Opinion: Crypto VCs are limiting the future of the crypto industry
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Opinion: Crypto VCs are limiting the future of the crypto industry
The excessive concentration of crypto VC funding in public blockchains has led to insufficient investment in foundational services and protocols, resulting in imbalanced capital allocation.
Navigating Web3 tides with focused insightsAuthor: Anthony DeMartino
Compiled by: TechFlow
Overinvestment in Public Blockchains
Over the past two years, crypto venture capital has overwhelmingly prioritized investments in public blockchains over other protocols. This shift has led to an explosion of new Layer 1 (L1) and Layer 2 (L2) networks, but left the ecosystem lacking in high-quality protocols.
From a financial standpoint, this strategy has delivered significant returns, as the market caps of many chains far exceed their total value locked (TVL). In contrast, leading protocols struggle to reach even 20% of their TVL in valuation.
Bottlenecks in Foundational Services
This overinvestment has created bottlenecks for other foundational service providers.
In particular, cross-chain bridges, wallets, oracles, exchange integrations, and the ability to attract top-tier stablecoins and protocols have all fallen behind. As a result, new chains often rely on subpar alternatives, increasing friction for developers and users.
Currently, Fireblocks is the only institutionally scaled wallet provider, so lack of integration makes attracting institutional capital difficult.
This issue worsens when new blockchains are not EVM-compatible, as Fireblocks’ deployment timelines become significantly longer.
The problem is especially pronounced for chains using the MOVE language, where the absence of institutional support is clearly evident.
Top-tier cross-chain bridges like Layer Zero face similar challenges. A premier bridge that institutions and users can trust is critical for attracting capital and assets from other chains.
Given that top bridges have large and growing backlogs of transactions, new chains must either use weaker alternatives or pay high fees for priority access. Some chains happily pay more to expedite transactions, while capital-constrained chains are forced to use inferior bridges—limiting their growth potential.
Protocol-Side Challenges
When it comes to protocols, the problem is even more severe.
Some leading new protocols, such as ETHENA and Kamino, have TVLs 5 to 20 times greater than many new chains, yet their valuations pale in comparison.
This underinvestment in available protocols has created a massive shortage.
To address this, blockchain foundations are forced to incubate amateur teams—teams that typically just copy existing codebases rather than build robust, battle-tested solutions. This introduces significant risk in two key areas:
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Capital Attraction: Protocols developed by underfunded teams struggle to gain credibility, investor backing, and TVL.
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Security and Stability: Copying an existing protocol like AAVE is easy, but operating it effectively and securing user funds requires experience and expertise.
Money Market Crisis
Money markets are the lifeblood of any top-tier public blockchain. However, entrusting these critical protocols to inexperienced teams undermines the usability and trustworthiness of these chains.
While anyone can use ChatGPT to replicate AAVE’s code, successfully running a lending protocol demands deep risk management expertise.
A major oversight in many of these clones is the absence of external risk managers (such as Chaos Labs), which have been instrumental in AAVE’s unmatched security record.
Simply copying code without implementing equivalent risk controls dooms these protocols to failure.
This cycle has already proven costly—we’ve seen several new money market protocols hacked in this market cycle.
Moreover, when a blockchain’s foundation must self-fund protocol development, it signals weak external investor interest. Without financial backers to support new protocols, they struggle early on to attract meaningful liquidity providers (LPs)—a crucial factor for success.
DEX Dilemma
While decentralized exchanges (DEXs) are less critical than money markets, their absence or poor quality hinders a blockchain’s success. Both spot and perpetual DEXs struggle to attract capital due to:
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Lack of Skilled Teams: Many of these exchanges are run by inexperienced teams and are mere copies.
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Slippage and Poor UI/UX: Poorly designed interfaces and shallow liquidity deter liquidity providers (LPs).
The result is a poor trading experience, high slippage, slow TVL growth, and a weakened overall ecosystem.
Shifting Incentive Structures
Despite these challenges, economic incentives still favor investing in new L1s and L2s over protocols.
This imbalance can be addressed in three ways:
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Protocol valuations must rise: The market needs to reflect the true value and utility of top-tier protocols.
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L1/L2 investment must decrease: If chain valuations fall, capital allocation will naturally shift toward protocols.
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Protocols should become their own chains: This trend has already begun with HyperLiquid and Uniswap’s recent moves.
While convergence between protocol and chain valuations is clearly needed, whether protocols *should* become chains is less certain.
This trend is emerging partly in response to valuation imbalances. Not only do top protocols now attract more TVL than most new chains, but they also generate exponentially higher fees—yet remain overlooked by VCs.
Although building an exceptional protocol is complex and rare, launching a new chain has become increasingly simple—relying more on marketing team quality than developer skill.
Furthermore, these teams may be distracted by building low-value technology solely to inflate valuations, diverting focus from protocol-layer development.
If this trend gains momentum, it will only deepen the deficit in protocol quality and perpetuate the cycle.
The key question is whether VCs will recognize and correct this imbalance before it's too late.
The Industry’s Future at Stake
If these issues remain unaddressed, the entire crypto industry risks stagnation.
Without strong, well-funded protocols, new chains will struggle to deliver the seamless user experiences required for mainstream adoption.
Major institutional players entering the space quickly may be forced to retreat—or fund their own protocols—pushing the industry toward greater centralization.
In the end, VCs must rebalance their investment priorities to break this stagnation, or else the future of cryptocurrency hangs in the balance.
— Anthony DeMartino, CEO & Founder of Trident Digital, GP at Istari Ventures.
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