logic Affliction) is a disease affecting Ethereum VCs — a structural problem, especially for large “tier-one” VCs.
Take a large fund like Dragonfly, which raised $650 million in 2022 from top LPs like Tiger Global, KKR, and Sequoia, and is likely to have a heavy infrastructure weighted investment thesis. Large funds like Dragonfly are structurally incentivized to deploy capital within a defined period (e.g., two years). This means they will gradually be willing to fund larger rounds and at higher valuations. If they don't fund larger rounds, they won't be able to deploy capital and will have to return capital to their LPs.
Think about the financial incentives of GPs: they receive a management fee each year (2% of funds raised) and a success fee upon exit (20% of returns). Therefore, on a risk-adjusted basis, funds have an incentive to raise more funds to “accumulate fees.”
Given that infrastructure projects (like Rollups/interoperability/re-staking) can easily achieve $1B+ FDV, investing in infrastructure projects is the right thing to do given the billions of dollars in infrastructure exits in 21-22. But this is a narrative of their own creation, driven by Silicon Valley’s capital and legitimacy engine.
Here’s what the infrastructure narrative looks like:
1. The money web will succeed the information web. That’s why it’s called Web3.
2. If you could “invest” in TCP/IP or HTTP in the 1990s, you would. Now you can invest through network tokens.
3. These blockchain infrastructure bets are this generation’s bet on a monetary protocol equivalent to TCP/IP and HTTP protocols.
It’s a pretty compelling narrative, and one that does have some substance. The question is, in 2024, as we look toward the next EVM L2 specifically designed to scale TPS to support the ultra-high TAM potential of the NFT community, have we strayed from the original story of TCP/IP becoming global currency. Or, is this rationale driven by the fund economics of large crypto funds (e.g. Paradigm/Polychain/a16z crypto).
EBOLA made founders and LPs sick
Given the assumption that infrastructure branding drives high valuations, we’ve seen many major EVM applications announce or launch L2s in hopes of achieving these high valuations. The chase for EVM infrastructure is so frenetic that even top consumer founders like Pudgy Penguins feel the need to launch L2s.
Take EigenLayer for example - a project on Ethereum that 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; what about the criticism of low-impact, high-FDV projects?
The infrastructure bubble has already started to burst, and many of the top infrastructure projects in this cycle have issued tokens with FDVs below their private placement valuations. With significant unlocking occurring in 6-12 months, venture capital firms will be in a bind, and it will be a race to the bottom to see who sells first, impacting returns.
There is a reason why there is a new round of anti-VC sentiment among retail investors; they feel that more VC money = higher FDV, lower liquidity infrastructure.
Bad VC advice leads you to your grave
EBOLA also claims that among its victims are promising applications/protocols, where venture capitalists influence founders to build applications/protocols on chains that cannot deliver on their product vision. Many social applications, consumer-facing applications, or high-frequency DeFi applications will never be realized on the Ethereum mainnet due to its modem-like performance and ridiculously high gas fees. However, these applications are still built on Ethereum despite other options, resulting in a large number of applications that are promising in concept but cannot go beyond "proof of concept" because the infrastructure they rely on has reached the end of its rope. In my opinion, the examples are numerous, from Enzyme Finance (2017) to more recent SocialFi applications such as Friend Tech, Fantasy Top, and Quail Finance (2024).
Take Lens Protocol, the largest DeFi protocol Aave, for example, which raised $15 million and launched on Polygon due to a large grant (and now switched to zkSync again due to another grant), while maintaining its L3. Fragmentation caused by infrastructure chaos led to the downfall of Lens Protocol, which otherwise could have become a foundational social graph. In contrast, Farcaster took a light infrastructure approach - a Web2 heavy approach.
Story Protocol recently raised $140 million led by a16z to build an “IP blockchain.” Despite being cornered, Tier 1 VCs are doubling down on infrastructure narratives. As a result, keen observers may notice exit paths: the narrative evolves from “infrastructure” to “application-specific infrastructure” — but often focuses on unproven EVM stacks (like OP) rather than the tried-and-true Cosmos SDK.
