The shortsightedness and long pain of VC: Why excessive betting on public chains has plunged the encryption world into a "hollow nest" crisis?

Original title: Are VCs Limiting Crypto’s Future?

Original author: Anthony DeMartino

Original text compiled by: Shenchao TechFlow

Over-investment in public chains

Over the past two years, crypto venture capital has overwhelmingly prioritized investments in public chains over other protocols. This shift has led to a surge in new Layer 1 (L1) and Layer 2 (L2) networks, but has left the ecosystem lacking in high-quality protocols.

From a financial perspective, this strategy has yielded significant returns, as the market capitalization of many chains far exceeds their total locked value (TVL). In contrast, the valuation of leading protocols struggles to even reach 20% of their TVL.

bottleneck of basic services

This over-investment has created bottlenecks for other infrastructure service providers.

Specifically, the capabilities for cross-chain bridges, wallets, oracles, and trading platform integrations, as well as the ability to attract top stablecoins and protocols, have lagged behind. As a result, new chains often rely on secondary alternatives, thereby increasing friction for developers and users.

Currently, FireBlocks is the only scalable institutional wallet, so the lack of integration makes it difficult to attract institutional capital.

This issue will become more severe when the new public chain is not EVM compatible, as the delivery time from FireBlocks will be longer.

This issue is particularly prominent for chains that use the MOVE language, where the lack of institutional support is evident.

Top cross-chain bridges like Layer Zero also face the same challenges. A top bridge that can provide reassurance to both institutions and users is crucial for attracting capital and assets from other chains.

Due to the significant and growing backlog of transactions on top-tier cross-chain bridges, new chains must either use weaker alternatives or pay high fees to increase their priority. Some chains are willing to pay more to speed up transaction times, while chains with less funding have to resort to secondary cross-chain bridges, which will limit their growth potential.

issues regarding the protocol

The issue is particularly serious when it comes to protocols.

Some top new protocols, such as ETHENA and Kamino, have a TVL that is 5 to 20 times that of many new chains, but their valuations are comparatively modest.

This has led to insufficient investment in available protocols, resulting in a significant shortage.

To address this issue, the foundation of the public chain is forced to incubate amateur teams, which often merely replicate existing codebases rather than build robust, battle-tested solutions. This introduces significant risks in two main areas:

Attracting Capital: Protocols developed by underfunded teams struggle to gain credibility, investor support, and TVL.

Security and Stability: It is easy to replicate existing protocols like AAVE, but effectively operating it and ensuring the safety of user funds requires experience and expertise.

currency market crisis

The money market (Money Market)) is the lifeblood of any top public chain. However, entrusting these critical protocols to inexperienced teams undermines the usability and trust of these chains.

Although anyone can use ChatGPT to replicate AAVE’s code, successfully running a lending protocol requires deep knowledge of risk management.

A major oversight of many of these copycat versions is the lack of external risk managers (such as Chaos Labs), which are crucial to AAVE’s unparalleled safety record.

Simply copying the code without implementing the same risk controls will doom these protocols to fail.

It has been proven that during this period, we have seen several new currency market protocols come under attack.

Furthermore, when the foundation of a public chain must fund the protocol development itself, it means that the interest of external investors diminishes. Due to the lack of financial backers supporting the new protocol, it is difficult for them to attract significant LPs in the early stages, which is crucial for success.

DEX Predicament

Although the importance of decentralized trading platforms like (DEX) is not as significant as that of currency markets, their absence or poor quality can hinder the success of public chains. Both spot and perpetual contract DEXs struggle to attract capital for the following reasons:

· Lack of Skilled Teams: Many of these trading platforms are run by inexperienced teams operating replicas.

· Slippage and Poor UI/UX: The lack of a well-designed interface and deep liquidity prevents liquidity providers (LP) from participating.

The result is a poor trading experience, large slippage, slow TVL growth, and a weakening of the overall ecosystem.

Change Incentive Structure

Despite these challenges, economic incentives still favor investing in new L1 and L2, rather than protocols.

There are three ways to address this imbalance:

· The valuation of the protocol must increase: The market needs to reflect the actual value and utility of top protocols.

· L1/L2 investment must be reduced: If the valuation of the chain declines, capital allocation will naturally shift towards the protocol.

· Protocols becoming their own chains: This trend began with the recent actions of HyperLiquid and Uniswap.

Although it is obvious that the valuations between protocols and chains need to converge, whether a protocol should become a chain is less clear.

This trend has started to emerge, partly in response to the imbalance in valuations. Not only do the top protocols attract a TVL that exceeds most new chains, but they also receive exponentially increasing fees, yet they still have not garnered favor from VCs.

Although creating an outstanding protocol is complex and rare, establishing a new chain has become increasingly simple and relies more on the quality of the marketing team rather than the skills of the developers.

In addition, these teams may become distracted by building low-value technologies to boost their valuations, thereby neglecting the construction of the protocol layer.

If this trend is driven by external forces, it will only exacerbate the lack of quality in the agreements and perpetuate this cycle.

The key question is whether the VC will recognize and correct this imbalance before it is too late.

The future of the industry is in jeopardy.

If these issues are not resolved, the entire cryptocurrency industry will face the risk of stagnation.

Without a strong and well-funded protocol, new chains will struggle to provide the seamless user experience needed for mainstream adoption.

Institutional players who quickly enter the field will be forced to retreat or fund their own protocols, thereby pushing the industry to become more centralized.

Ultimately, VCs need to realign their investment priorities to break the stagnation, or the future of cryptocurrency will be in jeopardy.

—Anthony DeMartino, CEO and Founder of Trident Digital, GP of Istari Ventures.

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