The encryption industry is undergoing the most severe elimination wave, and the only opportunity may be a vertical segmentation approach.

The essence of blockchain is a funding track. As long as the product can utilize these tracks to facilitate economic transactions in an unordered segmented market, value will be generated.

Written by: Joel John

Compiled by: AididiaoJP, Foresight News

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

The cryptocurrency industry has passed its infancy and is entering a new stage, where the revenue base determines the success or failure of a project.

Humans are shaped by emotions and composed of them, with nostalgia being particularly prominent. This attachment to past norms makes us prone to resisting technological changes. Let's call it 'cognitive inertia': the inability to break free from old patterns of thinking. When the fundamental logic of the industry changes, early adopters tend to cling to past ways. When the electric light was invented, some lamented that oil lamps were better; in 1976, Bill Gates had to write an open letter in response to the geeks who were dissatisfied with his development of paid software.

Nowadays, the crypto space is experiencing its own moment of cognitive inertia.

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

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

Let's dive deeper.

The traditional tricks in the crypto world have become ineffective

Venture capital can be traced back to the whaling era of the 19th century. Capitalists invested funds to purchase ships, hire crews, and equip them, and successful voyages often yielded tenfold returns. However, this meant that most expeditions ended in failure, either due to bad weather, shipwrecks, or even crew mutinies, but just one success could result in substantial profits.

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

The common point 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 form 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 an already small and increasingly tight market. Without volatility or new wealth effects (such as meme assets on Solana), users lack cross-chain motivation. It's like traveling from North America to Australia to catch whales. The lack of economic output is directly reflected in the prices of these tokens.

Understanding this phenomenon requires the perspective of "protocol socialism": protocols subsidize open-source applications through grants, even if they have no users or economic output. The benchmarks for such 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, whether the tokens generated enough fees, whether users were mostly bots, or whether there were any applications was not important. What people were betting on was the hypothetical probability that the protocol would attract a massive number of users, similar to investing before Android or Linux took off.

The problem is that in the history of open source innovation, there have been 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 the Linux kernel changes. Why would profit-driven institutions invest in these operating systems? The answer is obvious:

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

These operating systems have network effects and are worth continued investment. Over the past thirty years, the scale of economic activities supported by their user base has formed a significant competitive moat.

Comparing today's L1 ecosystem: DeFillama data shows that among the existing over 300 L1 and L2, only 7 chains have daily on-chain fees exceeding $200,000, and only 10 ecosystems have a TVL exceeding $1 billion. For developers, building on most L2s is like opening a shop in a desert, with scarce liquidity and unstable foundations. Unless money is poured in, 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 becomes secondary; hype and performance are more eye-catching. Projects do not need to be truly profitable; they only need to appear to be under construction. As long as someone buys the tokens, this logic holds. Being in Dubai, I often wonder why there are drone performances or taxi advertisements for tokens. Do the CMOs really expect users to come out of this desert nook? Why are so many founders flocking to the "KOL wheel"?

The answer lies in the bridge between attention and capital injection in Web3. Attracting enough eyeballs and creating enough FOMO (Fear of Missing Out) provides an opportunity for high valuations.

All economic activities stem from attention. If you cannot continuously attract attention, you cannot persuade others to talk, date, cooperate, or trade. But when attention becomes the sole pursuit, the cost is also evident. In an era of rampant AI-generated content, L2 continues to rely on outdated scripts, and the endorsements of top VCs, large exchanges listing tokens, random airdrops, and fake TVL games have become 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 because the underlying asset ETH could potentially surge 200 times within a year. In 2023, Solana replicated a similar wealth effect, with its underlying asset rebounding about 20 times from the bottom, sparking a series of meme asset booms.

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

The consequences of application lag are intuitively reflected in the price-to-sales ratio (P/S) of mainstream networks. A lower value is generally considered healthier. As demonstrated in the Aethir case later, the P/S ratio decreases with revenue growth. However, most networks do not follow this pattern; new token issuance supports valuation while revenue stagnates or declines.

The table below selects network samples built in recent years, with data reflecting economic realities. The P/S ratio of Optimism and Arbitrum remains at a relatively sustainable 40-60 times, while some networks have this value as high as 1000 times.

So, where is the road?

