ArkStream Capital: A Guide to the Rebirth of Crypto VC and Why It's Hard to Outperform BTC

2025-09-02 21:07:47

Collection

From data analysis, the returns, mortality rates of top VCs, and the dilemma of Shansai coins.

Author: ArkStream Capital

How long has it been since you last heard the term Web 3? As the narrative shifts from "Web 3" back to "cryptocurrency," investment institutions in the cryptocurrency market are experiencing a significant reshuffle, and we are witnessing it all.

The result of this "narrative regression" is that Bitcoin and Ethereum are reaching new highs, while the altcoin season is long overdue. Holding onto coins in anticipation of price increases may just be a beautiful wish; the harsher reality is that since 2022, the comprehensive decline in primary market investment returns is continuously impacting VC practitioners and investors who adhere to the "Vintage Investment Theory." This article will systematically sort through the investment and financing data and market structure changes from early 2022 to the second quarter of 2025, to uncover the deep reasons behind the drastic switch in the cryptocurrency primary market from peak prosperity to shrinking returns.

We attempt to answer two core questions:

1. What dilemmas do crypto VCs currently face?

2. How should investment institutions participate in this market under the new cycle logic?

As a long-term participant in the primary market, ArkStream Capital has observed that since the peak in 2022, the market has undergone a severe capital contraction and a cooling of financing activities, reaching a low point in 2023. Although the overall financing scale in Q1 2025 has rebounded, the increase is mainly concentrated in a few large financing events. Excluding these exceptional cases, market activity remains sluggish.

Parallel to this is a shift in venture capital strategies and preferences:

Investment stages are shifting from early to late, with a significant contraction in risk appetite: Data shows that the proportion of early-stage financing (Seed and PreSeed) maintained a high level of over 60% from 2022 to Q3 2023 (with a peak of 72.78%), but began to fluctuate downward thereafter. By Q1 2025, the proportion of early-stage financing deals has dropped below 50% for the first time since 2022, falling to 47.96%.
The narrative has shifted from growth-oriented tracks like Social/NFT/Game to areas emphasizing practicality and long-term value, such as DeFi, infrastructure, and RWA. Comparing Q2 2022 and Q2 2025, financing in NFT/Games/Social has plummeted from 129 deals to 15; meanwhile, the infrastructure/DeFi/CeFi tracks accounted for 85.8% of financing deals in Q2 2025 (97/113), becoming the absolute core of the market.
The "paper wealth" model under high FDV is being disproven by the market: Analysis of 75 investments shows that market performance has dropped sharply from 46 deals with returns exceeding 10 times at peak to only 6 remaining; additionally, 24 investments (32%) and 18 projects (42.85%) have current valuations that have fallen below their private placement prices.
Even Binance's "listing effect" is losing its efficacy, with "highs followed by lows" becoming the new norm: Data indicates that while 25 projects had first-day increases exceeding 10 times in 2024, by 2025, the number of projects that fell below their issue price seven days after listing surged to 42, indicating that relying solely on endorsements from leading exchanges to drive valuations has failed.
Although the cycle from financing to TGE is lengthening, this has not led to a higher success rate: Data shows that among over 17,000 assets recorded by Coingecko, trading volumes for those ranked below 1500 are nearly zero, and even top VCs like Polychain Capital have a failure rate of 26.72% for their invested projects.
The VC investment logic in the crypto primary market has become ineffective: Data shows that in the harsh reality where up to 77% of projects cannot issue tokens, only 5.5% of top projects can eventually list on Binance. However, the average return for these top projects is only 2-5 times, which is far from covering the losses of the other 94.5% of failed investments, making it mathematically impossible for the portfolio to achieve profitability.

Note: The relevant data analysis results are based on top crypto VC investment cases from Europe and the US, and the selected samples are representative but do not cover the entire industry. See the later sections for details.

We believe that this round of declining returns is not only a liquidity result of the interest rate hike cycle but also reflects a fundamental paradigm shift in the crypto primary market: from valuation-driven to value-driven, from broad net casting to a focus on certainty, and from chasing narratives to betting on execution capability. Understanding and adapting to this paradigm shift may become a necessary prerequisite for achieving excess returns in future cycles.

Overview of Primary Market Data: Heat and Cycle Evolution

Global Crypto Primary Market Financing Overview

The investment and financing data in the primary market is a standard for measuring whether the market is willing to pay for innovative ideas. Higher investment and financing data mean more risk capital is willing to bet on the future development of this industry. Whether it is the composability of decentralized finance (DeFi), the vision of Web 3 advocating for data to be "readable, writable, and ownable," or the continuous improvements in infrastructure regarding privacy protection, distributed storage, and scalability, all rely on the sustained betting of risk capital on this market. Accompanying risk capital is the influx of talent; the prosperity of the primary market is often reflected in the continuous stream of talent innovating and starting businesses in this industry.

This data peaked in Q1 2022, with a single quarter financing amount reaching $12.4 billion and financing deals totaling 588. However, since then, the market has taken a sharp downturn, entering a sustained downward cycle, with both total financing amounts and activity levels declining. By Q4 2023, quarterly financing dropped to $1.9 billion, and the number of financing deals fell to 255, hitting the cycle's bottom. Although there was a slight rebound in 2024, the overall market still operates at low levels.

The financing data for Q1 2025 superficially shows signs of warming: the total quarterly financing amount rebounded to $5.2 billion, and the number of financing deals increased to 271. However, this "recovery" cannot withstand detailed dissection. In that quarter, the strategic investment by the Abu Dhabi sovereign fund MGX in Binance (approximately $2 billion) accounted for over 40% of the total amount, representing an outlier driven by a single event. Additionally, World Liberty Financial's $550 million ICO also significantly inflated the overall data. Excluding these large financing amounts, the actual financing scale for crypto-native projects in Q1 was only about $2.65 billion. The downward trend continued into Q2 2025. For instance, projects like SharpLink, BitMine, Digital Asset, and World Liberty Financial need to be treated separately and should not be viewed as the norm for the crypto venture capital market. It can be seen that starting from Q1 2025, there has been a clear divergence between crypto-native venture capital and traditional financial funding, with crypto-native venture capital continuing to shrink while traditional financial capital is rushing in, making significant moves in the equity market. Behind the apparent growth is capital accelerating its concentration on low-risk preference projects, and the overall venture capital activity in the market has not truly revived.