The structural collapse of the VC market
The current venture capital market is not allocating capital efficiently. Crypto ventures manage billions of dollars in assets that collectively need to be deployed into specific missions within the next 24 months: from private seed rounds to Series A projects.
On the other hand, liquid capital allocators 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.
Current market structure: Public market - insufficient capital supply, oversupply of high-quality projects Private market - oversupply of capital, insufficient supply of high-quality projects
The lack of public market capital supply has led 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, half of the total market cap of all tokens ranked in the top 10 to top 100. This is a surefire way to ensure that price discovery will decline until real buyers are found.
The private venture capital market has shrunk. Haseeb acknowledges as much — these funds are smaller than previous funds for a reason — and Paradigm would have raised 100% of the size of its previous funds if it could.
The structurally broken VC market is not just a cryptocurrency problem.
The cryptocurrency market clearly needs more liquid funds to act as structural buyers in the public market to solve the problem of the collapse of the VC market.
Vaccination to prevent EBOLA
Enough chit-chat, now let’s talk about potential solutions and what needs to be done as an industry — both for founders and investors.
For investors – lean toward liquidity strategies that gain scale by embracing public markets rather than fighting them.
Liquidity funds essentially invest in or hold publicly traded liquidity tokens. As DeFiance founder Arthur points out, an efficient and liquid cryptocurrency market requires the presence of active fundamental investors - which means there is plenty of room for cryptocurrency liquidity funds to grow. To be clear, we are specifically talking about "spot" liquidity funds; 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 7 years ago. They believed that a liquidity fund could provide the best of both worlds: venture capital economics (investing in early-stage tokens for outsized returns) combined with public market liquidity.
This approach has several advantages, such as:
1. The liquidity of the public market allows them to exit at any time based on changes in their themes or investment strategies.
2. The ability to invest in competing protocols to reduce risk. Often, it is easier to spot trends than to pick specific winners within those trends, so liquid funds can invest in multiple tokens within a particular 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.
Contrary to Ethereum, Solana’s funding rounds in 2023-24 are on average quite small, with the exception of DePIN; almost all first major rounds are rumored to be below $5 million. Major investors include Frictionless Capital, 6MV, Multicoin, Anagram, Reciprocal, Foundation Capital, Asymmetric, and Big Brain Holdings, in addition to Colosseum, which hosted the Solana Hackathons and launched a $60 million fund to support founders building on Solana.
Solana Liquidity Funding Timing:
It’s time to rely on liquidity strategies and make money through VC incompetence, stupidity, or both. 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 for these tokens early. For example, on Solana, there are many FDV tokens worth 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 a vibrant token launch launchpad 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 lower startup costs before finding a PMF
As Naval Ravikant said, stay small until you find something that works. He said that entrepreneurship is about finding a scalable and repeatable business model. So what you're really doing is looking for, until you find a repeatable and scalable business model, you should stay very, very small and very, very cheap.
Solana’s Low Startup Costs
As Tarun Chitra points out, Ethereum startups are much more expensive than Solana. He notes that it often requires a lot of infrastructure development (e.g., the entire app becomes a rollapp craze) in order to gain enough novelty and ensure a good valuation. Infrastructure developments inherently require more resources because they are largely research-driven, requiring the hiring of a research and development team, as well as numerous ecosystem/BD experts to convince the few Ethereum applications to integrate.
On the other hand, applications on Solana do not need to pay too much attention to infrastructure, which is taken care of by selected Solana infrastructure startups (such as Helius/Jito/Triton or protocol integration). Generally speaking, applications do not need enough funds to start; take Uniswap, Pump/fun and Polymarket as examples.