Income Replaces Cognitive Narratives

I was fortunate to participate early in several cryptocurrency data products. Among them, two are the most influential:

• Nansen: The first platform that uses AI to label 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 release of the two is intriguing. Nansen was born in 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 critical, and public opinion manipulation became central. During the period of shrinking on-chain transactions, it quantified attention allocation.

Kaito has become the benchmark for measuring the flow of attention, completely transforming the logic of crypto marketing. The era of creating value through bot-generated volume or fake metrics is over.

Looking back, cognition drives value discovery, but cannot sustain growth. In 2024, most "popular" projects have plummeted by 90%, while those applications that have steadily progressed 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. TokenTerminal data shows that Aave has cumulatively spent 230 million USD to build its current lending scale of 16 billion USD; Maple, on the other hand, has built a lending scale of 1.2 billion USD with 30 million USD. Although the current returns of both are similar (with a P/S ratio of about 40 times), the volatility of returns is significantly different. Aave established a capital moat with heavy investment in its early stages, while Maple focuses on the niche market of institutional lending. This does not determine which is superior or inferior, but clearly illustrates the significant differentiation in the crypto field: on one end are protocols that built capital barriers with heavy early investment, and on the other end are products deeply engaged in vertical markets.

Maple's Dune Dashboard

Similar differentiation also appears 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 the meme coin ecosystem of Solana is larger, this points to a broader trend in Web3. Metamask, as a well-established product launched in 2018, has unmatched brand recognition; while Phantom, as a newcomer, has achieved substantial returns due to its precise positioning in the Solana ecosystem and excellent product quality.

Axiom pushes this phenomenon to the extreme. Since February of this year, the product has generated a total of $140 million in fees, with $1.8 million earned just yesterday. Last year's application layer revenue mainly came from trading interface products. They do not indulge in "decentralized" performances and directly address users' essential needs. Whether this can be sustained remains to be seen, but when the product generates about $200 million in revenue over six months, the question becomes "is sustainability necessary."

It is believed that cryptocurrency will be limited to gambling, or that tokens will have no necessity in the future, akin to asserting that the US GDP will be concentrated in Las Vegas, or that the internet is solely for pornography. The essence of Blockchain is a financial track; as long as products can utilize these tracks to facilitate economic transactions in a fragmented and chaotic market, value will be created. The Aethir protocol perfectly illustrates this point.

Last year, during the AI boom, there was a shortage of high-end GPU rentals. Aethir built a GPU computing power market, with clients including those in the gaming industry. For data center operators, Aethir provides a stable source of income. So far, Aethir has accumulated revenue of about 78 million USD since the end of last year, with profits exceeding 9 million USD. Is it "explosive" on crypto Twitter? Not necessarily. However, its economic model is sustainable, despite the declining token price. This divergence between price and economic fundamentals defines the crypto field's "vibecession," with one end being protocols with few users and the other end being a handful of products that have seen revenue surges but whose token prices have not reflected that.

Imitation Game

The movie "The Imitation Game" tells the story of Alan Turing cracking the code machine. There is a memorable scene: after the Allies decipher the code, they must restrain themselves from acting immediately, as premature reactions could expose the fact that the code has been broken. The market operates in a similar manner.

Startups are essentially a game of perception. You are always selling the probability that the future value of the company will surpass the current fundamentals. When the probability of improvement in the company's fundamentals rises, the value of equity increases accordingly. This is why signs of war can drive up Palantir's stock price, or Tesla's stock can soar when Trump is elected.

But cognitive games can also have a counter effect. Failure 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 crypto: assets with income and PMF will crush those without a foundation; founders can develop applications based on mature protocols without issuing tokens; hedge funds will scrutinize the economic models of underlying protocols, as listing on exchanges no longer supports high valuations.

The market is gradually maturing, paving the way for the next wave of capital influx, as traditional equity markets begin to favor crypto-native assets. Currently, the 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 like Aave that build a moat will continue to survive, but where do the founders of new projects go from here? The writing on the wall has pointed the way:

• Issuing tokens may no longer be ideal. An increasing number of trading interface projects without VC support have generated millions of dollars in revenue.
• Existing tokens will be subject 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 capital is beginning to enter the cryptocurrency space. For founders, this means that focusing on niche markets to extract value from small user groups could lead to huge profits, as there are capital pools waiting to acquire them. This expansion of capital sources may be the most optimistic development for the industry in recent years.

The unresolved question is: can we break free from our habitual thinking and respond to this change with clarity? Like many key questions in life, only time will reveal the answer.