“They’re playing the game of technological innovation, not product-market fit.”

By Hannah Miller and Muyao Shen

Compiled by: Luffy, Foresight News

As funding for the cryptocurrency industry takes off again, venture capitalists are turning back to crypto startups founded by professors.

Companies like Sahara, CheckSig and NEBRA were all founded by academics and have raised new funds in the past two months. Among the projects known in the industry as "professor coins," two stand out. EigenLayer, founded by former University of Washington associate professor Sreeram Kannan, raised $100 million from Andreessen Horowitz in February, while Babylon, founded by Stanford professor David Tse, received $18 million in December. Both projects focus on a growing area of cryptocurrency, "re-staking," which allows new projects and blockchains to get a head start by borrowing the security infrastructure and resources of Ethereum or Bitcoin.

Some of the techniques people are using to generate yield during cryptocurrency cycles “came from David and Sreeram’s research,” said Riad Wahby, a professor of engineering at Carnegie Mellon University and CEO of cryptocurrency startup Cubist. “They worked on a lot of this re-staking technology. I mean, it’s kind of their brainchild. I think more and more of this technology is going to come from research.”

Kannan worked with Tse as a postdoc at UC Berkeley and Stanford University for two years, according to his bio on the University of Washington's Information Theory Laboratory webpage. The two co-authored 23 academic papers between 2015 and 2023, publishing extensively on blockchain and the concepts their respective startups rely on, according to computer science literature website DBLP. Neither Kannan nor Tse responded to requests for comment.

Re-pledge favored by capital

Global venture capital activity in cryptocurrency startups. Source: PitchBook

Kate Laurence, CEO of Bloccelerate VC, says her VC firm often sees academic background as a disadvantage when deciding which founders to back. “Professors tend to focus on academics and theory, rather than on practical and business applications,” she says.

But Kannan’s work on restaking and his close relationship with Tse led Bloccelerate to invest first in EigenLayer and then in Babylon. “They were working together to solve the same problem, but EigenLayer was addressing a different market,” she said.

The process of “re-staking” is a reference to the way Ethereum works. In Ethereum, tokens are “staked” into the network to help validate transactions on the blockchain. For new projects and blockchains running the same mechanism, building their own staking systems can be too slow and costly due to a lack of user activity and funding. Re-staking allows new players to get a head start by borrowing Ethereum’s staking power.

Babylon takes a similar approach, but focuses on Bitcoin. The task is more complicated because Bitcoin uses a different mechanism (proof of work) to verify transactions. If successful, the Babylon platform will also solve a long-standing problem for Bitcoin holders: lack of yield.

Vance Spencer, whose firm Framework Ventures has also invested in Babylon, said it makes sense that such advanced technology would come from a university. “There are so few people who can build blockchains,” he said, “and they’re likely to come from these research institutions.”

What controversies exist?

Emin Gun Sirer, a former associate professor of computer science at Cornell University and CEO of Ava Labs, which developed the Avalanche blockchain, said that the road ahead is often not smooth for crypto projects led by professors, and most projects end in failure.

“They were playing the game of technological innovation,” Sirer said, “not product-market fit.”

DefiLlama said that while the EigenLayer platform has attracted more than $15 billion in crypto assets, it has also encountered setbacks, which critics believe is a misunderstanding of the broader crypto asset market.

Although Kannan told Bloomberg in February that they had no plans to issue tokens, EigenLayer released the issuance plan of Eigen tokens in April and began distributing them on Friday. Eigen's total supply is about 1.67 billion tokens, with more than half designated for investors and early contributors, which caused strong dissatisfaction in the community after being disclosed. This distribution method has triggered criticism that the EigenLayer team and initial supporters have enriched themselves, and also raised users' concerns about potential selling pressure. The decision to make the tokens non-transferable at the time of issuance also disappointed some early users who invested heavily in EigenLayer.

The Eigen Foundation, which oversees the token initiative, said in a blog post that by limiting token transfers, it can allow more time to improve the project’s decentralization and enhance key features associated with the token.

The total value of cryptocurrency on EigenLayer has exceeded $15 billion. Source: DefiLlama

Ayesha Kiani, COO of cryptocurrency hedge fund MNNC Group and adjunct professor at New York University, pushed back against the criticism surrounding EigenLayer, arguing that the startup is more than just another “get-rich-quick scam.” She said Kannan and Tse are working to improve the crypto industry.

“They’ve been criticized for lacking decentralization or being just a money-making ploy,” she said. “In this industry, we’re so used to free incentives now that if things don’t work out, we basically have to abandon the project.”