Figure: Quarterly Financing from 2022 to Present

Data Source: Financing data panel from RootData

This downward trend shows a clear negative correlation with Bitcoin's market share. Bitcoin has experienced significant increases since early 2023, but the financing activity in the primary market has not rebounded in sync, breaking the past cycle's correlation where BTC price increases led to a warming of venture capital.

Figure: Bitcoin Market Cap Dominance from 2022 to Present

This means that the changes in the altcoin market's heat are no longer solely dictated by Bitcoin's price; instead, as Bitcoin rises, market confidence in altcoins is continuously eroding. The decline in 2022 reflects a macro retreat, while the low point in 2023 reflects the collapse of market confidence. The rebound in Q1 2025 is more driven by a few projects with strategic value or capital moats, marking that the primary market has entered a new stage of "selected concentration." The era of "a hundred flowers blooming" is no longer, and the wave guided by the "Web 3" narrative is fading.

For VCs, this means that the era of "broad net casting" is retreating, and reassessing certainty, strengthening fundamental screening, and evaluating exit paths has become the new paradigm. In the context of overall declining returns, rising Bitcoin prices, but stagnant funds, VCs can no longer hope for a natural uplift from a macro bull market but should focus on technological barriers, business model resilience, and actual user value to meet investors' higher demands for stable returns.

Analysis of Mainstream Institutional Investment Activity

In the overall unfavorable environment of the market, to survive, VCs still operating in the cryptocurrency market have had to switch strategies, moving from "all roads lead to Rome" to seeking more certain fixed strategies.

First, the preference for investment rounds has begun to tilt from early rounds to later-stage projects. In Q1 2025, the proportion of early-stage financing rounds dropped below 50% for the first time, marking a turning point since 2022. This change indicates that in an environment where exit paths are increasingly uncertain and top projects occupy resources, institutions' preference for "certainty" has significantly increased, favoring investments in mature projects with validated products and clear revenue sources. Meanwhile, the proportion of financing deals in PreSeed and Seed stages has decreased, although overall it remains in a relatively healthy range, indicating that early entrepreneurial vitality still exists, but fundraising thresholds have significantly increased.

*Figure: Quarterly Funding Round Distribution (%) *

Data Source: Financing records collected by RootData, grouped and summarized by quarter and round

Secondly, the preference for investment sectors is becoming more concentrated. Starting from Q1 2024, the proportion of financing projects in crypto-native non-financial application sectors like Social, Games, NFT, and DAO has dropped below 50% for the first time, marking the retreat of "concept-driven" narratives. In its place is the return of DeFi and infrastructure sectors, which emphasize the actual application value and sustainable revenue of protocols, shifting capital focus from To C narratives to platform projects with To B business models. Meanwhile, although the CeFi sector has low visibility in market narratives, its financing volume remains high, reflecting its cash flow-intensive business's continued recognition by capital.

Figure: Quarterly Sector Funding Trend

Data Source: Financing numbers collected by RootData across various sectors

The shift in investment preferences also significantly reduces the paths available to entrepreneurs. If in the past, starting a business in the cryptocurrency industry was like an open-ended exam, now it feels like a "themed essay," with only Infra, DeFi, and RWA as options, ultimately competing in already mature business models to see who can break out of the red ocean.

For VCs, this trend means that the research and investment system needs to closely revolve around changes in industry structure, dynamically reallocating time and resources to prioritize support for projects with deep value capture capabilities rather than short-term traffic-driven themes.

Project Lifecycle and Exit Window Analysis

Project TGE and FDV

Project data explanation: This analysis uses top crypto VC investments from Europe and the US as samples, involving institutions such as a16z, Coinbase Ventures, Multicoin Capital, YZi Labs, OKX Ventures, Polychain Capital, Paradigm, and Pantera Capital. (Source data can be found in the appendix tables VC Investments, VC-Backed Listings on Binance: Spot Returns, VC-Backed Listings on Binance: Spot Returns Pivot)

Data screening criteria:

Prioritize investment counts: The same project may undergo multiple rounds of financing, with significant valuation differences across rounds directly impacting investment returns. Therefore, different rounds of financing for the same project are treated as independent investment counts to more accurately reflect investment activity.
Binance projects prioritized: As one of the largest exchanges globally, Binance has extensive liquidity and market coverage capabilities. To more comprehensively reflect market performance, only projects that have launched spot trading on Binance are selected as star projects.
Data accuracy: Investments disclosed after token issuance are considered OTC (over-the-counter) and are not counted in the venture capital category to ensure the accuracy and consistency of data statistics.
Exclude projects with insufficient data dimensions: Projects that do not disclose investment amounts and valuations are excluded from statistical calculations due to insufficient data dimensions.

In the crypto primary market, the valuation system of projects is a core variable affecting VC return rates. Especially the market performance of token prices after TGE (Token Generation Event) has become a key indicator for measuring exit efficiency. However, the method of financing through project valuation or FDV (Fully Diluted Valuation) in the crypto industry over the past decade is no longer effective in the current cycle. This has rendered investments that could have brought dozens or even hundreds of times paper returns nearly worthless upon final exit.

At the same time, whether traditional VCs or crypto VCs, project failures are the norm. For VCs, as long as a few star projects can achieve high returns, it is enough to significantly boost overall returns. Therefore, the core standard for evaluating VC performance externally is not the investment success rate, but whether they have captured those star projects.

By analyzing the market performance of projects after listing, opening FDV, peak FDV, and current FDV, and comparing the initial costs of investment institutions with publicly available information, we further calculated the investment return performance of these institutions.

Figure: Investment Return Multiples

The above figure shows the market performance of mainstream VC investment projects after token issuance, revealing the severity of the current investment return situation. By statistically analyzing the ratios of opening FDV/private placement valuation, peak FDV/private placement valuation, and current FDV/private placement valuation, it is evident that a significant number of investment cases correspond to projects whose current FDV is below or even far below their private placement valuations. At the same time, the number of projects with excess returns based on opening and peak FDV/valuation has shown a sharp downward trend over time.

Statistical results show that among 75 investment cases and 42 projects (detailed data can be found in the appendix table):

Projects with opening FDV/private placement valuation exceeding 100% account for 71 deals/40 projects, of which 28 deals/18 projects have opening FDV returns exceeding 1000%;
Projects with peak FDV/private placement valuation exceeding 100% account for 73 deals/41 projects, of which 46 deals/29 projects have peak FDV returns exceeding 1000%.

