Ethereum VCs have EBOLA for Infra

The structural issue with large VCs funding huge Infra rounds, broken venture markets, and the cure for founders and investors.

“Allow your adversary to speak, and they will weave the net that ensures them.”

Two weeks ago on ‘The Chopping Block,’ Haseeb and Tom from Dragonfly made a bunch of arguments in an Ethereum v. Solana segment. Roughly, they articulated the following:

1. Solana has an incomplete VC ecosystem.
2. The volume of capital on Solana is much lower than on Ethereum, and there are very few winners in the Solana ecosystem, apart from memecoins.
3. Solana is seen as the memecoin chain and, perhaps, the DePIN chain. Solana’s TVL is only $5 billion, limiting its TAM.
4. Starting on Ethereum is like ‘starting up’ in the US, as it’s much more EV-positive.
5. Solana has a higher Gini coefficient (greater inequality).

We will review these arguments — highlight the structural issues with larger funds, how that pushes them toward infrastructure investments — and worse, drowns founders in bad advice. Finally, we will share tactical advice on how to avoid getting EBOLA.

Ethereum VCs have highly contagious EBOLA

As Lily Liu calls it, EBOLA (EVM Bags Over Logic Affliction) is a disease affecting Ethereum VCs — a structural problem, particularly for big ‘Tier-1’ VCs.

Take the example of a large fund like Dragonfly, which raised $650 million for their fund in 2022 with Tier-1 LPs like Tiger Global, KKR, and Sequoia, likely pitching an infrastructure-weighted thesis. Large funds like Dragonfly are structurally incentivized to deploy their funds within the articulated period — say, two years. This means they will be incrementally willing to fund much larger rounds and assign higher valuations. If they don’t fund larger rounds, they won’t be able to deploy their capital and will have to return capital to their LPs.

Think about the economic incentives of a GP: they get paid management fees every year (2% of capital raised) and a success fee upon exit (20% of returns). Therefore, on a risk-adjusted basis, funds are incentivized to raise more capital to “stack fees.”

Given that infra projects (like rollups/interoperability/restaking) can cruise to a $1 billion+ FDV, considering the multi-billion-dollar infrastructure exits in ‘21-’22, it is EV+ to deploy to infrastructure projects. But, this is a narrative of their own creation, supercharged by Silicon Valley's capital and legitimacy engine.

Here’s how the infrastructure narrative goes:

1. The web of money is here to succeed in the web of information. That’s why it’s called Web3.
2. If you could have “invested” in TCP/IP or HTTP in the 1990s, you would have. And now you can, through a network token.
3. These blockchain infrastructure bets are this generation’s bets on the equivalent TCP/IP and HTTP protocols but for money.

That’s a pretty compelling narrative, and there is some real substance to this narrative. The question is whether, in 2024 when we’re looking at the next EVM L2 specializing in scaling TPS to support the super high TAM potential of an NFT community, we’ve strayed from the original story of TCP/IP for global money. Or, whether this rationale is driven by the fund economics of mega crypto funds (eg, Paradigm/Polychain/a16z crypto).

EBOLA is making founders and LPs sick

Given this assumption that infra branding drives high valuations, we’ve seen many major EVM apps announce or launch L2s in an effort to obtain these high valuations. The EVM infrastructure chase is so wild that even top consumer founders, like those of Pudgy Penguins, feel compelled to launch an L2.

Take, for instance, EigenLayer — a single project on Ethereum that has raised $171 million, yet is still far from making any significant impact, let alone generate revenue. It will make a few VCs and insiders (who hold 55% of the tokens) wealthy. There’s been rightful criticism of low float, high FDV projects; how about criticism of low impact, high FDV projects?

The Infra bubble is already starting to burst with many tier-1 infra projects launching tokens this cycle that are already below their private round valuations. With major unlocks in 6–12 months, the VCs will be underwater and it will be just a race to the bottom of who sells first, impacting returns.

There’s a reason why retail has a new wave of anti-VC sentiment; the feeling that more VC money = More high FDV, low float Infra.

The Graveyard of Bad VC Advice

EBOLA also claims promising apps/protocols amongst its victims, where VCs influence founders to build on chains unable to scale with their product aspirations. Many social applications, consumer-focused applications, or high-frequency DeFi applications would never be feasible on Ethereum Mainnet due to its modem-like performance and unaffordable gas fees. Yet, these were still built on Ethereum despite available alternatives, resulting in a graveyard of apps that are promising in concept, but unable to move past “proof of concept” simply due to the dead-end infrastructure upon which they rely. On top of my mind, examples are plenty, from Enzyme Finance (2017) to recent SocialFi applications like Friend Tech, Fantasy Top, and Quail Finance (2024).

Take, for example, Lens Protocol from the biggest protocol, Aave, which raised $15 million and began on Polygon due to a large grant (now moving to zkSync again due to another grant), all while maintaining their L3. The fragmentation caused by infrastructure three card monte led to the downfall of Lens Protocol, which could have otherwise been a foundational social graph. In contrast, study Farcaster, which has taken a light-infra approach — meaning, a Web2 heavy approach.

