The State of Crypto VC

Some insights for founders into the current state of crypto fundraising and some of my personal prediction on the future of crypto venture capital
👇 Setting the stage: It's tough out there

Fundraising is challenging because of upstream DPI and LP capital challenges.

Across the broader venture landscape funds are returning less dollars to LPs on the same timeframe of previous vintages. This in turn results in less dry capital to existing and new VCs which results in a tougher fundraising environment for founders.

New Blockchain Letter just dropped.

Three Big Trends in DeFi:
1️⃣ Consumer DeFi – fintech-grade UX meets onchain yields
2️⃣ Real World Assets (RWAs) – the bridge to TradFi capital
3️⃣ DeFi as Platforms – evolving from standalone apps to DeFi platforms

Let’s break it down 👇 Trend 1: Consumer DeFi 📱
Consumer grade crypto apps are coming.
Think fintech-like UX but crypto backends focused on…
💡 Opinionated discovery
📱 Mobile first
📈 Power-user features (e,g. multi-collateral leverage)
⚡ Seamless onchain interactions

Stablecoins represent a trillion dollar opportunity.

Over the next decade, digital dollars will come to define the world of finance.

Here's how we see the stablecoin landscape and where we seen opportunities today 👇

https://twitter.com/Ryan__Barney/status/1864713545235206354

While the world is no longer early to Bitcoin, we're still in the early innings of stablecoins with only 20-30 million monthly active users of stablecoins.

Over the course of the next decade, I expect this number to grow significantly as hundreds of millions of users interact with stablecoins – directly or indirectly – in their daily lives.

Great recent newsletter from @artemis__xyz about stablecoin activity.

Some takeaways that I thought were interesting 👇 The on and offramp space, once dominated by Moonpay continues to grow more competitive.

Recently, traditional large fintech Revolut has grown as a leading stablecoin onramp provider.

Thought provoking essay but I still stand in the fat app thesis camp.

While horizontal wallets certainly capture value today I think Applications will be better positioned than wallets in the future.

Applications will capture more value than horizontal wallets because:
1) Wallet fragmentation will happen. All large apps will launch their own wallets.
2) Every app in the future will be its own wallet capturing order flow and attention.
3) Crypto’s inevitable shift to mobile will favor applications over horizontal wallets. 1) All apps want to own the end user.

Wallets are increasingly commoditized and every sufficiently large app launches its own wallet - Uniswap, Coinbase, Magic Eden, Jupiter, etc.

I also disagree with the statement: “If an application increases its take rate, will users leave for a cheaper alternative?” Apps with retail users are sticky just like wallets are sticky.

The top applications all maintain healthy take rates - Uniswap, Magic Eden, Aave, Jupiter, Raydium.

The superpower of crypto is creating new assets and markets.

Now, I try to ask the question – how could this business become an exchange? For certain businesses it’s very clear, but for others, it requires some imagination.

Let’s talk about exchanges, and where to find them 👇 One of the most common and successful business models in crypto is the exchange model which is why we've seen so many companies and protocols eventually adopt the exchange business model.

https://x.com/masonnystrom/status/1813629598065910144

There are a few common crypto business models:
- Exchanges and marketplaces
- Transaction sequencing
- Asset managers

Let's dive into some examples 👇 Exchange Model
Subset 1) marketplace models – fee on transactions
- create a new asset and market (e.g. Polymarket, Perps)
- expand access to emerging asset (Coinbase and BTC)
- convenience fee (wallet swaps)
- SaaS enabled marketplaces – Proof marketplaces

Exchange subset 2): Liquidity servicing - build valuable pool of specialized liquidity and charge acces fee to end app (e.g. hooks) or match-maker fee (e.g. swaps)
- DEXs
- Lending

Lots of people on the timeline questioning token incentives and whether they're net-beneficial or net-negative.

Some thoughts 🧵

https://twitter.com/masonnystrom/status/1809687714599678080

When combined with new products, tokens – or the promise of tokens – have proven effective at alleviating the cold start problem.

But, networks that launch with a token from the jump, must find PMF in a shortened window amidst inorganic activity or otherwise these networks are just spending tokens for limited upside.

My friend and fellow investor, @howdai27 calls this the “hot start problem” where the presence of a token limits the window of time a startup has to find PMF and gain enough organic traction such that the startup can retain users/liquidity as token rewards diminish.

Over 2 million compressed NFTs have been minted in just a few weeks.

Enabled by @metaplex's new NFT compression standard (Bubblebum), Compressed NFTs offer greater scale to NFT minting and open up a new array of use cases for Solana NFTs. But what are compressed NFTs?

Normal Solana NFTs have metadata stored in on-chain accounts

Compressed NFTs group the state of many NFTs into a merkle tree and hash the merkle root on-chain with each leaf of the tree (e.g. NFT) verifiable on-chain while the metadata is offchain

Some thoughts on NFT marketplace defensibility and value capture
nystrom.substack.com/p/defensible-n… The magic of NFTs as an asset class is that the underlying assets are composable. But, this effortlessly destroys the moat of secondary trading liquidity that marketplaces have relied on to succeed.

Artists have earned over $5m in earnings on Sound Protocol.