However, currently only 6 investment counts and 4 projects have current FDV/private placement valuation exceeding 1000%, while 24 investments and 18 projects have current FDV/private placement valuation below 100%, accounting for 32% and 42.85%, respectively. This means that nearly one-third of investment counts and over 40% of investment projects currently do not meet the valuation expectations set during the private placement stage.

It is worth noting that some star projects, even when listed on the most liquid exchange, Binance, still cannot match the high valuations from the private placement stage. This phenomenon reflects the severe challenges the current market environment poses to project valuations and highlights the downward pressure on investor returns.

Additionally, according to the "1+3" lock-up period commonly set by leading exchanges (i.e., a one-year lock-up period followed by three years of linear unlocking), the amount that investment institutions can ultimately exit is very limited. This further illustrates that although some projects achieved high market valuations in the early stages, their subsequent performance has struggled to meet investors' expected returns.

This "paper valuation inflation" is particularly prevalent in the crypto primary market: project teams adopt high FDV pricing in early financing to secure better valuations and terms, but once they enter the TGE circulation phase, insufficient market demand and continuous token supply unlocking often fail to support the original valuation expectations, leading to rapid price declines. Data shows that the actual circulating market value of many projects is even long-term lower than the entry valuation during the private placement round, directly compressing the exit multiples for VCs.

Essentially, high FDV often obscures two core issues:

The "paper wealth" lacking real market liquidity support is difficult to realize in the secondary market;
The token release plan is severely disconnected from market demand, leading to rapid selling pressure after TGE, further suppressing prices.

For VCs, if FDV is still regarded as the core pricing anchor in primary market investments, it may significantly overestimate the achievable liquidity returns of projects, thus inflating the paper value of the investment portfolio.

Therefore, in the current market cycle, the judgment of project valuations must return to fundamentals: including the intrinsic closed-loop design of the token economic model, supply-demand dynamic balance, release rhythm, and the support of real buyer liquidity after TGE. We believe that FDV should not be seen as an "upper limit on valuation," but more like a "risk ceiling." The higher the FDV, the greater the difficulty in realization, and the higher the risk of discounting investment returns.

Shifting the focus from "paper premiums of high FDV" to "realization of exit liquidity value" is a necessary evolution of VC investment methodology at this stage.

Performance of Projects Listed on Leading Exchanges

In the crypto primary market, listing on leading exchanges has been seen as a mark of project success and a window for VC exits. However, this "endorsement effect" is clearly weakening.

Analysis of price fluctuations for projects listed on multiple exchanges from January 2022 to June 2025 shows significant differences in performance across exchanges. However, a common trend is that the vast majority of projects experience rapid price declines shortly after listing, even falling below their issue prices. This reflects that the empowering effect of exchanges on token prices is gradually diminishing.

The following figure shows the price fluctuation statistics of spot projects listed on Binance from 2022 to Q2 2025.

Figure: Binance Opening Performance Since 2022

This phenomenon of "highs followed by drops" largely stems from excessive incentives and artificially created liquidity booms before listing. Some projects rapidly increase TVL and user attention through large-scale airdrops or "point mining," but simultaneously introduce significant selling pressure during the early TGE phase. For example, this year's Berachain project saw a rapid decline in user retention after TGE, leading to a substantial drop in token prices.

More importantly, the focus has shifted from merely listing to a continuous test of project market performance. In 2025, Binance adjusted its listing logic, launching the Alpha platform as an early showcase channel and introducing higher standards for tracking mechanisms, focusing on evaluating the activity, liquidity quality, and price stability of listed projects. If project teams cannot maintain real user growth and long-term narrative stickiness, even if they get listed, they may be marginalized or even delisted. Listing on exchanges is no longer the "end event" of the valuation closure for projects.

This trend indicates that the liquidity exit window in the primary market is shifting from "node-driven" to "process-driven." For VCs, this requires longer-term post-investment support and value capture logic, where projects must rely on solid product capabilities and market validation to continuously support token performance in the secondary market, rather than relying on single event-driven "valuation realization." The model of merely creating short-term valuation recovery windows through listings is failing.

Cycle from Financing to TGE and TGE Success Rate

Project data explanation: This analysis uses top crypto VC investments from Europe and the US as samples, involving institutions such as Coinbase Ventures, Multicoin Capital, YZi Labs, OKX Ventures, Polychain Capital, and Pantera Capital. (Source data can be found in the appendix table VC Portfolio Failure & Non-Listing Rate)

Data screening criteria:

Prioritize investment counts: The same project may undergo multiple rounds of financing, with significant valuation differences across rounds directly impacting investment returns. Therefore, different rounds of financing for the same project are treated as independent investment counts to more accurately reflect investment activity.
Binance projects prioritized: As one of the largest exchanges globally, Binance has extensive liquidity and market coverage capabilities. To more comprehensively reflect market performance, only projects that have launched spot trading on Binance are selected as star projects.
Data accuracy: Investments disclosed after token issuance are considered OTC (over-the-counter) and are not counted in the venture capital category to ensure the accuracy and consistency of data statistics.
Exclude projects with insufficient data dimensions: Projects that do not disclose investment amounts and valuations are excluded from statistical calculations due to insufficient data dimensions.

From the data provided in the previous section, the final performance of star projects is often disappointing. So how do the performances of most other projects fare? Can they redeem the reputation of crypto VCs? In this bottom-up industry, could the ultimate winners be those initially unnoticed projects that only reveal their value after time? The answer is not optimistic. These projects are more likely to find that investors cannot find suitable exit routes at all.

In traditional venture capital, seed round financing typically takes 6-12 months, while Series A takes 9-18 months. However, due to the flexibility of token financing mechanisms in the crypto industry (such as the rapid deployment of ERC-20 or BEP-20), extreme models of "financing completed in days, TGE completed in weeks" emerged in the early days. However, with increasing regulatory pressure and a gradual cooling of the market, project teams have begun to focus more on product refinement and user growth, significantly extending the average cycle from financing to TGE.

Although lengthening the cycle helps project teams prepare more thoroughly, it has not fundamentally improved project quality. Data shows that since 2021, Coingecko has recorded 17,663 crypto assets, among which the trading volume of coins ranked below 1500 is nearly zero, indicating that many projects lack actual value and sustained vitality in the market.