Recently, there’s the example of Story Protocol’s $140 million raise led by a16z for “Blockchain for IP”. Tier-1 VCs are still doubling down on the infrastructure narrative, even while backed into a corner. Keen observers may therefore notice the exit path: an evolution of this narrative from “infrastructure” into “application-specific infrastructure” — but typically focused on unproven EVM stacks like OP, rather than the battle-tested Cosmos SDK.

Structurally Broken Venture Markets

Current venture markets are not allocating capital effectively. Crypto venture has billions of assets under management that by and large need to be deployed into a specific mandate: private pre-seed to Series A projects — within the next 24 months.

Liquid capital allocators, on the other hand, are highly responsive to global opportunity costs, from “risk-free” T-bills to holding crypto assets. This means that liquid investors will price more efficiently than venture investors.

Current Market Structure:
Public Markets — Undersupply of Capital and Oversupply of Good Projects
Private Markets — Oversupply of Capital and Undersupply of Good Projects

The undersupply of capital in public markets leads to poor price discovery, as evidenced by this year’s token listings. High FDV launches have been a major issue in the first half of 2024. For instance, the total FDV of all coins launched in the first six months of 2024 is nearly $100 billion, which is half the total market cap of all coins ranked between the top 10 and the top 100. This is a sure way to ensure price discovery is down only till organic buyers are discovered.

Private venture markets are already shrinking. It’s something even Haseeb acknowledges — these funds are all smaller than their previous ones for a reason — Paradigm would have raised 100% of their previous fund size if they could have.

The structurally broken venture markets are not just a crypto problem.

Crypto markets clearly need more liquid funds to serve as structural buyers in public markets, addressing the issues in the broken venture markets.

Get Vaxxed against EBOLA

Enough of ranting, let’s now talk about potential solutions and what needs to be done as an industry — both for founders as well as investors.

For Investors — Lean into a liquid strategy and Scale by embracing public markets, not fighting them.

Liquid Funds essentially invest or take positions in publicly traded liquid tokens. As Arthur from DeFiance notes, an efficient liquid crypto market requires the presence of active fundamental investors — which means there is enough room for crypto liquid funds to thrive. To be clear, we are specifically discussing ‘spot’ liquid funds; leverage liquid funds (or hedge funds) didn’t play out well in the last cycle.

Tushar and Kyle from Multicoin captured this concept 7 years ago when they founded Multicoin Capital. They suggested that a liquid fund can achieve the best of both worlds: venture capital economics (investing in young tokens to achieve outsized returns) combined with public market liquidity.

This approach offers several advantages, such as:

1. Public market liquidity allows them to exit at any time based on changes in their thesis or investment strategy.
2. The ability to invest in competing protocols to reduce risks. It’s generally easier to spot trends than to pick specific winners within those trends, so a liquid fund can invest in multiple tokens within a particular trend.

While a typical VC fund provides more than just capital, liquid funds can still offer various forms of support. For example, liquidity support can help solve the cold start problem for DeFi protocols, and these liquid funds can also take a hands-on role in protocol development by being active in governance and providing input on the strategic direction of the protocol or product.

Contrary to Ethereum, Solana’s fundraises in 2023–24 have been pretty small on average except DePIN.; anecdotally almost all first major rounds have been less than $5 million. Major investors include Frictionless Capital, 6MV, Multicoin, Anagram, Reciprocal, Foundation Capital, Asymmetric, and Big Brain Holdings, apart from Colosseum, which runs the Solana Hackathons, which launched a $60M fund to support founders building on Solana.

Time for Solana Liquid Funds:

It’s time for one to lean into liquid strategy and make money because of their incompetence, stupidity, or both. Contrary to 2023, Solana now has plenty of liquid tokens in the ecosystem and one can easily launch a liquid fund to bid on these tokens early on. For instance, on Solana, there are a bunch of <$20 million FDV coins each with a unique thesis like MetaDAO, ORE, SEND, and UpRock to name a few. Solana DEXs are now battle-tested doing more volumes than even Ethereum, with vibrant token launch launchpads and tooling like Jupiter LFG, Meteora Alpha Vault, Streamflow, Armada, and more.

With a developing liquid market on Solana, liquid funds can be a contrarian bet for both individuals (who are looking to angel invest) and smaller institutions. Bigger institutions should start aiming for larger and larger liquid funds.

For Founders — Pick an ecosystem that has low startup costs till you find PMF

As Naval Ravikant notes, stay small until you’ve figured out what’s working. He says a startup is a search for a scalable and repeatable business model. And so what you’re really doing is you’re searching, and until you’ve found that business model that you can repeat and you can scale, you should stay very, very small and very, very cheap.

