Original author: Joel John
Original translation: AididiaoJP, Foresight News
The crypto industry has gradually begun to avoid discussing how grand the narrative is, and instead focus on the sustainability of the economic model. The reason is simple: when institutional funds begin to get involved in the crypto field, economic fundamentals will become extremely important, and crypto entrepreneurs need to reposition themselves in a timely manner.
The crypto industry has passed its infancy and is entering a new phase where the revenue base determines the success or failure of a project.
Humans are shaped by and made of emotions, especially nostalgia, and this attachment to the old normal makes us susceptible to resistance to technological change. Let's call it "mental inertia": the inability to break free from old thinking patterns. When the basic logic of the industry changes, early adopters always cling to the old ways. When the electric light came out, some people lamented that oil lamps were better; in 1976, Bill Gates had to write an open letter to geeks who were dissatisfied with his development of paid software.
Today, the crypto space is experiencing its own moment of mental inertia.
In my spare time, I always think about how the industry will evolve. Now the dream of "Summer of DeFi" has appeared, and Robinhood has issued stocks on the blockchain.
When the industry crosses the chasm, how should founders and capital allocators act? When marginal Internet users begin to use these tools, how will the core narrative of encryption evolve? This article attempts to explain: how to generate monetary premiums by distilling economic activities into compelling narratives.
Let’s dive in.
The traditional routines of the cryptocurrency circle have become ineffective
Venture capital can be traced back to the whaling era in the 19th century. Capitalists invested money to purchase ships, hire crews and equipment, and a successful voyage usually brought a tenfold return. But this meant that most expeditions ended in failure, either due to bad weather, the ship sinking, or even crew mutiny, but as long as one success could bring a lot of rewards.
The same is true of venture capital today: as long as there is one superstar in the portfolio, it doesn’t matter if most startups fail.
The commonality between the whaling era and the app explosion in the late 2000s is market size. Whaling is feasible as long as the market is large enough; app development is possible as long as the user base is large enough to form a network effect. In both cases, the density of potential users creates a market size large enough to support high returns.
In contrast, the current L2 ecosystem is dividing a small and increasingly tense market. Without volatility or new wealth effects (such as meme assets on Solana), users lack the motivation to cross chains. This is like going from North America to Australia to hunt whales. The lack of economic output is directly reflected in the prices of these tokens.
The perspective for understanding this phenomenon is through "protocol socialism": protocols subsidize open source applications through grants, even if they have no users or economic output. The benchmark for such grants is often social affinity or technical fit, which turns into a "popularity contest" funded by token heat rather than an efficient market.
In 2021, when liquidity is plentiful, it won’t matter whether the token generates enough fees, whether most of the users are robots, or even whether there are any apps. People are betting on the hypothetical probability that the protocol will attract a large number of users, just like being able to buy shares in Android or Linux before it takes off.
The problem is that in the history of open source innovation, tying capital incentives to forkable code has rarely been successful. Companies such as Amazon, IBM, Lenovo, Google, and Microsoft directly incentivize developers to contribute to open source. In 2023, Oracle was the main contributor to Linux kernel changes. Why do for-profit organizations invest in these operating systems? The answer is obvious:
They use these foundations to build profitable products. AWS relies partly on Linux server architecture to generate tens of billions of dollars in revenue; Google's open source Android strategy has attracted Samsung, Huawei and other manufacturers to jointly build its dominant mobile ecosystem.
These operating systems have network effects that make them worth investing in. Over the past three decades, the scale of economic activity supported by their user base has formed a moat of influence.
Compare with the current L1 ecosystem: DeFillama data shows that among the more than 300 existing L1 and L2, only 7 chains have daily fees exceeding $200,000, and only 10 ecosystems have TVL exceeding $1 billion. For developers, building on most L2s is like opening a store in the desert, with scarce liquidity and unstable foundations. Unless you throw money around, users have no reason to come. Ironically, most applications are doing this under pressure from grants, incentives, and airdrops. Developers are not competing for a share of the protocol fees, which are precisely a symbol of the activity of the protocol.
