The original text is from Richard Chen
Translation｜Odaily Planet Daily Golem (@web 3_golem)
In 2025, cryptocurrency welcomes the "dawn of mainstreaming." The U.S. "GENIUS Act" has been signed into law, providing clear regulation for stablecoins in the crypto market, and mainstream institutions are actively adopting cryptocurrencies. Compared to the past decade, it's a huge win!
As crypto technology bridges the gap, early-stage venture capitalists are beginning to see more crypto-adjacent projects, rather than just crypto-native projects. "Crypto-native" refers to projects built by "crypto experts" for "crypto experts," while "crypto-adjacent projects" refer to those using crypto technology in larger traditional sectors. This is the first time in my career that I have witnessed such a shift, and this article will discuss the key differences in building both.
Projects Built for Crypto-Native Users
So far, the most successful crypto products have almost all been built for crypto-native users: Hyperliquid, Uniswap, Ethena, Aave, and so on. Like any subcultural movement, crypto technology is so avant-garde that those outside the crypto-native bubble cannot "understand" it and cannot become enthusiastic daily active users. Only those crypto-native Degens on the front lines have enough risk tolerance, are willing to get their hands dirty, test every new product, and endure the trials of hacking, online fraud, and more.
Most traditional Silicon Valley venture capital firms previously abandoned crypto-native projects because they believed the potential market size (TAM) for crypto-native users was too small. This was indeed the case, as the development of crypto technology was still in a very early stage. At that time, there were almost no on-chain applications, and the term "DeFi" was only introduced in a group chat in San Francisco in October 2018.
But at that time, entrepreneurs had to hold onto hope, praying that macro tailwinds would eventually arrive, significantly increasing the potential market size (TAM) for crypto-native applications. Sure enough, the summer of DeFi arrived in 2020, and liquidity mining combined with the zero-interest era of 2021 rapidly expanded the market size for crypto-native applications. Overnight, every venture capitalist in Silicon Valley rushed into the cryptocurrency space due to FOMO, seeking advice from crypto VCs, hoping they could make up for the missed opportunities of the past four years.
However, from then until today, the TAM for crypto-native applications remains relatively small compared to non-crypto markets. The number of crypto users on X (a significant social media platform in the crypto space) may only be in the tens of thousands at most. Therefore, to achieve a nine-figure annual revenue (ARR), the average revenue per user (ARPU) must be very high. This leads to the important fact:
The core of crypto-native applications is to cater to heavy crypto users.
Every successful crypto-native product exhibits an extreme power-law distribution in user engagement. Last month, the top 737 users (0.2% of total users) accounted for half of OpenSea's trading volume; the top 196 users (0.06% of total users) accounted for half of Polymarket's trading volume.
As a founder of a crypto-native project, what should truly keep you awake at night is how to retain your core users, not how to attract more new users. This is contrary to traditional Silicon Valley thinking, which emphasizes user growth, such as daily active users (DAU).
However, user retention in the crypto space has always been challenging. Core users are often profit-driven and respond well to incentives. This makes it easy for emerging competitors to appear out of nowhere; by poaching a few of your core users, they can erode your market share. Examples like Blur and OpenSea, Axiom and Photon, LetsBonk and Pump.fun illustrate this fact.
All of this indicates that the defensibility of crypto-native products is far lower than that of Web 2, and everything is open-source and easily replicable. Crypto-native projects come and go, with few lasting beyond one cycle or even a few months. Founders often become wealthy after a token generation event (TGE) and choose to quietly exit the project, turning to angel investing as a post-retirement job.
The only secret to retaining core users is to continuously innovate the product, always staying one step ahead of the competition. Seven years later, Uniswap remains competitive because it continuously rolls out new 0 to 1 product features that satisfy heavy users: V3 concentrated liquidity, followed by UniswapX, Unichain, and V4 hooks. Although Uniswap is building a decentralized exchange (DEX), and the DEX space is the most crowded and competitive in the crypto industry, it still stands out.
Building Crypto-Adjacent Applications
In the past, there have been numerous attempts to apply blockchain technology to larger real-world markets, such as supply chain management or interbank payments, but they failed due to timing issues. Fortune 500 companies experimented with blockchain in their innovation labs but did not take it seriously enough to apply it on a large scale in production. Remember those popular slogans "Blockchain is not Bitcoin" and "Distributed Ledger Technology"?