Solana’s Low Startup costs

As Tarun Chitra notes, Ethereum has much higher startup costs compared to Solana. He points out that, to achieve sufficient novelty and secure a good valuation, it often requires significant infra development (e.g., the whole app becoming rollapp mania). Infra-plays are inherently more resource-intensive, as they are heavily research-driven and require hiring a team of researchers and developers, as well as numerous ecosystem/BD specialists to convince a handful of Ethereum apps to integrate.

On the other hand, apps on Solana don’t need to care much about infra, which is taken care of by select Solana infra startups like Helius/Jito/Triton or protocol integrations. Apps in general don’t need high enough funding to start with; take Uniswap, Pump/fun, and Polymarket as an example.

Pump.fun is the perfect example of Solana’s low transaction fees unlocking the “Fat App Thesis”; where a single app, Pump.fun has flipped Solana in the last 30d revenues, even outperformed Ethereum in 24-hour revenue for a few days. Pump.fun initially started on Blast and Base but quickly realized that Solana’s capital velocity was unmatched. As Alon from Pump.fun acknowledges, both Solana and Pump.fun have been focused on reducing costs and barriers to entry.

As Mert notes, Solana is the best place to build a startup, owing to community/ecosystem support, scalable infra, and an ethos around shipping. We are already seeing an early trend of new entrepreneurs (particularly consumer founders) preferring Solana, thanks to the rise of successful consumer apps like Pump.fun.

Solana is not just for Memecoins

“Solana is only for memecoins” has been the biggest cope of ETH maxis in the last few months and yes, memecoins are dominating the activity for Solana with Pump.fun being at the center of it. Many might say, that DeFi on Solana is dead and Solana blue chips aren’t performing well like Orca and Solend, but stats say otherwise:

1. DEX volumes for Solana have been comparable to Ethereum and the top 5 pairs for 7D volumes for Jupiter are mostly non-memecoins. In reality, memecoin activity only accounts for about 25% of DEX volumes on Solana (as of August 12), and Pump.fun accounts for 3.5% of daily transactions on Solana — a small percentage given the platform’s rapid adoption.
2. Solana’s TVL ($4.8 billion) is 10 times smaller than Ethereum’s ($48 billion), as Ethereum still enjoys much higher capital leverage due to its 5x larger market cap, deeper penetration in DeFi, and battle-tested protocols. However, this doesn’t limit the TAM for newer projects. Two of the best examples are:

• Kamino Lend, which grew to $1.4 billion in just 4 months.
• PayPal USD, which reached $450 million in just 3 months, overtaking Ethereum’s supply of $360 million, despite being on Ethereum for a year.

With many EVM blue chips deploying on Solana, TVL is just a matter of time.

While one might argue that Solana DeFi tokens are significantly down in price, the same is true for Ethereum’s DeFi blue chips, highlighting the structural problems in value accrual for governance tokens.

Solana is undoubtedly the leader in DePIN, with over 80% of all major DePIN projects being built on Solana. One can also conclude that all emerging metas (DePIN, Memecoins, Consumer) are being developed on Solana, while Ethereum remains the leader in the 2020–21 metas (Money Markets, Yield Farming).

Advice to Application Founders

The larger the fund, the less you should listen to them. They’re incentivized to financialise your product before you achieve product market fit. Travis from Uber captures it well on why you should stop listening to big VCs. While it’s certainly lucrative to pursue Tier-1 VCs and a high valuation for credibility, you don’t necessarily need large VCs to start. Particularly when you are pre-PMF, this approach can lead to valuation baggage, trapping you in a cycle of needing to continuously raise and launch at a higher FDV. Poor discovery at launch makes it much harder to build a genuine, distributed community around the project.

1. Raising Capital — Smaller Rounds. More community-oriented.

• Raise from an angel syndicate via platforms like Echo. It’s underrated: You trade valuation for distribution and launch into strength. Seek out relevant founders and KOLs, and make a concerted effort to onboard them. This way, you build an early evangelist community/network of high-quality builders and influencers who can fully support you. Prioritize the community over tier 2/3 VCs. Shoutout to some Solana Angels like Santiago, Nom, Tarun, Joe McCann, Ansem, R89Capital, Mert, and Chad Dev.
• Pick up accelerators like AllianceDAO (best for consumer projects) or Colosseum (Solana native fund), which aren’t predatory and are much more aligned with your vision. Leverage Superteam for all your startup needs; it’s a cheat code.

2. Go Consumer — Embrace Speculation. Capture Attention.

• Attention Theory: Jupiter capturing an $8 billion FDV in public markets is a strong testament that markets have begun to value frontends and aggregators. The best part? They aren’t funded by any VCs and are still the biggest app in all of crypto.
• Rise of App-focused VCs: Yes, VCs will likely follow the same infrastructure playbook for consumer applications when they see multi-billion dollar exits here. We’ve already seen many $100 million ARR apps.

Tldr;

1. Stop listening to VCs for forced Infra Narrative.
2. Time for Liquid Funds to Thrive.
3. Build for Consumers. Embrace Speculation. Chase Revenues.
4. Solana is the best place to experiment due to low startup costs.

Major props to Akshay BD for inspiring this piece!