In this environment, economic output becomes secondary, and gimmicks and performances are more eye-catching. Projects do not need to be truly profitable, they just need to appear to be under construction. As long as someone buys the token, this logic holds true. In Dubai, I often wonder why there are drone shows or taxi ads for tokens. Do CMOs really expect users to emerge from this desert nest? Why are so many founders flocking to the "KOL wheel"?
The answer lies in the bridge between attention and capital injection in Web3. Attract enough eyeballs and create enough FOMO (fear of missing out), and there will be a chance to get a high valuation.
All economic activities stem from attention. If you can't keep attracting attention, you can't convince others to talk, date, cooperate or trade. But when attention becomes the only pursuit, the cost is also obvious. In the current era of AI-generated content, L2 uses the old script. Top VC endorsements, big exchanges listing coins, random airdrops and fake TVL games are no longer effective. If everyone repeats the same routine, no one can stand out. This is the cruel reality that the crypto industry is gradually awakening to.
In 2017, even with a lack of users, development based on Ethereum was still feasible because the underlying asset ETH could soar 200 times in a year. In 2023, Solana reproduced a similar wealth effect, with its underlying assets rebounding about 20 times from the bottom and spawning a series of meme asset crazes.
When investors and founders are enthusiastic, the new wealth effect can sustain crypto open source innovation. But in the past few quarters, this logic has reversed: individual angel investments have decreased, founders' own funds have difficulty surviving the financing winter, and large financing cases have dropped sharply.
The consequences of lagging adoption are directly reflected in the price-to-sales (P/S) ratio of major networks. The lower this number is, the healthier it is. As shown in the Aethir case below, the P/S ratio decreases as revenue grows. But this is not the case for most networks, where new token issuance maintains valuation while revenue stagnates or declines.
The table below selects a sample of networks built in recent years, and the data reflects economic reality. The P/S ratio of Optimism and Arbitrum remains at a more sustainable 40-60 times, while some networks have this value as high as 1000 times.
So, where is the way forward?
Income replaces cognitive narrative
I was fortunate to be involved in several crypto data products early on. Two of them were the most influential:
Nansen: The first platform to use AI to tag wallets and show where funds are flowing
Kaito: The first tool to use AI to track the influence of crypto Twitter product volume and protocol creators
The timing of their release is intriguing. Nansen was born in the middle of the NFT and DeFi craze, when people were eager to track the movements of whales. I still use its stablecoin index to measure Web3 risk appetite. Kaito was released after the Bitcoin ETF craze in Q2 2024. At this time, the flow of funds is no longer critical, and public opinion manipulation becomes the core. During the period of shrinking on-chain transactions, it quantifies attention distribution.
Kaito has become a benchmark for measuring attention flow, completely changing the logic of crypto marketing. The era of creating value through bots or fake indicators is over.
Looking back, cognition drives value discovery, but it cannot sustain growth. Most of the "hot" projects in 2024 have plummeted by 90%. On the other hand, those applications that have been steadily developing for several years can be divided into two categories: vertical segmented applications with native tokens, and centralized applications without native tokens. They all follow the traditional path of product-market fit (PMF).
Take the TVL evolution of Aave and Maple Finance as an example. TokenTerminal data shows that Aave has spent a total of US$230 million to build the current lending scale of US$16 billion; Maple has spent US$30 million to build a lending scale of US$1.2 billion. Although the current returns of the two are similar (P/S ratio is about 40 times), the volatility of returns is significantly different. Aave invested heavily in building a capital moat in the early stage, while Maple focused on the institutional lending market segment. This is not a judgment of which is better, but it clearly shows the great differentiation in the crypto field: on one end is the protocol that invested heavily in building capital barriers in the early stage, and on the other end is the product that deeply cultivates the vertical market.