Even more concerning is that high failure rates are not only present in grassroots projects but are also common among institution-supported projects. Data shows that as of 2024, approximately 20.8% of VC-supported projects have ceased operations, and even top institutions have not been spared. For example, the failure rate of projects supported by Coinbase Ventures is 21.6%, while that of Polychain Capital-supported projects is as high as 26.72%. This phenomenon indicates that the current market's screening mechanism for crypto projects still needs further improvement, and the success rate of institutional investments urgently needs to be enhanced.

Figure: VC Portfolio Failure & Non-Listing Rate

Additionally, although there is a significant positive correlation between financing scale and project survival rates, many star projects with financing exceeding $50 million have still ceased operations. For instance, Mintbase, which raised $13.5 million, MakersPlace, which raised $30 million, and Juno, which raised $21 million, have all stopped operating. This indicates that ample capital is not a sufficient guarantee for project success; factors such as market environment, operational capabilities, and product competitiveness are also crucial.

These changes place higher demands on VCs' investment strategies. Transitioning from the past "TGE first, build later" acceleration model to a "refine first, then list" calm cycle means that projects need to undergo a longer verification period before listing. Investors must conduct deeper evaluations of projects' technical implementation capabilities, team execution abilities, and product-market fit to enhance post-investment survival rates and exit feasibility.

Declining Returns in the Primary Market

Structural Analysis of Declining Returns

The significant decline in investment returns in the cryptocurrency primary market is not only a liquidity result of the interest rate hike cycle but also the result of multiple structural factors acting together. These changes profoundly impact the market's operational logic and pose new challenges for investment institutions' strategies.

The Siphoning Effect of Bitcoin and the Dilemma of Altcoins

In recent years, the differentiation of capital flows has become increasingly evident. Bitcoin's market cap dominance has risen from about 40% at the beginning of 2023, repeatedly breaking through 55% in 2024, becoming the absolute leader in market liquidity. Meanwhile, since the approval of the US spot Bitcoin ETF in January 2024, it has attracted over $100 billion in assets under management (AUM), with net inflows exceeding $30.7 billion.

Figure: Total Net Inflow of Bitcoin Spot ETFs in 2024

In stark contrast is the bleakness of the cryptocurrency primary market. The total financing amount for the entire year of 2024 was only $9.897 billion, far below the $28.6 billion during the same period in 2022. The past correlation of "Bitcoin rises, altcoin season follows" has been broken, with funds highly concentrated in Bitcoin while the altcoin market is bleeding.

This phenomenon reflects the risk appetite of traditional financial capital. The compliant funds brought by ETFs, managed by institutions like BlackRock and Fidelity, primarily meet clients' needs for low-risk asset allocation. These funds view Bitcoin as "digital gold," rather than a gateway to "Web 3," and are unlikely to flow into higher-risk altcoins and early projects.

At the same time, the "Web 3" narrative is fading. Once-popular tracks like GameFi and SocialFi have lost their appeal due to collapsed economic models and user attrition, and the market is beginning to focus on Bitcoin's verified value storage function. This structural shift has made Bitcoin the main destination for capital, while the altcoin market struggles to support a large supply of projects and valuation systems.

Contraction and Concentration of Track Choices

The investment preferences in the crypto market have significantly shifted, reflecting VCs' pursuit of "certainty." In Q1 2025, the proportion of early-stage financing rounds dropped below 50% for the first time, indicating that institutions are more inclined towards mature projects, backed by the fact that as many as 68.75% of projects failed to launch, with some top institutions' supported projects having a launch failure rate close to 80%. The exit dilemma forces VCs to reassess capital efficiency, prioritizing projects with clear business models and moats.

Track choices are also becoming more concentrated. Starting from Q1 2024, the "concept-driven" tracks of Social, Games, and NFT are retreating, while DeFi and infrastructure tracks are returning, with VCs shifting towards emphasizing actual application value and sustainable revenue.

This trend transforms the entrepreneurial path from an "open-ended exam" to a "themed essay," with only a few competitive tracks like Infra, DeFi, and RWA, ultimately competing to see who can break out of the red ocean. The concentration of market choices not only exacerbates capital differentiation but also compresses overall return rates, becoming an important reason for the decline in VC investment returns. VCs need to dynamically adjust their research and investment systems, focusing on deep value capture to meet the market's demand for certainty.

High Failure Rates of Projects and Inefficient Capital Conversion

Although the lengthening of market cycles provides projects with more preparation time, project quality has not fundamentally improved. Data shows that since 2022, among the 17,663 crypto assets recorded by Coingecko, many coins ranked below 1500 have trading volumes that are nearly zero, reflecting that most projects lack actual value and vitality.

Even more alarming is that the failure rate of institution-supported projects remains high. As of 2024, approximately 20.8% of VC-supported projects have ceased operations, with top institutions like Coinbase Ventures and Polychain Capital experiencing failure rates of 21.6% and 26.72%, respectively. This indicates that the advantages of capital and resources have not effectively reduced the risk of failure.

Even star projects with large financing scales are not immune to shutdowns, such as Mintbase, which raised $13.5 million, and MakersPlace, which raised $30 million, both of which have ceased operations.

This cycle, with its high elimination rate, has cleared the market, raising the bar for investors: shifting from "TGE first, build later" to "validate first, then list." Only by deeply exploring projects' technical implementation, team resilience, and market fit can truly resilient projects be selected under the dual pressures of capital and cycles.

Listing Does Not Equal Success: Valuation Bubbles and Exit Dilemmas

Listing on leading exchanges has been a mark of success for crypto projects and a window for investment exits, but this effect is waning. Data shows that 32.89% of investment counts and 42.85% of projects currently have FDV below private placement valuations, and the number of projects with current FDV/private placement valuation exceeding 1000% is zero, reflecting the severe challenges the market poses to high FDV valuations.

In the early stages, projects created paper premiums through high FDV financing, but the disconnect between token release plans and market demand led to accumulated selling pressure, causing prices to plummet. Some projects, despite creating liquidity booms through airdrops or incentive mechanisms, struggle to maintain user retention and long-term narratives, ultimately leading to token price crashes.

