Forward the Original Title‘Opinion: Ethereum VCs Are Suffering from a Disease Called ‘EBOLA’

“Let your opponents speak, and they’ll create a story that benefits them.”

In a recent episode of “The Chopping Block“ podcast, Dragonfly’s Haseeb and Tom made several points during a debate about Ethereum versus Solana:

Solana’s VC ecosystem is incomplete.

The amount of capital on Solana is far lower than on Ethereum. Outside of Memecoins, there are almost no successful projects within the Solana ecosystem.

Solana should be viewed as either a Memecoin chain or a DePIN chain. With a TVL of only $5 billion, Solana’s market potential is limited.

Building on Ethereum is like “starting a business” in the United States, where enterprise value (EV) tends to be higher.

Solana has a higher Gini coefficient, indicating more severe inequality within its ecosystem.

I will review these points and explore the structural issues that drive large VCs to focus on infrastructure investments. Finally, we will share some tactical advice on how to avoid contracting EBOLA.

Ethereum VCs Are Suffering from EBOLA

As Lily Liu described, EBOLA (EVM Bags Over Logic Affliction) is a widespread disease among Ethereum venture capital firms, particularly affecting the larger, Tier 1 firms.

Take a large fund like Dragonfly, for example. In 2022, this fund raised $650 million from top-tier LPs (Limited Partners) like Tiger Global, KKR, and Sequoia. Their investment strategy might heavily favor infrastructure projects. Dragonfly may be under pressure to deploy this capital within a certain timeframe (say, two years), which pushes them to back larger funding rounds and offer higher valuations. If they fail to do this, they might not meet their capital deployment targets and would have to return the capital to the LPs. Think about the economic incentives for GPs (General Partners): they earn an annual management fee (2% of the capital raised) and a share of the profits (20% of the returns) upon exit. This motivates funds to raise even more capital.

Given that infrastructure projects (like Rollup/interoperability/re-staking) often have FDVs exceeding $1 billion, and billions of dollars exited from infrastructure in 2021-2022, deploying capital into infrastructure seems like the best choice for large VCs. But this narrative is largely driven by these VCs themselves, supported by Silicon Valley’s capital and legitimacy machinery.

Here’s the core of the infrastructure narrative:

Currency networks will thrive within information networks. That’s why it’s called Web3.

If you had the chance to “invest” in TCP/IP or HTTP in the 1990s, you wouldn’t miss it.

Blockchain infrastructure is this generation’s “TCP/IP” investment opportunity.

It’s a compelling story. But the question is, by 2024, when we focus on the next EVM L2 designed to scale TPS for the massive NFT market, have we strayed from the original story of TCP/IP becoming the global currency? Or is this rationale driven by the interests of the major crypto funds (like Paradigm/Polychain/a16z crypto)?

EBOLA Is Infecting Founders and Limited Partners

The buzz around Layer 2 (L2) solutions has driven up project valuations, prompting many EVM-based applications to announce L2 launches in pursuit of higher valuations. The community’s obsession with EVM infrastructure has reached such extremes that even leading consumer product founders, like those behind Pudgy Penguins, feel the need to launch an L2.

Take Ethereum’s EigenLayer as an example: it has raised $171 million but has yet to make any significant impact or generate revenue. This will, however, enrich some venture capitalists and insiders who hold 55% of the tokens. While criticism of low-circulation, high-FDV projects is common, what about low-impact, high-FDV projects?

The infrastructure bubble is beginning to burst, with many tokens from infrastructure projects in this cycle now trading below their private round valuations. With major unlocks expected in the next 6-12 months, venture capital firms will be under pressure, turning this into a race to exit first.

Retail investors’ anti-VC sentiment has a basis; they perceive that well-funded VCs lead to higher FDVs and lower circulating supply in infrastructure projects.

Poor Advice from VCs

EBOLA also affects promising apps and protocols, as VCs push founders to build on chains where their vision can’t be fully realized. Due to its performance bottlenecks and sky-high gas fees, many social apps, consumer-facing apps, or high-frequency DeFi apps can never succeed on Ethereum’s mainnet. Yet, despite having alternatives, these apps are built on Ethereum, leading to many that are conceptually promising but never progress beyond “proof of concept” because the infrastructure they depend on is already maxed out. Examples abound, from Enzyme Finance (2017) to recent SocialFi apps like Friend Tech, Fantasy Top, and Quail Finance (2024).

Consider Aave’s Lens Protocol, one of the largest of its kind. Thanks to a large grant, Aave raised $15 million and launched on Polygon (another grant now supports its zkSync launch). However, the fragmentation caused by the infrastructure’s “shell game” led to Lens Protocol’s failure, which might otherwise have become a foundational social graph.

