The encryption industry is undergoing the most severe elimination wave, and the only opportunity may lie in vertical segmentation strategies.

Written by: Joel John

Compiled by: AididiaoJP, Foresight News

The crypto industry is gradually starting to avoid discussing how grand the narrative is, instead focusing on the sustainability of economic models. The reason is simple: when institutional funds begin to enter the crypto space, economic fundamentals will become incredibly important, and crypto entrepreneurs need to reposition themselves in a timely manner.

The cryptocurrency industry has moved past its infancy and is entering a new stage, where the revenue foundation determines the success or failure of projects.

Humans are shaped by emotions and constructed from them, with nostalgia being particularly prominent. This attachment to past norms makes us prone to resistance against technological change. Let's call it "cognitive inertia": the inability to escape old thought patterns. When the fundamental logic of an industry changes, early adopters are often fixated on past methods. When electric lights were introduced, some lamented that oil lamps were better; in 1976, Bill Gates had to write an open letter in response to geeks unhappy with his development of paid software.

Today, the cryptocurrency sector is experiencing its own moment of cognitive inertia.

In my spare time, I always think about how the industry will evolve. Now the vision of the "Summer of DeFi" has emerged, and Robinhood has issued stocks on the blockchain.

How should founders and capital allocators act when the industry crosses the chasm? As marginal internet users begin to use these tools, how will the core narrative of cryptocurrency evolve? This article attempts to explain how to generate a monetary premium by distilling economic activities into compelling narratives.

Let's dive deeper.

The traditional套路 in the cryptocurrency circle has become ineffective.

Venture capital can be traced back to the whaling era of the 19th century. Capitalists invested money to purchase ships, hire crew, and equip them, with successful voyages often yielding tenfold returns. However, this meant that most expeditions ended in failure, either due to harsh weather, shipwrecks, or even crew mutinies, but just one successful venture could yield substantial rewards.

The same is true for venture capital today. As long as there is one super project in the portfolio, it doesn't matter if most startups fail.

The commonality connecting the whaling era and the explosion of applications in the late 2000s is market size. As long as the market is large enough, whaling is feasible; as long as the user base is sufficient to create network effects, application development will proceed. Among these, the density of potential users creates a market size capable of supporting high returns.

In contrast, the current L2 ecosystem is splitting a market that is already small and increasingly tense. Without volatility or new wealth effects (such as meme assets on Solana), users lack cross-chain motivation. It's akin to traveling from North America to Australia to hunt whales. The lack of economic output is directly reflected in the prices of these tokens.

Understanding this phenomenon requires the perspective of "protocol socialism": agreements subsidize open source applications through grants, even if they have no users or economic output. The benchmarks for these grants are often social affinity or technical compatibility, evolving into a "popularity contest" funded by token hype rather than an effective market.

In 2021, when liquidity was abundant, it didn't matter whether the tokens generated enough fees, whether users were mostly bots, or whether there were any applications. What people were betting on was the hypothetical probability of the protocol attracting a massive user base, much like getting in on the ground floor before Android or Linux took off.

The problem is that in the history of open source innovation, there are few successes in binding capital incentives with forkable code. Companies like Amazon, IBM, Lenovo, Google, and Microsoft directly incentivize developers to contribute to open source. In 2023, Oracle surprisingly became the main contributor to Linux kernel changes. Why would profit-driven organizations invest in these operating systems? The answer is obvious:

They leverage these building blocks to create profitable products. AWS relies in part on Linux server architecture to generate billions of dollars in revenue; Google’s open-source Android strategy attracts manufacturers like Samsung and Huawei to collaboratively build its dominant mobile ecosystem.

These operating systems have network effects and are worth continuous investment. For thirty years, the scale of economic activities supported by their user base has formed an influential moat.