Moreover, listing on exchanges has shifted from being a "valuation realization node" to a "long-term performance test." Leading exchanges like Binance have raised listing standards, requiring projects to maintain real growth and price stability, or risk being delisted. This has rendered short-term valuation recovery windows ineffective, making investment exits increasingly reliant on projects' long-term market performance.

This dilemma reveals the inherent risks of high FDV: obscuring issues of insufficient liquidity and imbalanced token economics, compressing investment return space. VCs need to return to fundamentals, focusing on the closed-loop design of token economics and real market demand; only solid product capabilities and market validation can support a project's long-term value, preventing paper wealth from becoming an illusion of exit.

Macroeconomic Pressures and the Retreat of Risk Capital

Since March 2022, the Federal Reserve has continuously raised interest rates, increasing the federal funds rate to a high of 5.25%-5.50% within a year and a half, while the yield on 10-year US Treasury bonds broke 4.5% in the second half of 2023, significantly enhancing the appeal of risk-free assets and increasing the opportunity cost of investing in high-risk assets. During this time window, the risk appetite in global capital markets has clearly declined, sharply reducing funding support for high-risk areas like crypto projects.

The high-interest-rate environment has had a profound impact on the valuations and investment returns of crypto projects. First, high-interest rates increase the discount rate for future earnings, meaning that the expected returns of crypto projects relying on long-term growth or token value will depreciate due to increased discount costs, directly compressing project valuations in the secondary market. At the same time, as the yields on risk-free assets (such as US Treasury bonds) exceed 4.5%, investors are more inclined to choose low-risk, high-return asset allocations, reducing their funding for high-risk crypto projects. This change in capital flow further weakens the financing capabilities of crypto startups, making it difficult for many projects to secure sufficient capital support. Additionally, the low valuations and reduced funding in the secondary market make it challenging for investors to achieve high-return exits, and the shrinking investment return rates not only affect the returns of VC funds but also undermine market confidence in the crypto sector.

The Lifeline for VCs: Can "Home Runs" Cover Massive Losses?

Data screening criteria:

Prioritize investment counts: The same project may undergo multiple rounds of financing, with significant valuation differences across rounds directly impacting investment returns. Therefore, different rounds of financing for the same project are treated as independent investment counts to more accurately reflect investment activity.
Binance projects prioritized: As one of the largest exchanges globally, Binance has extensive liquidity and market coverage capabilities. To more comprehensively reflect market performance, only projects that have launched spot trading on Binance are selected as star projects.
Data accuracy: Investments disclosed after token issuance are considered OTC (over-the-counter) and are not counted in the venture capital category to ensure the accuracy and consistency of data statistics.
Exclude projects with insufficient data dimensions: Projects that do not disclose investment amounts and valuations are excluded from statistical calculations due to insufficient data dimensions.

In the venture capital field, high failure rates are the norm. The success or failure of VC funds does not depend on avoiding project failures but on whether one or two "home run" projects can emerge from their investment portfolios. These successful projects need to deliver at least 10 times or even higher returns to compensate for the losses of numerous other projects that have gone to zero, ultimately achieving overall profitability for the fund.

In the current crypto market, successfully listing on Binance spot has become the golden standard for measuring whether a project has truly "made it." Therefore, the core question for evaluating investment returns in the primary market can shift from "Will the project die?" to: What proportion of the investment portfolio can ultimately list on Binance? Are the returns from these projects sufficient to cover the massive losses of those that did not list?

Let’s look at a set of macro data to examine the brutal funneling process of projects from investment to listing on Binance from two dimensions: "investment counts" and "project counts."

Taking an investment portfolio that includes 1,026 investments corresponding to 757 unique projects as an example, its overall performance is as follows:

The Vast Majority of Investments Remain Silent (Not TGE)

Among all investments, as many as 747 investments (accounting for 72.8%) corresponding to 584 projects (accounting for 77.1%) failed to complete TGE (Token Generation Event and listing on exchanges). This means that over 70% of investments and projects are still at the paper stage, not yet entering the public market circulation, facing extremely high uncertainty.

A Few Successfully "Issue Tokens" (Complete TGE)

Only 279 investments (accounting for 27.2%), corresponding to 173 projects (accounting for 22.9%), successfully achieved TGE and entered secondary market circulation. This is the first step for projects to provide exit opportunities for early investors, but there is still distance to "success."

The Final Narrow Bridge (Listing on Binance)

At the top of the pyramid, only 76 investments, corresponding to 42 projects, successfully listed on Binance spot.
This means that even among those projects that have successfully "issued tokens," only about a quarter (24.3% by project count, 27.2% by investment count) can reach Binance, the top liquidity market.
From the starting point of the entire investment portfolio, the success rate is even lower:
By investment count, the proportion that can ultimately list on Binance is only 7.4%.
By project count, the proportion that can ultimately list on Binance is as low as 5.5%.

For any crypto fund, the probability of its investments being able to list on Binance is only about 5.5%. This means that over 94.5% of investment projects cannot deliver top-tier returns.

Now let’s see how the 5.5% "chosen ones" perform. Below is an estimate of the average return rates for projects backed by top institutions that successfully listed on Binance spot:

It can be seen that even for the world's top VCs, the average return multiples for their projects listed on Binance generally range between 2 to 5 times, far from the "10 times" myth needed to cover losses.

Let’s do some math. Suppose a fund needs to break even; a highly simplified model is: if 77% of projects go to zero, the remaining 23% of projects need to generate at least 4.3 times average returns (1 / 0.23 ≈ 4.3) to barely break even.

However, the reality is:

The proportion that can list on Binance is too low: only 5.5% of projects can reach top liquidity.
The returns from projects listed on Binance are not high enough: average returns of 2-5 times are far from covering the losses of the other 95.5% of projects that failed. Not to mention those that did not list on Binance and only listed on ordinary exchanges, which have even worse return rates and liquidity.

This harsh reality is that even for top funds, viewing all investment projects as a whole, the current listing rate on Binance and the return multiples after listing can no longer cover the losses of the many other failed projects in their investment portfolios.

This ultimately leads primary market investment institutions to confront three major challenges: declining absolute returns, lower listing multiples, and liquidity exhaustion. The entire industry's investment logic is being forced to shift from a model of "broad net casting and betting on hits" to a deeper evaluation of projects' intrinsic value, team execution capabilities, and market fit.

