It’s 2025, and VCs don’t want to invest in crypto-native projects anymore

In terms of capital attraction, traditional field companies "brushing the edge" of crypto are about to flip "crypto-native" projects.

Original:Building for crypto-native vs. building for crypto-adjacent

Author:Richard Chen

Translated by:Golem, Odaily

In 2025, cryptocurrency will usher in the "dawn of mainstream adoption". The US GENIUS Act has been signed into law, with clear stablecoin regulations finally in place, and mainstream institutions are actively adopting cryptocurrencies. 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 that use crypto technology in other larger traditional fields. This is the first time I've witnessed such a transformation in my career, 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 is so avant-garde that people outside the crypto-native bubble cannot "understand" it and cannot become passionate daily active users. Only those crypto-native Degens fighting on the front lines have the risk tolerance to personally test every new product and withstand challenges like hacker attacks and online fraud.

Most traditional Silicon Valley venture capital firms previously abandoned crypto-native projects because they believed the potential total addressable market (TAM) of crypto-native users was too small. This was indeed the case, 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 coined in a group chat in San Francisco in October 2018.

But the 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 expanded 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 the opportunities missed in the past four years.

However, from then until today, the TAM of crypto-native applications remains quite small compared to non-crypto markets. The number of crypto users on X (an important social media in the crypto field) might be at most 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.

As a founder of a crypto-native project, what should truly keep you up at night is how to retain your core users, not attracting 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 respond well to incentive mechanisms. This makes it easy for emerging competitors to appear out of nowhere, and by poaching just a few core users, they can eat 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 the defensibility of crypto-native products is much lower than Web 2, and everything is open-source and easily replicable. Crypto-native projects come and go, rarely lasting beyond a cycle or even a few months. Founders often become wealthy after token generation events (TGE) and quietly exit the project to become angel investors as a post-retirement job.

The only secret to retaining core users is continuous product innovation, always staying one step ahead of competitors. Seven years later, Uniswap remains 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 in succession. 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, such as 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 shift in existing enterprises' attitude towards crypto. Large banks and corporations are launching their own stablecoins. The regulatory clarity of the Trump administration has opened the "Overton window" for mainstream crypto application. Cryptocurrency is no longer the unregulated wild west of finance.

In our professional careers, we will see for the first time that integrated crypto projects outnumber crypto-native projects. This is well-reasoned, as the biggest achievements in the coming years are likely to come from integrated crypto projects rather than crypto-native projects, because traditional financial market IPOs can be measured in tens of billions of dollars, while crypto TGEs 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 of these projects is that they treat crypto technology as a function rather than a product.

In the integrated crypto industry, heavy users are of course 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 integrated crypto industry and understand what factors are crucial. 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 function, 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.

Ironically, crypto payments have long been an unattractive category, but before 2023, it was the perfect time to start a crypto fintech company and seize distribution channels. After Stripe acquired Bridge, we saw crypto-native founders moving 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 Proceed?

What does integrated crypto enterprises mean for crypto VCs? It's important not to make adverse selection on founders that non-crypto VCs would have abandoned, because crypto VCs are often fools who don't understand non-crypto native industries deeply. This adverse selection largely manifests in choosing crypto-native founders who have recently shifted to integrated crypto.

But the disturbing fact is that the crypto industry often makes adverse selection on founders who couldn't succeed in Web 2.

Historically, a good way for crypto VC founders to arbitrage was to find talent outside the Silicon Valley network. They didn't have glamorous resumes (like Stanford, Stripe), weren't good at VC pitches, but deeply understood crypto-native culture and built 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.

But the founder prototype of a successful integrated crypto project is entirely different from that of a crypto-native project. They are not the wild west financial cowboys who understand crypto-native industry variables and can create 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 too.

Inspiration for Integrated Crypto Project Entrepreneurs

1. Telegram's ICO in early 2018 well illustrated the divergence in thinking between Silicon Valley VCs and crypto-native VCs. Companies 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.
2. The crypto industry currently lacks consumer applications. But most consumer applications are not industries that VCs are willing to support because of lack of revenue stickiness. For such enterprises, founders should not seek venture capital but be self-reliant and find profitable paths. Then, continue to print money using the current consumer trend in the months before this consumer wave shifts.
3. Nubank (a digital banking platform based in Brazil) had an unfair advantage because they entered the field before the term "fintech" was clearly defined. They were simply 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.
4. If you're building a stablecoin 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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