Pump.fun is a perfect example of Solana’s low transaction fees unlocking the “fat app theory”; a single app, Pump.fun, has surpassed Solana in revenue over the past 30 days, and even surpassed Ethereum in 24-hour revenue for a few days. Pump.fun originally started with Blast and Base, but quickly realized that Solana’s capital velocity is unmatched. As Alon of Pump.fun acknowledged, 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 of its community/ecosystem support, scalable infrastructure, and philosophy around delivery. We are already seeing an early trend of new entrepreneurs (especially consumer founders) preferring Solana due to the rise of successful consumer applications such as Pump.fun.
Solana isn't just for Memecoin
“Solana is only for memecoins” has been the biggest controversy among ETH maximalists in the past few months. Yes, memecoins dominate Solana activity, and Pump.fun is at the heart of it. Many people may say that DeFi on Solana is dead and Solana blue chips like Orca and Solend are not performing well, but the statistics say otherwise:
1. Solana’s DEX volume is comparable to Ethereum’s, and most of the top 5 trading pairs on Jupiter 7D are not memecoins. In fact, memecoin activity only accounts for about 25% of DEX volume on Solana (as of August 12), and Pump.fun accounts for 3.5% of daily trading volume on Solana - a small proportion considering the rapid adoption of the platform.
2. Solana’s TVL ($4.8 billion) is 10x smaller than Ethereum’s ($48 billion) because Ethereum still enjoys higher capital leverage with its 5x market cap, deeper penetration of DeFi, and proven protocols. However, this does not limit the TAM of new projects. The two best examples are:
Kamino Lend grew to $1.4 billion in just 4 months.
PayPal USD reached a supply of $450M in just 3 months, surpassing PYUSD’s supply of $360M on Ethereum, even though PYUSD has been on Ethereum for a year.
With many EVM blue chips being deployed on Solana, TVL is only a matter of time.
While one could argue that the massive price drop in the Solana DeFi token, as well as Ethereum’s DeFi blue chips, highlights a structural problem with governance token value accumulation.
Solana is undoubtedly the leader in the DePIN space, with more than 80% of major DePIN projects being built on Solana. We can also conclude that all emerging areas (DePIN, Memecoins, Consumer) are being developed on Solana, while Ethereum remains the leader in the space for 2020-21 (Money Markets, Yield Farming).
Advice for app creators
The larger the fund, the less you should listen to them. They have an incentive to fund your product before you achieve product-market fit. Travis from Uber does a great job explaining why you shouldn’t listen to big VCs. While it’s certainly profitable to pursue top-tier VCs and high-credibility valuations, you don’t necessarily need big VCs to get started. Especially before you’re at PMF, this approach can lead to valuation burdens, locking you into a cycle of needing to continually raise money and launch at higher FDVs. Poor discovery at launch makes it harder to build a truly distributed community around your project.
1. Fundraising - Smaller scale. More community-oriented.
Raise money from a syndicate of angel investors through platforms like Echo. It’s underrated: you trade valuation for distribution, then play to strength. Find relevant founders and KOLs and make a concerted effort to get them on board. This way you can build an early evangelist community/network of high-quality builders and influencers who can fully support you. Prioritize community over 2/3 stream VC. Hats off 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 is more aligned with your vision. Leverage Superteam for all your startup needs; it’s a cheat sheet.
2. Consumer-oriented - Embrace speculation and attract attention.
Attention Theory: Jupiter has achieved $8 billion in FDV on the public market, providing strong evidence that the market has begun to value frontends and aggregators. The best part? They are not funded by any venture capital firms and are still the largest application in the entire cryptocurrency space.
The rise of application-focused VCs: Yes, when VCs see billion-dollar exits, they will likely follow the same infrastructure strategy to develop consumer applications. We have already seen many applications reach $100 million in annual revenue.
Summary (too long to read):
Stop believing the VC infrastructure narrative.
The time has come for liquid funds to flourish.
Built for consumers. Embracing speculation. Chasing yield.
Solana is the best place to experiment due to its low startup costs.