Today, we see a 180-degree shift in existing companies' attitudes toward crypto. Large banks and corporations are launching their own stablecoins. The regulatory clarity from the Trump administration has opened the "Overton Window" for the mainstream application of cryptocurrencies _ (Odaily Note: a political theory that refers to policy ideas that were once outright rejected are now widely discussed)_. Cryptocurrencies are no longer the unregulated Wild West of finance.
In our careers, we will see more crypto-adjacent projects than crypto-native projects for the first time. This is well justified, as the biggest achievements in the coming years are likely to come from crypto-adjacent projects rather than crypto-native projects, since the IPO scale in traditional financial markets can reach hundreds of billions, while the TGE scale in the crypto space is only in the hundreds of millions to tens of billions.
Examples of such projects include:
- Fintech companies using stablecoins for cross-border payments;
- Robotics companies using DePIN incentive mechanisms for data collection;
- Consumer goods companies using zero-knowledge proof transport layer security protocols (zkTLS) to verify private data;
- ……
The commonality among these projects is that they treat crypto technology as a function rather than a product.
In the crypto-adjacent industry, heavy users are still important, but their influence is not as significant. When crypto merely becomes a function, the success of the project is less about crypto and more about whether the entrepreneur is a deep expert in the crypto-adjacent industry and understands which factors are crucial. Let's take fintech as an example.
The core of fintech lies in acquiring distribution channels with good unit economics (CAC/LTV). Today, emerging crypto fintech startups are always worried that a more established non-crypto fintech company with broader distribution channels will use crypto technology as a function, thereby crushing them or driving up CAC, making it impossible for them to compete. Moreover, unlike crypto-native projects, they cannot save themselves by issuing a token that looks good narratively.
Ironically, crypto payments have long been an unappealing category, but before 2023, it was an excellent time to start a crypto fintech company and seize distribution channels. After Stripe acquired Bridge, we saw founders of crypto-native companies shift from DeFi to payments, but they would inevitably be outperformed by former Revolut employees who are well-versed in fintech strategies.
What Should Crypto VCs Do?
What does the rise of crypto-adjacent businesses mean for crypto venture capital? It is important not to engage in adverse selection of founders that non-crypto-specialized venture capital firms would abandon, as crypto VCs are often those who do not have a deep understanding of non-crypto-native industries. This adverse selection largely manifests as choosing those crypto-native founders who have recently turned to the crypto-adjacent industry.
But the unsettling fact is that, generally, the cryptocurrency space often engages in adverse selection of founders who have not succeeded in Web 2.
Historically, a good way for crypto VCs to find arbitrage opportunities has been to look for talent outside the glamorous Silicon Valley network. They may not have shiny resumes (like Stanford or Stripe) and may not excel at pitching to VCs, but they have a deep understanding of crypto-native culture and have built a passionate online community. Hayden left Siemens' mechanical engineering department to create Uniswap by learning Vyper. Stani created Aave (originally ETHLend) while completing law school in Finland.
However, the prototype of a successful crypto-adjacent project founder is entirely different from that of a crypto-native project founder. They are not the type of wild west financial cowboys who deeply understand the variables of the crypto-native industry and can cultivate a cult of personality around themselves and their token network. Instead, they may be a more mature, business-savvy founder who comes from a traditional industry and has unique marketing strategies to acquire users. As the crypto industry matures, so will the next generation of successful founders.
Inspiration for Entrepreneurs of Crypto-Adjacent Projects
The Telegram ICO in early 2018 well exemplified the divergence in thinking between Silicon Valley venture capitalists and crypto-native venture capitalists. Companies like Kleiner Perkins, Benchmark, Sequoia, Lightspeed, and Redpoint invested in Telegram because they believed it had the users and distribution channels to become a dominant application platform. Almost all crypto-native venture capitalists, however, passed on it.
The crypto industry currently does not lack consumer applications. However, the vast majority of consumer applications are not in sectors that venture capital is willing to support, as their revenue lacks stickiness. For such businesses, founders should not seek venture capital but should be self-sufficient and find ways to become profitable. Then, in the months before this consumer trend shifts, they should continue to capitalize on the current consumer craze to print money.
Nubank (a digital banking platform based in Brazil) has an unfair advantage because they entered the field before the term "fintech" was clearly defined. Similarly, they are competing for users against Brazil's existing large banks rather than against other fintech startups. Brazilians are so fed up with the existing banks that they immediately turned to Nubank after its product launch, giving Nubank the rare advantage of having nearly zero customer acquisition cost (CAC) and product-market fit at the same time.
If you are building a new stablecoin bank for emerging markets, you should not be living in San Francisco or New York. You need to be grounded and communicate with users in those countries. This is actually a good initial screening criterion.
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