Recently, Story Protocol secured $140 million in funding, led by a16z, to build a “blockchain for intellectual property.” Despite being in a tight spot, top VCs are doubling down on the infrastructure narrative. Observant readers may notice a shift: the narrative has evolved from “infrastructure” to “application-specific infrastructure,” often relying on untested EVM stacks (like OP) rather than the tried-and-true Cosmos SDK.

A Venture Capital Market in Structural Decline

The current venture capital market struggles to allocate capital efficiently. Crypto VCs are managing billions of dollars that need to be invested in specific projects within the next 24 months.

Meanwhile, liquid capital allocators are highly sensitive to global opportunity costs, ranging from “risk-free” treasury bills to holding crypto assets. This means that liquid investors are likely to be more efficient at pricing than venture capitalists.

The current market structure looks like this:

Public Market: There is a shortage of capital and an oversupply of high-quality projects.

Private Market: There is an oversupply of capital and a shortage of high-quality projects.

The lack of capital in public markets leads to poor price discovery, as seen in this year’s token listings. High FDVs have been a significant issue in the first half of 2024. For instance, the total FDV of all tokens issued in the first six months of 2024 is nearly $100 billion, representing half the total market cap of all tokens ranked 10th to 100th.

The private venture capital market has already contracted. Haseeb has acknowledged this; for some reason, these funds are smaller than their previous iterations. If they could, Paradigm would raise a fund of the same size as before.

The structural decline in the venture capital market is not just a cryptocurrency problem.

The crypto market needs more liquid capital to act as structural buyers in the public market and address the issues stemming from the decline in the venture capital market.

How to Prevent EBOLA

Enough talk; let’s focus on potential solutions and what founders and investors need to do.

For Investors: Shift towards liquidity strategies by embracing the public market rather than resisting it.

Liquid funds primarily invest in or hold liquid, publicly traded tokens. As DeFiance’s Arthur pointed out, an efficient liquid crypto market needs active fundamental investors, which suggests plenty of growth potential for liquid crypto funds. Note that we’re specifically discussing “spot” liquid funds here, as leveraged liquid funds (or hedge funds) performed poorly in the last cycle.

Seven years ago, Multicoin’s Tushar and Kyle recognized this opportunity when they founded Multicoin Capital, believing that liquid funds could offer the best of both worlds: the benefits of venture capital combined with public market liquidity.

This approach has two key advantages:

Public market liquidity allows for flexible exits based on changes in investment theses or strategies.

Investing in competing protocols helps balance risk. Typically, spotting a trend is easier than picking winners within it, so liquid funds can diversify by investing in multiple tokens within a clear trend.

While traditional venture capital funds offer more than just capital, liquid funds can still provide various forms of support. For example, liquidity support can help DeFi protocols overcome the cold start problem. Additionally, liquid funds can play an active role in protocol development by participating in governance and offering strategic advice on the direction of the protocol or product.

Unlike Ethereum, where most DePIN projects have focused, Solana’s funding amounts in 2023-2024 have been relatively small. Rumor has it that almost all major first-round funding amounts were below $5 million. Key investors include Frictionless Capital, 6MV, Multicoin, Anagram, and Big Brain Holdings, along with Colosseum, which organizes Solana Hackathons and has launched a $60 million fund to support Solana ecosystem projects.

Opportunities for Solana Liquid Funds: Now is the time to leverage liquidity strategies for profit. Unlike 2023, Solana’s ecosystem now has many liquid tokens, making it easy to launch liquid funds to get an early bid on these tokens. On Solana, there are numerous tokens with an FDV of under $20 million, each with unique themes such as MetaDAO, ORE, SEND, and UpRock. Solana DEXs have been battle-tested, and their trading volumes now surpass those of Ethereum. The ecosystem also boasts vibrant token launchpads and tools like Jupiter LFG, Meteora Alpha Vault, Streamflow, and Armada.

As Solana’s liquidity market continues to evolve, liquid funds can become a contrarian bet for individuals (looking for angel investments) and small institutions. Large institutions should start targeting increasingly sizable liquid funds.

For Founders: Choose an ecosystem with lower startup costs until you find product-market fit.

As Naval Ravikant said, stay small until you find a viable path. Entrepreneurship is about finding a scalable and repeatable business model. So, your main task is to search, and you should remain very small and low-cost until you discover a repeatable and scalable business model.

Solana’s Low Startup Costs

As Tarun Chitra pointed out, startup costs on Ethereum are much higher than on Solana. To achieve sufficient novelty and ensure a strong valuation, projects on Ethereum often require significant infrastructure development (e.g., the RollApp craze). Infrastructure development inherently demands more resources because it’s largely research-driven, requiring a research and development team, plus a business development team to persuade a small number of Ethereum applications to integrate.

