Author｜Richard Chen
Translated by | Odaily Golem
Original Title: By 2025, VCs Don't Want to Invest in Crypto-Native Projects Anymore
In 2025, cryptocurrency is embracing the "dawn of mainstream adoption". The US GENIUS Act has been signed into law, providing clear stablecoin regulation, and mainstream institutions are actively adopting cryptocurrency. Compared to the past 10 years, we win big!
As crypto technology crosses the chasm, early venture capitalists are beginning to see more crypto-adjacent projects, rather than just crypto-native projects. "Crypto-native" refers to projects built by "crypto experts" for "crypto experts", while "crypto-adjacent projects" are those using crypto technology in other larger traditional domains. This is the first time in my career I've witnessed such a transformation, and this article will discuss the key differences when building these two types of projects.
Projects Built for Crypto-Native Users
To date, the most successful crypto products have almost all been built for crypto-native users: Hyperliquid, Uniswap, Ethena, Aave, and so on. Like any subculture movement, crypto technology is so avant-garde that people outside the crypto-native bubble cannot "understand" it or become passionate daily active users. Only those crypto-native Degens fighting on the front lines have sufficient risk tolerance to personally test every new product and withstand challenges like hacker attacks and online fraud.
Most traditional Silicon Valley venture investment companies previously abandoned crypto-native projects because they believed the potential market size (TAM) of crypto-native users was too small. This was indeed true, as crypto technology was still in a very early stage of development. At the time, there were almost no on-chain applications, and the term "DeFi" was only proposed in a group chat in San Francisco in October 2018.
But entrepreneurs at the time had to and could only have confidence, praying that macro tailwinds would eventually arrive and significantly expand the potential market size (TAM) of crypto-native applications. Indeed, the DeFi summer of 2020 and the zero-interest rate era of 2021 rapidly inflated the market size of crypto-native applications. Overnight, every venture capitalist in Silicon Valley rushed into the cryptocurrency field due to FOMO, seeking advice from crypto VCs to make up for missed opportunities in the past four years.
However, from then until today, the TAM of crypto-native applications remains quite small compared to non-cryptocurrency markets. The number of crypto users on X might be at most only tens of thousands. Therefore, to achieve nine-digit annual recurring revenue (ARR), the average revenue per user (ARPU) must be very high. This leads to the following important fact:
The core of crypto-native applications is to build for heavy crypto users.
Every successful crypto-native product shows an extreme power-law distribution of user activity. Last month, the top 737 users (0.2% of total users) accounted for half of OpenSea's trading volume; the top 196 users (0.06% of total users) accounted for half of Polymarket's trading volume.
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As a crypto-native project founder, what should truly keep you up at night is how to retain your core users, not attract more new users. This goes against traditional Silicon Valley concepts, which focus on user growth, such as daily active users (DAU).
User retention has always been difficult in the crypto field. Core users are often purely profit-driven and responsive to incentive mechanisms. This makes it easy for emerging competitors to appear out of nowhere, simply by poaching a few of your core users and eating into your market share. Examples like Blur and OpenSea, Axiom and Photon, LetsBonk and Pump.fun all illustrate this fact.
All of this indicates that crypto-native products have far lower defensibility than Web 2, and everything is open-source and easily replicable. Crypto-native projects come and go, with few lasting beyond a cycle or even a few months. Founders often become wealthy after token generation events (TGE) and quietly exit the project to pursue angel investing as a retirement job.
The only secret to retaining core users is continuous product innovation, always staying one step ahead of competitors. After seven years, Uniswap has remained competitive because it continuously launches new zero-to-one product features that satisfy heavy users: V3 concentrated liquidity, followed by UniswapX, Unichain, and V4 hooks. Despite building a decentralized exchange (DEX) in the most crowded and competitive track in the crypto industry, it still stands out.
Building Crypto-Adjacent Applications
In the past, people have repeatedly tried to apply blockchain technology to larger real-world markets like supply chain management or inter-bank payments, but failed due to timing. Fortune 500 companies experimented with blockchain in their innovation labs but never seriously applied it at scale. Remember those popular slogans "blockchain is not Bitcoin" and "distributed ledger technology"?