Maple's Dune Dashboard
Similar differentiation also occurs between Phantom and Metamask wallets. According to DeFiLLama data, Metamask has generated a total of $135 million in fees since April 2023, while Phantom has generated $422 million in revenue since April 2024. Although Solana's meme coin ecosystem is larger, this points to a broader trend in Web3. Metamask, as an old product launched in 2018, has unrivaled brand recognition; while Phantom, as a latecomer, has received rich rewards for its precise layout of the Solana ecosystem and excellent products.
Axiom has taken this phenomenon to the extreme. Since February this year, the product has generated a total of $140 million in fees, with $1.8 million yesterday alone. Last year, most of the application layer revenue came from trading interface products. They are not obsessed with "decentralization" performances, but directly hit the essential needs of users. Whether it can be sustained remains to be seen, but when the product generates revenue of about $200 million in half a year, "whether it needs to be sustained" becomes a problem.
To believe that crypto will be limited to gambling, or that tokens will not exist in the future, is like believing that the US GDP will be concentrated in Las Vegas, or that the Internet is only about pornography. Blockchain is essentially a financial track, and as long as products can use these tracks to facilitate economic transactions in segmented and disordered markets, value will be generated. The Aethir protocol perfectly illustrates this point.
When the AI boom broke out last year, there was a shortage of high-end GPU rentals. Aethir has built a GPU computing power market, and its customers also include the gaming industry. For data center operators, Aethir provides a stable source of income. As of now, Aethir has accumulated revenue of approximately US$78 million since the end of last year and has made a profit of more than US$9 million. Is it "hot" on crypto Twitter? Not necessarily. But its economic model is sustainable, despite the lower token price. This deviation from price and economic fundamentals defines the "vibecession" in the crypto field, with protocols with few users on one end and a few products with surging revenues but not reflected in token prices on the other.
The Imitation Game
The movie "The Imitation Game" tells the story of Alan Turing's cracking of the cipher machine. There is a memorable scene: after the Allies cracked the code, they had to restrain the urge to act immediately, because premature reaction would expose the fact of cracking the code. The same is true for market operation.
Startups are essentially a cognitive game. You are always selling the probability that the future value of the business will exceed the current fundamentals. When the probability of improving business fundamentals increases, the equity value increases accordingly. This is why signs of war push up Palantir's stock price, or why Tesla's stock soared when Trump was elected.
But the cognitive game can also work in reverse. Failure to effectively communicate progress will be reflected in prices. This "communication gap" is creating new investment opportunities.
This is the era of great differentiation in crypto: assets with income and PMF will crush those without foundations; founders can develop applications based on mature protocols without issuing coins; hedge funds will strictly examine the economic models of underlying protocols, because listing coins on exchanges will no longer support high valuations.
The gradual maturity of the market will pave the way for the next wave of capital inflow, and the traditional equity market has begun to favor crypto-native assets. The current assets present a barbell structure, with meme assets such as fartcoin on one end and strong projects such as Morpho and Maple on the other. Ironically, both attract institutional attention.
Protocols like Aave that build moats will continue to survive, but where do new project founders go from here? The handwriting on the wall has already pointed the way:
Issuing coins may no longer be ideal. More and more trading interface projects without VC support have achieved millions of dollars in revenue
Existing tokens will be strictly scrutinized by traditional capital, resulting in a reduction in investable assets and a crowded trading environment.
Mergers and acquisitions of listed companies will become more frequent, bringing new capital to the crypto space beyond token holders and venture capital
These trends are not new. Arthur of DeFiance and Noah of Theia Capital have long turned to income-oriented investing. What’s new is that more traditional funds are getting involved in crypto. For founders, this means that focusing on niche markets and extracting value from small user bases can bring huge profits because there are pools of funds waiting to acquire them. This expansion of capital sources may be the most optimistic development in the industry in recent years.
The question that remains unanswered is: Can we break free from our ruts and deal with this shift with a clear mind? As with many key questions in life, only time will tell.