In contrast, applications on Solana don’t need to worry much about infrastructure; it’s managed by reliable Solana infrastructure startups like Helius, Jito, Triton, or protocol integration. Generally, applications can launch with minimal funding, as seen with Uniswap, Pump.fun, and Polymarket.

Pump.fun is a prime example of Solana’s low transaction fees unlocking the theory of the “fat app chain.” Pump.fun has outperformed Solana in revenue over the past 30 days and even surpassed Ethereum in daily revenue on some days. Pump.fun initially launched on Blast and Base but quickly realized that Solana’s capital efficiency is unmatched. Pump.fun’s Alon said that both Solana and Pump.fun focus on reducing costs and lowering entry barriers.

As Mert mentioned, Solana is the best choice for startups because it offers community/ecosystem support and scalable infrastructure. With the success of consumer applications like Pump.fun, we’re already seeing signs that new entrepreneurs, especially consumer product founders, are gravitating toward Solana.

Solana Is More Than Just Memecoins

“Solana is only good for Memecoins” has been a core argument among Ethereum maximalists in recent months. Yes, Memecoins have dominated activity on Solana, with Pump.fun at the center. Many might claim that DeFi on Solana is dead and that Solana blue chips aren’t performing as well as Orca and Solend, but the data tells a different story:

Solana’s DEX trading volume is on par with Ethereum, and most of the top 5 trading pairs on Jupiter by 7-day trading volume are not Memecoins. In fact, Memecoin activity accounts for only about 25% of DEX trading volume on Solana (as of August 12th), and Pump.fun accounts for only 3.5% of Solana’s daily trading volume.

Solana’s TVL ($4.8 billion) is only one-tenth of Ethereum’s ($48 billion) due to Ethereum’s higher market cap, deeper DeFi penetration, and older protocols having higher capital leverage. However, this won’t always limit the market size for new projects. Two prime examples are Kamino Lend, which grew to $1.4 billion in just four months, and PayPal’s stablecoin on Solana, which reached $450 million in just three months, surpassing the $360 million on Ethereum, where it had existed for a year.

As more EVM blue chips deploy on Solana, it’s only a matter of time before TVL increases.

While some may argue that Solana DeFi tokens have seen significant price declines, the same is true for Ethereum’s DeFi blue chips, which is a structural issue with the value accumulation of governance tokens.

Solana is undoubtedly the leader in the DePIN field, with over 80% of major DePIN projects built on Solana. We can also conclude that all emerging primitives (DePIN, Memecoins, consumer applications) are being developed on Solana, while Ethereum continues to dominate the older primitives of 2020-2021 (money markets, liquidity mining).

Advice for App Creators

The bigger the fund, the less you should heed their advice. Before you achieve product-market fit, large VCs will push you to raise money. Uber’s Travis made it clear why you shouldn’t rely on big venture capital. While it can be lucrative to chase after top VCs and high valuations, it’s not always necessary. Especially before you find product-market fit, raising money can burden you with high valuations, trapping you in a cycle of constantly needing to raise funds and launch with higher FDVs.

Tip 1: Raise Small, Community-Focused Funds

1. Use platforms like Echo to raise funds from angel investors. Echo is underrated, and you can connect with relevant founders and influencers (KOLs) to get them on board. This allows you to build a community/network of evangelists made up of high-quality builders and KOLs. Focus on building your community rather than seeking funding from 2nd or 3rd-tier VCs. Shout out to some Solana Angels like Santiago, Nom, Tarun, Joe McCann, Ansem, R89Capital, Mert, and Chad Dev.
3. Opt for accelerators like AllianceDAO (great for consumer projects) or Colosseum (a Solana-native fund) that align better with your vision and aren’t predatory. Utilize Superteam to cover all your startup needs.

Tip 2: For Consumer Projects: Embrace Speculation and Capture Attention

1. Attention is key: Jupiter achieved an $8 billion FDV in the public market, proving that the market values front-ends and aggregators. They didn’t receive any VC funding, yet they became one of the largest applications in the entire crypto space.
3. The rise of application-focused VCs: Yes, when VCs see multi-billion-dollar exits, they’re likely to apply the same strategy to consumer applications as they do to infrastructure. We’ve already seen many applications hit $100 million in ARR.

Conclusion

1. Stop buying into the infrastructure narrative sold by VCs;
2. The time is ripe for liquid funds to thrive;
3. Focus on building for consumers: embrace speculation and chase returns;
4. Solana is the best playground for experimentation due to its low startup costs.

Disclaimer:

1. This article is reprinted from [ForesightNews], Forward the Original Title‘Opinion: Ethereum VCs Are Suffering from a Disease Called ‘EBOLA’. All copyrights belong to the original author [Yash Agarwal]. If you have any objections to the reprint, please contact the Gate Learn team, and the team will process it promptly according to relevant procedures.
2. Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
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