Today, we see a 180-degree change in existing enterprises' attitude towards crypto. Large banks and enterprises are launching their own stablecoins. The regulatory clarity from the Trump administration has opened the "Overton window" for mainstream crypto adoption. Cryptocurrency is no longer the unregulated Wild West of finance.
In our careers, we will see crypto-adjacent projects for the first time outnumber crypto-native projects. This is well-reasoned, as the biggest achievements in the coming years will likely come from crypto-adjacent projects rather than crypto-native projects, because traditional financial market IPO sizes can be in the tens of billions of dollars, while crypto TGE sizes are only in the hundreds of millions to billions.
Examples of such projects include:
Fintech companies using stablecoins for cross-border payments;
Robotics companies using DePIN incentive mechanisms for data collection;
Consumer goods companies using zero-knowledge proof transport layer security protocol (zkTLS) to verify private data;
...
The common point is that crypto technology is treated as a function rather than a product.
In the crypto-adjacent industry, heavy users are still important, but their influence is no longer as significant. When crypto is merely a function, a project's success has less to do with crypto and more to do with whether the entrepreneurs are deep experts in the crypto-adjacent industry and understand what factors are critical. Let's take fintech as an example.
The core of fintech lies in acquiring distribution channels with good unit economics (CAC/LTV). Today, emerging crypto fintech startups are always worried that a more established non-crypto fintech company with broader distribution channels will use crypto technology as a feature, crushing them or driving up CAC, making them uncompetitive. Unlike crypto-native projects, they cannot save themselves by issuing a token that looks good in narrative trading.
Ironically, crypto payment has long been an unappealing category, but it was the perfect opportunity to establish crypto fintech companies and seize distribution channels before 2023. After Stripe acquired Bridge, we see crypto-native founders shifting from DeFi to payments, but they will inevitably be eliminated by former Revolut employees who are well-versed in fintech strategies.
How Should Crypto VCs Operate?
For crypto VCs, what does merging crypto enterprises mean? It's important not to perform adverse selection on founders that non-crypto VCs would abandon, as crypto VCs are often fools who lack deep understanding of non-crypto native industries. This adverse selection largely manifests in choosing crypto-native founders who have recently pivoted to merging crypto industries.
But the disturbing fact is that in the cryptocurrency field, there's often adverse selection of founders who couldn't succeed in Web 2.
Historically, a good way for crypto VC founders to arbitrage was to find talent outside Silicon Valley networks. They might not have impressive resumes (like Stanford, Stripe) or excel at VC pitches, but they deeply understand crypto-native culture and build passionate online communities. Hayden left Siemens' mechanical engineering department to create Uniswap by learning Vyper. Stani created Aave (originally ETHLend) while completing law school in Finland.
However, the founder prototype of a successful merged crypto project is entirely different from a crypto-native project founder. They are not the wild West financial cowboys who deeply understand crypto-native industry variables and can cultivate personal cult around themselves and their token network. Instead, they might be a more mature, business-minded founder from traditional industries with unique marketing strategies to acquire users. As the crypto industry matures, the next batch of successful founders will be similarly sophisticated.
Inspiration for Merged Crypto Project Entrepreneurs
The Telegram ICO in early 2018 perfectly illustrated the divergence in thinking between Silicon Valley VCs and crypto-native VCs. Firms like Kleiner Perkins, Benchmark, Sequoia, Lightspeed, and Redpoint invested in Telegram because they believed it had users and distribution channels to become a dominant application platform. Almost all crypto-native VCs abandoned it.
The crypto industry currently lacks consumer applications. But most consumer applications are not industries VCs are willing to support due to lack of revenue stickiness. For such enterprises, founders should not seek venture capital but be self-reliant and find profit paths. Then, continue to print money during the current consumer trend in the months before this wave shifts.
Nubank (a digital banking platform based in Brazil) had an unfair advantage because they entered the field before the term "fintech" was clearly defined. Similarly, they were merely competing with existing large Brazilian banks for users, not with other fintech startups. Brazilians were so tired of existing banks that they immediately switched to Nubank after its product launch, giving Nubank the rare combination of near-zero customer acquisition cost (CAC) and product-market fit.
If you're building a stablecoin new bank for emerging markets, you shouldn't live in San Francisco or New York. You need to be on the ground, communicating with users in these countries. This is actually a good initial screening criterion.
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