Let’s take a brief look at the state of @soundxyz_ Protocol & Marketplace 🎧 🧵
sound.xyz Sound Protocol by the numbers:
•$10m in NFT volume (4.4m Primary and 5.7m Secondary)
• Minted over 80,000 music
• Over 400 talented artists
• Nearly 13,000 collectors

dune.com/nicoelzer/soun…

Today, the way in which protocols build demand is often dictated by two GTM approaches:
1) Network-driven Protocol GTM
2) Product-led Protocol GTM

Let's examine when each GTM strategy works best.
nystrom.substack.com/p/protocol-gtm… 1) Network-driven protocol GTM focuses on building a protocol with broad distribution and permissionless access, and then evangelizes others to build on top of the network.

Examples: Ethereum, Polygon, Livepeer, Metaplex, Lens, XMTP, Reservoir

Every so often, a new playbook for token distribution emerges:
• Liquidity Mining (e.g. Compound)
• Retroactive airdrops (e.g. Uniswap)
• Infra setup (e.g. Helium)

Blur created the next token playbook: Sequenced Airdrops

Here's what you need to know👇🏻variant.fund/articles/what-… Disclosure: We're not investors in Blur. But given our thesis on user ownership, we think the Blur case study holds interesting lessons for all crypto projects seeking to turn users into owners.

There's still massive latent demand for NFTs from large brands that people identify with and care about.

Nike's @dotSWOOSH NFT marketplace (still in beta) has seen ~300k Swoosh IDs minted and is onboarding thousands of users each week.

The first .Swoosh collection is coming👇🏻 A Swoosh ID is basically your username for the Nike .Swoosh platform.

The ID is non-transferable and the Swoosh platform also gives users a wallet when they claim their .Swoosh ID (managed by @BitGo).

Crypto offers a blank canvas for token distribution & cryptoeconomic models.

The abundance of tech innovation in crypto often means that disruptive innovations come from the implementation of new crypto economic models or distribution mechanisms.
variant.fund/articles/the-n… Each wave of crypto is dominated by new distribution mechanisms and cryptoeconomic models.

Let’s examine three of the newer emerging models: Contract Secured Revenue (CSR), NounishDAOs, and MEV Orderflow.

The story of the web is about connecting valuable information.

Web1 linked related pieces of info (hyperlinks).

Web2 connected relationships via social & interests graphs (Facebook & Reddit).

Web3 creates an ownership graph based on what we own & value
nystrom.substack.com/p/the-types-of… There are a variety of types of value graphs that have been leveraged to create social networks and platforms.
• Social graphs - Facebook and Instagram
• Interest graphs - Reddit, Pinterest
• Social & Experience graphs - Linkedin
• Knowledge/search graphs - Google

There are a variety of consumer crypto trends that are emerging (🌱) or continue to rapidly expand (🚀).

Let’s briefly examine six of these trends🧵

• Web3 loyalty
• Dynamic NFTs
• NFT licensing
• Phygital objects and infra
• Web3 social
• New marketplaces #1 Web3 loyalty

Web3 loyalty enables permissionless loyalty programs for cross brand collabs/benefits.

Some exciting examples:
New loyalty programs (LinksDAO)
Platforms (e.g. Passage, Hang)
DEXs for loyalty points
Cross brand loyalty tokens (e.g. class pass for loyalty).

Throughout the 21st century, the primary catalyst for new consumer behaviors has been novel social technologies: the Internet, mobile, social networks.

Blockchains and tokens will shape the next decade of consumer behavior 👇🏻 Broadly I categorize consumer behavior on a spectrum of "Skeuomorphic" to "Emergent".

• Skeuomorphic Behavior - resembling existing behavior, but changes consumption format or perception

• Emergent Behavior - closer to net new behavior changing both format & perception

Collectively, PFP projects possess the greatest market cap of any NFT category (~$12B).

The significant valuations often beg the question, how will these companies monetize their PFP collections?

The answer: the largest brands in the world monetize by merch & PFPs might too🧵 Some PFP projects have started to issue physical merchandise and goods like Cool Cats, Pudgy Penguins, Doodles collectibles, and Nouns Coffee.

Token incentives are a new form of customer acquisition cost (CAC). Each dollar of token incentives corresponds to a new customer or fees/revenue.

Projects should ensure their token acquisition cost (TAC) and token incentives to rev ratio is competitive within their market. Revenue per user should exceed TAC on some time basis. TAC ratios also differ by projects (lending vs DEXs).

Like all startups, its okay for your token acquisition cost (TAC) or $ of token incentives per $ of fees/revenue to be negative to obtain users.

Two important trends in the financialization of sports:

1. Sports betting's continued growth from favorable regulations.

2. NFT fantasy sports are one of the strongest web3 consumer applications.

Total Secondary Sales
• Sorare: $400m
• NBA Top Shot: $1B
• NFL All Day: $42m

https://twitter.com/Blockworks_/status/1567505459342458880

NFT fantasy sports is a game of collectors to die hard players.

Sorare card owners:
1 card: ~153k
5 cards: ~100k
10 cards: ~65k
25 cards: ~30k

With a variety of leagues by Sorare, there will be casual players to people who take it more seriously than their Yahoo fantasy league.