Comparing today's L1 ecosystem: DeFillama data shows that among the existing 300+ L1 and L2 chains, only 7 have daily on-chain fees exceeding $200,000, and only 10 ecosystems have a TVL over $1 billion. For developers, building on most L2s is like opening a store in a desert, with scarce liquidity and unstable foundations. Unless money is thrown around, users have no reason to come. Ironically, under pressure from grants, incentives, and airdrops, most applications are doing just that. What developers are competing for is not the protocol fee sharing, but these fees are precisely a symbol of the protocol's activity.

In this environment, economic output has become secondary, and hype and performance are more eye-catching. Projects do not need to be genuinely profitable; they just need to appear to be in development. As long as someone is buying coins, this logic holds. Being in Dubai, I often wonder why there are drone performances or taxi advertisements for tokens; do CMOs really expect users to emerge from this desert nook? Why are so many founders so eager for the "KOL wheel"?

The answer lies in the bridge between attention and capital injection in Web3. Attracting enough eyeballs and creating sufficient FOMO (fear of missing out) provides the opportunity to achieve high valuations.

All economic activities stem from attention. If you cannot sustain attention, you cannot persuade others to converse, date, cooperate, or trade. However, when attention becomes the only pursuit, the cost is evident. In an era of rampant AI-generated content, L2 continues to rely on outdated scripts; endorsements from top VCs, large-scale token listings, random airdrops, and false TVL games are becoming ineffective. If everyone repeats the same routine, no one can stand out. This is the harsh reality that the crypto industry is gradually awakening to.

In 2017, even without users, development based on Ethereum was still feasible, as the underlying asset ETH could potentially skyrocket by 200 times within a year. In 2023, Solana recreated a similar wealth effect, with its underlying asset rebounding approximately 20 times from the bottom, leading to a series of meme asset booms.

When investors and founders are enthusiastic, the new wealth effect can sustain the open-source innovation in the cryptocurrency space. However, over the past few quarters, this logic has reversed: individual angel investments have decreased, founders' own funds are struggling to survive the funding winter, and large financing cases have sharply declined.

The consequences of application lag are visually reflected in the price-to-sales (P/S) ratio of mainstream networks. A lower value is generally healthier. As illustrated in the Aethir case later, the P/S ratio decreases as revenue grows. However, most networks do not follow this pattern; the issuance of new tokens sustains valuations while revenue stagnates or declines.

The table below selects network samples built in recent years, and the data reflects economic reality. The P/S ratios of Optimism and Arbitrum remain at a more sustainable 40-60 times, while certain networks have figures as high as 1000 times.

So, where is the road?

Income replaces cognitive narrative

I was fortunate to be involved early in several cryptocurrency data products. Among them, two of the most influential:

Nansen: The first platform that uses AI to tag wallets and display fund flows.

Kaito: The first tool that uses AI to track the volume of crypto Twitter products and the influence of protocol creators.

The timing of the releases is intriguing. Nansen emerged during the mid-phase of the NFT and DeFi boom, when people were eager to track the movements of whales. To this day, I still use its stablecoin index to measure Web3 risk appetite. Kaito, on the other hand, was released after the Bitcoin ETF boom in Q2 2024, when capital flows were no longer crucial and public opinion manipulation became central, quantifying attention distribution during the downturn of on-chain trading.

Kaito has become the benchmark for measuring the flow of attention, fundamentally changing the logic of crypto marketing. The era of creating value through bot traffic or fabricated metrics is over.

Looking back, cognition drives value discovery but cannot sustain growth. In 2024, most of the "hot" projects have plummeted by 90%. In contrast, those applications that have steadily made progress over the years can be divided into two categories: vertical niche applications with native tokens and centralized applications without native tokens. They all follow the traditional path of gradually achieving product-market fit (PMF).

Taking the evolution of TVL for Aave and Maple Finance as an example. Data from TokenTerminal shows that Aave has cumulatively spent $230 million to build its current lending scale of $16 billion; Maple has built a lending scale of $1.2 billion with $30 million. Although the current returns for both are similar (with P/S ratios around 40 times), there is a significant difference in return volatility. Aave invested heavily early on to establish a capital moat, while Maple focused on the niche market of institutional lending. This is not to determine which is better or worse, but it clearly shows the major differentiation in the crypto space: on one end are protocols that built capital barriers early with substantial investments, while on the other end are products that deeply cultivate vertical markets.