Returning to Essence: When the "Web 3 Revolution" Tide Goes Out

The previous text clearly reveals the "fruit" of the market, namely the comprehensive decline in primary market returns and the failure of the 2017-2022 Crypto Vintage investment logic. However, to truly understand this upheaval, we must explore the "cause" behind it. We believe that the dilemmas currently faced by crypto VCs are not merely cyclical adjustments but a profound paradigm revolution. The essence of this revolution is that the crypto industry, after experiencing a round of enthusiastic exploration, is finally beginning to return from the grand narrative of "Web 3" to its true core value: as a disruptive force for building the next generation of financial infrastructure.

Misaligned Skill Trees: The Bankruptcy of the Web 3 Narrative and the End of Growth

In recent years, the entire industry has been immersed in the dream of "Web 3." This dream depicts a decentralized internet where users own data sovereignty and can stand toe-to-toe with Web 2 giants. Under this narrative, the logic for VCs is simple and clear: find the next SocialFi, GameFi, or NFT platform capable of achieving exponential user growth and capture markets worth hundreds of billions or even trillions through disruptive application layer innovations.

However, this path has ultimately proven to be misguided.

The End of Growth: User Bottlenecks in the Web 3 Narrative

All disruptive stories at the application layer are predicated on exponential user growth. But the reality is that user growth in the crypto industry has hit a bottleneck. Complex wallet interactions, difficult private key management, and a lack of real application scenarios have prevented crypto applications from breaking out of niche circles and reaching mainstream audiences. When the myth of user growth collapses, the high valuation models built upon it also come crashing down. Once-popular tracks are now left in disarray.

Value Misalignment: When the "Revolution" Strays from Core Advantages

The core advantage of blockchain technology lies in its financial attributes: efficient creation of assets, permissionless global distribution, and programmable automated interactions. It is fundamentally aimed at changing production relationships, especially the production and circulation relationships of financial assets. However, most past "Web 3" projects have targeted less than 20% of this core, while the rest have attempted to use blockchain as a "financial hammer" to forcibly solve "non-financial nails" like social networking and gaming. This value misalignment has led to a waste of resources and failed explorations. VCs have propelled this grand social experiment, and while the results may not be satisfactory, they are highly valuable—demonstrating with real money which paths are unviable.

Returning to Core: The Essence of the Crypto Industry is Building Next-Generation Financial Infrastructure

If the doors of Web 3 cannot temporarily lead to the future, where is the true value outlet of the crypto industry? The answer is becoming increasingly clear: return to its technological origins and focus on building a new, efficient, and global financial infrastructure.

Unlike the pursuit of a "fresh start" in the Web 3 revolution, the goal of building financial infrastructure is more pragmatic and foundational: it does not aim to create a detached virtual world but to utilize blockchain technology to provide a superior "track" and "traffic rules" for the flow of real-world assets and values.

This precisely explains the trends observed in the data earlier:

The return of DeFi and infrastructure: These are the new financial "tracks" themselves, the cornerstones of value circulation, whose importance is self-evident.
The rise of RWA (Real World Assets): This is key to enabling the "goods" of the real world (such as bonds, real estate, and credit) to ride on the new "tracks," connecting the virtual and the real, empowering the real economy with blockchain efficiency.
The sustained financing capability of CeFi (Centralized Finance): As a "transfer station" and main entry point between the new and old financial systems, its cash flow value is highly favored by capital when the market returns to rationality.

When the industry's development direction shifts from "Web 3 applications" to "financial infrastructure," the entire evaluation system also changes accordingly. The previous reliance on vague narratives and user growth expectations for valuation models is discarded, replaced by a value assessment framework closer to traditional infrastructure, emphasizing system stability, transaction efficiency, asset security, and sustainable business models. This is the fundamental reason for the overall downward adjustment of the current valuation system.

Changing Participants: From "Believers" to "Rational Actors"

In the early stages of any emerging industry, it is dominated by endogenous, idealistic "believers." They are risk embracers, creators and disseminators of new narratives, willing to pay for high-risk, high-return dreams.

However, with the approval of Bitcoin ETFs, the crypto industry is irreversibly moving from niche geek circles to mainstream financial markets. The structure of industry participants is undergoing fundamental changes.

The sources of capital have changed: Traditional financial giants like BlackRock and Fidelity are entering the market with compliant funds. They are not pursuing the speculative myth of hundredfold returns but rather stable asset allocations. To them, Bitcoin is "digital gold," not a ticket to Web 3.
The mindset of investors has changed: After enduring a brutal bear market, investors in the market have shifted from fervent speculators to more cautious "rational actors." They are beginning to focus on the fundamentals of projects, assessing their intrinsic value rather than blindly chasing the next hot trend.

This transformation from "believers" to "rational actors" is not an isolated case; it has striking parallels in the development history of Web 2: the internet bubble around 2000.

At the peak of the bubble, the market's "believers" firmly believed that "whoever captures eyeballs wins." They did not care about profits, only paying for user click rates and grand narratives. A typical example is Pets.com. It had a disruptive story of selling pet supplies online and successfully went public, but it quickly went bankrupt after burning through its investments due to completely ignoring high logistics costs and basic business logic. The failure of Pets.com was not because the vision of the internet was wrong, but because it had the fervor of "believers" without the commercial core of "rational actors."

After the bubble burst, capital dried up, and the market returned to rationality. The core question for investors shifted from "What is your user growth?" back to the simplest "How do you make money?" It is in this "rational actor"-dominated market that true giants emerge. Amazon, despite its stock price plummeting, survived due to its "heavy asset" moat built through warehouse logistics; Google successfully went public in 2004 with its clear and efficient profit model, AdWords, ushering in a new era.

The mirror of history clearly reflects the present: today's Web 3 projects that fail due to unsustainable economic models are akin to yesterday's Pets.com; while the DeFi, infrastructure, and RWA projects currently regaining capital favor resemble Amazon and Google of the past, their value rooted in sustainable, verifiable business logic rather than just a beautiful story.

This change in participants is a necessary path for the industry to mature. When the dominant force in the market shifts from "believers" to "rational actors," the high valuation bubbles built on faith and consensus will inevitably be squeezed out. Only those projects that can provide real, measurable value will receive reasonable valuations and market recognition in the new value system.

In summary, the current dilemmas in the primary market represent a "course correction" in the industry's development path. It marks the end of an era—an era driven by grand narratives and limitless imagination; and it also marks the beginning of a new era—an era dominated by real utility, sustainable business models, and rational capital. For VCs involved, understanding and adapting to this underlying logic shift will be key to navigating cycles and winning in the future.

Transformation of Investment Logic Under Value Reassessment

The market has declared in the most brutal way: a business model that merely relies on "listing on Binance" as an exit path is not investing but gambling. As secondary market liquidity premiums vanish and primary market valuation bubbles burst, the entire industry's value chain is undergoing a painful yet necessary reassessment.

However, this is by no means a reason for pessimistic exit. On the contrary, this is the golden moment for top investors to recalibrate their stance with rigor and patience to capture real value. The goal is no longer to chase the next wave of hot tokens but to invest in and nurture "the Stripe or Uber of the crypto world."

From the perspective of VCs, in the post-AI era, the marginal effect of capital is diminishing, and capital-intensive effects will decline. The costs previously used for hiring, market expansion, and R&D will decrease with the development of AI. Therefore, the value of VCs is no longer merely about throwing money but about endorsement and branding. This will lead to the conclusion that VCs who cannot actively uncover value gaps and merely follow the trend of investing will fade away.

From "Narrative-Driven" to "Business-Driven"

In the past few years, VC investments have overly relied on "sector narratives": ZK, Layer 2, GameFi, SocialFi, NFT… but most projects have failed to self-validate in terms of user retention and real revenue.

The core question for the future is no longer "How many users do you have?" but:

Who are these users?
Are they paying for real pain points?
If token rewards are removed, will they still stay?

Truly resilient projects often have stable on-chain transactions and fee income, driven by real demand rather than subsidies.

Case Study: Ethena

Launched the stable asset USDe in 2024, with circulation exceeding $3 billion within six months, becoming one of the fastest-growing stablecoins;
The core mechanism is a Delta-Neutral structure for hedging perpetual contracts, consistently generating real yield during market cycles;
Users include not only "yield farmers" but also institutions, market makers, and hedge funds, with demand fundamentally being "hedging and stable income," rather than short-term incentives;
The revenue model is directly linked to the derivatives market, with annualized returns exceeding 20% in 2024, gradually solidifying into protocol-level cash flow.

This exemplifies the virtuous cycle of "user demand—real income—protocol value," which is why Ethena can stand out in the fiercely competitive stablecoin market.

"Ballast" Cash Flow

Future investment portfolios need more counter-cyclical cash flow protocols or applications.

Compliance and security API services: Chainalysis generated over $200 million in revenue in 2022, with a valuation reaching $8.6 billion at one point;
Web 3 infrastructure SaaS: Alchemy, Infura, etc., charge through dollar subscriptions, with income unrelated to token prices, providing great stability;
Hybrid on-chain and off-chain valuations: referencing both on-chain indicators like TVL and protocol income, while also incorporating traditional equity tools like DCF and P/E.

Such models provide value anchors for investments and serve as the "ballast" of the portfolio.

Realization of Return Curves

The return curves for crypto VCs are shifting from a "two-year hundredfold" J-shaped curve to an "eight-year tenfold" step curve.

Future exit paths will become more diversified:

Acquisitions by tech giants;
Listings on compliant STO platforms;
Mergers and integrations with traditional industries.

This implies longer cycles and deeper patience.

Signals Clearer Than Ever

The current contraction in the primary market is merely a "de-leveraging" following a period of wild growth. As noise dissipates, signals are clearer than ever.

For serious investors, this means:

Due diligence should resemble that of top equity VCs, focusing on market scale, unit economics, and product moats;
Post-investment support should genuinely empower projects, providing customers and channels rather than just exchange resources.

Prospective Tracks: The Next Round of Investment Opportunities in the Crypto Market

ArkStream Capital believes the following three directions have long-term investment potential:

Stablecoins: The Cornerstone of Next-Generation Global Payments and Settlements

The fundamental significance of stablecoins is not just "counter-cyclical" or "providing cash flow," but to liberate funds from the constraints of geopolitics, foreign exchange controls, and local financial systems, enabling capital to possess "universality" for the first time. In the past, dollar assets could not circulate freely in many countries, or even be accessed, but stablecoins have changed all that: they act as a "digital artery," injecting global capital into previously unreachable regions and industries.

Cross-Border E-commerce & Gaming

Pain Points: Cross-border payments generally take 3-7 days to settle, with fees of 3%-7%, and low credit card penetration leads to loss of payment conversion.
Stablecoin Changes: Using USDT/USDC for T+0/minute-level clearing and settlement, globally connecting wallets, significantly compressing costs and reconciliation expenses.
Market Scale: Cross-border e-commerce > $1 trillion/year (2023), estimated to exceed $3.3 trillion by 2028; global gaming at $184 billion (2023)------if only 10% of e-commerce + 5% of gaming adopt stablecoins, potential annual on-chain flow could reach $200 billion+.

Global Remittances & Remote Payroll

Pain Points: Traditional remittance average cost is 6.39% (Q4 2023), slow arrival, and limited channels; LMIC annual remittances at $656 billion (2023).
Stablecoin Changes: 24/7 arrival, on-chain traceability, significantly lower than traditional MTO costs, facilitating automated batch payroll and micro-payments.
Market Scale: Global remittances approximately $860 billion (2023); if 20% migrate to stablecoins, it could create $170 billion/year in on-chain settlement incremental space.

Corporate Working Capital in High Inflation/Capital Control Markets

Pain Points: Currency depreciation and foreign exchange quotas squeeze operating cash flow, hindering cross-border raw material procurement and external payments.
Stablecoin Changes: Using stablecoins for dollar-denominated operating capital, directly connecting overseas suppliers and contractors, bypassing inefficient/unreliable channels.
Market Scale: Nigeria recorded $59 billion in crypto transactions from July 2023 to June 2024; in Q1 2024, small stablecoin transfers (< $1 million) approached $3 billion, making stablecoins one of the mainstream uses.

DeFi Hedging & Global Derivatives Access

Pain Points: SMEs find it difficult to access foreign exchange/interest rate derivatives for hedging at low costs, with high barriers and slow processes.
Stablecoin Changes: Using stablecoins as collateral for on-chain lending, forwards/options hedging, achieving programmatic, composable risk control and financing.
Market Scale: Global OTC foreign exchange at $75 trillion/day (2022); each 0.5% increase in on-chain penetration ≈ $375 billion/day in potential on-chain nominal transactions.