A similar differentiation has also appeared between Phantom and Metamask wallets. DeFiLLama data shows that Metamask has generated a total of $135 million in fees since April 2023, while Phantom has generated $422 million since April 2024. Although Solana's meme coin ecosystem is larger, this points to a broader trend in Web3. Metamask, as an established product launched in 2018, has unmatched brand recognition; while Phantom, as a latecomer, has achieved substantial returns due to its precise positioning in the Solana ecosystem and excellent product.

Axiom pushes this phenomenon to the extreme. Since February of this year, the product has generated a total of $140 million in fees, reaching $1.8 million just yesterday. Last year's application layer revenue mostly came from transaction interface products. They are not obsessed with the performance of "decentralization" but directly address the essential needs of users. Whether it can be sustained remains to be seen, but when a product generates about $200 million in revenue in six months, the question becomes whether it needs to be sustained.

Believing that cryptocurrency will be limited to gambling, or that tokens will have no necessity in the future, is like assuming that the U.S. GDP will be concentrated in Las Vegas, or that the internet only consists of pornography. The essence of blockchain is the track of funds; as long as products can utilize these tracks to facilitate economic transactions in a fragmented and chaotic market, value will be generated. The Aethir protocol perfectly illustrates this point.

Last year, when the AI boom erupted, there was a shortage of high-end GPU rentals. Aethir built a GPU computing market, with clients including the gaming industry. For data center operators, Aethir provides a stable source of income. So far, Aethir has accumulated approximately $78 million in revenue since the end of last year, with profits exceeding $9 million. Is it "explosive" on crypto Twitter? Not necessarily. But its economic model is sustainable, despite the declining token price. This divergence between price and economic fundamentals defines the "vibecession" in the crypto space, with one end being protocols with few users and the other end being a handful of products with soaring revenues that are not reflected in token prices.

Imitation Game

The movie "The Imitation Game" tells the story of Alan Turing cracking the Enigma machine. There is a memorable scene: after the Allies decipher the code, they must restrain their urge to act immediately, as reacting too soon would expose the fact that they have broken the code. The market operates in a similar way.

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 improvement in the fundamentals increases, the equity value rises accordingly. This is why signs of war can drive up Palantir's stock price, or why Tesla's stock skyrocketed when Trump was elected.

But cognitive games can also have a reverse effect. Failing to effectively communicate progress will be reflected in the price. This "communication gap" is nurturing new investment opportunities.

This is the era of great differentiation in cryptocurrency: assets with income and PMF will crush those without a foundation; founders can develop applications based on mature protocols without the need to issue tokens; hedge funds will rigorously examine the economic models of underlying protocols, as listing on exchanges will no longer support high valuations.

The market is gradually maturing, paving the way for the next wave of capital influx, and the traditional equity market is beginning to favor crypto-native assets. Currently, assets exhibit a barbell structure, with one end being meme assets like fartcoin, and the other end being strong projects like Morpho and Maple. Ironically, both attract institutional attention.

Protocols that build moats like Aave will continue to survive, but where do the founders of new projects go from here? The writing on the wall has pointed the way:

Token issuance may no longer be ideal. An increasing number of trading interface projects without VC support have achieved millions of dollars in revenue.

Existing tokens will be subjected to strict scrutiny by traditional capital, leading to a reduction in investable assets and resulting in crowded trading.

Mergers and acquisitions of listed companies will become more frequent, introducing new capital into the crypto space beyond token holders and venture capital.

These trends are not new. Arthur from DeFiance and Noah from Theia Capital have long turned to income-oriented investments. The new change is that more traditional funds are beginning to venture into crypto. For founders, this means that focusing on niche markets to extract value from small user groups could yield huge profits, as there are pools of capital 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 unresolved is: Can we break free from our cognitive inertia and respond clearly to this transformation? Like many key questions in life, only time will reveal the answer.