RWA: Making Traditional Assets Truly Programmable

The scale of traditional financial assets is enormous but has long been constrained by geography, time, and clearing systems: government bonds can only settle on business days, cross-border real estate investment procedures are cumbersome, supply chain bill approvals are lengthy, and private equity funds have almost zero liquidity. Although capital is vast, it is locked in "static reservoirs."

The value of RWA lies in: digitizing rights to income and settlement, creating cash flows that can automatically circulate and combine on-chain. Government bonds can be used as collateral like stablecoins, real estate rents can be automatically distributed, supply chain financing can be instantly discounted, and private equity fund shares can gain secondary liquidity. For investors, this is not merely the digitization of single assets but a reconstruction of global capital efficiency.

Government Bonds / Money Market Funds

Pain Points: High barriers, T+1/2 settlement slows down capital turnover.
On-Chain Changes: Tokenizing T-Bills/MMFs, achieving 24/7 subscription/redemption and collateralization (BUIDL, BENJI).
Market Scale: US money market funds > $7 trillion; tokenized US Treasuries only $7.4 billion (2025-09).

Real Estate and Private Equity Funds

Pain Points: Poor liquidity, long exit cycles, complex cross-border investments.
On-Chain Changes: Tokenizing property/fund shares, distributing rents and dividends on-chain, and introducing secondary liquidity.
Market Scale: Global real estate at $287 trillion, private equity fund AUM > $13 trillion; less than $20 billion has been tokenized.

Supply Chain Financing and Accounts Receivable

Pain Points: SMEs face financing difficulties, with a global trade financing gap of $2.5 trillion.
On-Chain Changes: Tokenizing accounts receivable, allowing investors to connect directly to cash flows, with payments executed automatically by contracts.
Market Scale: Supply chain finance at $2.18 trillion; cumulative on-chain financing exceeds $10 billion.

Commodities and Stocks/ETFs

Pain Points: High friction in cross-border transfers of gold and ETF shares, limitations on fractional trading.
On-Chain Changes: Tokenizing physical gold and ETF/stock shares, enabling both settlement and collateralization.
Market Scale: Market cap of gold tokens ~ $2 billion; on-chain ETF/stock AUM > $100 million.

Crypto + AI: Empowering AI with Economic Agency

For AI to achieve autonomy, it must be able to spend money, reconcile accounts, and prove delivery on its own. The traditional financial system cannot accomplish this: payments rely on manual account openings, cross-border settlements are slow, and fee cycles are long, making it difficult to verify results. The crypto network provides a complete "operating system":

Currency Layer: Stablecoins/Deposit tokens enable global 24/7 settlement, with smart wallets allowing agents to automatically spend by holding tokens, and streaming payments achieving "pay-per-call."
Contract Layer: Fund custody, SLAs, and penalty clauses are written into contracts, with automatic refunds or penalties for service failures; strategy wallets can set limits and whitelists.
Verification Layer: TEE and zero-knowledge proofs allow for auditing of computing power and inference results, with payments based on "proof" rather than "promises."

When spendable money and verifiable work are connected on the same chain, agents are no longer just API callers but can operate like businesses: using money to buy computing power and data, exchanging delivery for income, and accumulating cash flow and credit. This is the true meaning of "Crypto is the native currency of AI."

Agent Native Settlement and Treasury

Pain Points: Fragmentation in API billing and cross-border payments, manual reconciliation/invoicing/risk control, making it impossible to "settle while calling."
On-Chain Changes: Agents hold smart wallets for streaming/micro-payments (by token, by millisecond, by request); contract custody guarantees margins and SLAs, with automatic refunds/penalties for defaults; strategy wallets set daily limits/whitelists/session keys to control risk and permissions.
Market Scale: GenAI total spending ~ $202 billion (estimated for 2028); if 5% is settled in real-time via "Agent→on-chain," it could create a $10 billion/year native payment channel.

Verifiable Computing Power and Inference Market

Pain Points: Cloud billing is expensive and settled later, inference results are unverifiable, and service failures/losses lack automatic compensation.
On-Chain Changes: Computing power providers stake→accept orders→provide proof (TEE/zk/multi-party verification)→settle based on proof; non-compliance leads to slashing; prices are matched by bidding pools, with "pay for proof" replacing "pay after trust."
Market Scale: AI infrastructure spending ~ $223 billion (estimated for 2028); 5% decentralized/verifiable channels ≈ $11 billion in on-demand settlement.

Data Source and Licensing Revenue Sharing

Pain Points: The sources of data for training/fine-tuning/inference are unclear, and measuring authorizations is difficult, making it hard for creators and enterprises to sustain revenue sharing.
On-Chain Changes: Data/models/materials are signed on-chain for licensing and fingerprint tracing; each call automatically splits revenue to addresses (creators, data DAOs, annotators, model owners), permanently binding earnings to sources.
Market Scale: Data brokerage ~ $292 billion (2025), creator economy ~ $480 billion (2027); if 5% connects to on-chain licensing and automatic revenue sharing, it could create billion-dollar-level continuous distribution channels.

Conclusion

In 2017, Crypto VCs brought "venture capital and token financing" into the crypto ecosystem. By 2024, foundational infrastructure and compliance channels have been filled, marking the end of the first curve—the creation and circulation of assets and highways from 0 to 1.

We officially enter the second curve of crypto in 2024—not to recreate a "hotter narrative," but to leverage crypto as a globally open, efficient, and verifiable financial highway to support real productivity: stablecoins enable cross-border capital flow, RWA brings cash flow assets on-chain, and Crypto + AI connects funds directly to delivery. The true value of the industry is shifting from valuation narratives to the reconstruction of production relationships.

For VCs, the role has not disappeared but has shifted towards more pragmatic value creation. Capital needs to transition from "chasing trends" to "calculating accounts," helping entrepreneurs connect real demand, stable cash flow, and reusable financial primitives to the chain. Investors who adhere to fundamentals and execution capabilities will become the true value capturers in the next decade.

Appendix

The investment and return data discussed in this article can be found in the table below; feel free to download.

References

https://cn.rootdata.com/

https://sosovalue.xyz/

https://defillama.com/

https://cryptorank.io/

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