Author: Wu Talks Blockchain
Recently, the well-known venture capital firm a16z announced that its cryptocurrency investment division a16z Crypto has been renamed a16z Frontier, extending its investment scope from Crypto to cutting-edge technology fields such as AI and robotics. This change also reflects that some cryptocurrency VCs are re-examining their investment directions.
This episode of Wu Talks podcast invites Dashan, co-founder of Waterdrop Capital, and Xiaoyang, a practitioner from a cryptocurrency VC, to discuss the true survival status of the cryptocurrency primary market. The two guests come from different scales of investment institutions but face similar problems: a large number of projects are struggling to maintain operations, investors find it difficult to exit, traditional cryptocurrency investment opportunities are decreasing, and funds and attention are gradually shifting towards emerging fields like AI.
Since its establishment in 2017, Waterdrop Capital has invested in nearly 300 projects, currently managing funds amounting to hundreds of millions of dollars. Dashan revealed that less than one-third of the invested projects are still operating well, with about 20%-30% of projects involved in running away, going to zero, defaulting, or harming investors' rights. By 2026, among the more than ten projects invested by Waterdrop Capital, only three or four belong to the cryptocurrency field, while the others are mainly focused on AI and chips. Dashan believes that cryptocurrency no longer needs to be the main character of the digital economy but should become the infrastructure for areas such as AI agent payments, data privacy, and operational verification.
In contrast, the fund Xiaoyang is part of has a scale of about 20 million dollars and has invested in about 100 projects, with more than 70 investments made in 2024 alone, but has stopped new investments since the first quarter of 2025. Xiaoyang stated that about two-thirds of the invested projects are still operational, but more than half struggle to maintain effective communication with investors. The fund's reported returns are close to breakeven, but actual exits still face difficulties. Both guests agree that future investments should pay more attention to founder integrity, genuine user needs, and sustainable business models rather than short-term market trends.
The opinions expressed by the guests do not represent those of Wu Talks and do not constitute any investment advice. Please strictly adhere to local laws and regulations.
Part One: Dashan of Waterdrop Capital — Transition from Crypto Investment to AI
Starting with 5000 ETH, accumulating nearly 300 projects
Cat Brother: Can you introduce the development history, fund size, and investment style of Waterdrop Capital?
Dashan: Waterdrop Capital was established in 2017 and is one of the earlier Token Funds in China. The initial co-founders pooled about 5000 ETH, mainly investing in ETH and BTC, and only gradually started using USDT after 2019.
In 2021, we established an LPF compliance structure in Hong Kong, and in 2023, we collaborated with traditional financial institutions to set up a compliant fund. Currently, taking into account our own funds and the funds we manage, the overall scale has reached several hundred million dollars, covering primary markets, secondary markets, quantitative trading, and RWA, among others, with the scale of the primary market fund being about tens of millions of dollars.
As of now, we have invested in nearly 300 projects. The team is about 15 people, kept under 20 in total.
The name Waterdrop Capital comes from Liu Cixin’s “Three-Body Problem.” We several co-founders are fans of “Three-Body Problem,” and at that time believed that blockchain could become a technology that disrupts the traditional financial system like the “water drop” in the novel, hence the name Water Drip.
Cat Brother: What changes have occurred in your investment direction over the years?
Dashan: During the ICO boom in 2017, we mainly invested in public chains and various “blockchain+” projects, including ecosystems like Cosmos and Polkadot. From 2018 and 2019 onwards, we started focusing on the integration of blockchain with traditional industries, and later entered areas such as DeFi and Layer 2.
The Bitcoin ecosystem is also a representative investment direction for us. We participated in Bitcoin mining in the early days, and later established a dedicated Bitcoin ecosystem fund, Satoshi Lab, investing in projects like the Lightning Network, RGB, and Bitcoin Layer 2.
We did participate in inscriptions but felt that it was closer to Meme Coin and therefore did not invest heavily. Although the enthusiasm for the Bitcoin ecosystem has declined, technologies like the Lightning Network and RGB are still developing, and we will continue to pay attention to them.
Overall, we are increasingly inclined to invest in projects with practical applications rather than those with high valuations and only technological concepts.
Cryptocurrency VCs undergo a major reshuffling; why is Waterdrop Capital still expanding?
Cat Brother: Many cryptocurrency VCs have faced difficulties in the past two years; why is Waterdrop Capital expanding instead?
Dashan: In 2018, there were over a hundred cryptocurrency investment institutions in China, but many of the funds that were active that year have now disappeared. Waterdrop Capital has been able to persist because, on one hand, we accumulated certain assets through early investments in Bitcoin and mining, and on the other hand, our team is small, keeping operating costs relatively low.
We have issued four funds in the past, some with returns reaching tenfold or twentyfold, while others did not break even, but we did not carry out large-scale layoffs because of this.
In the past two years, we have indeed increased personnel, primarily focusing on AI, chips, U.S. stocks, and related businesses, rather than expanding the crypto investment team. Besides Hong Kong, we now also have colleagues in the United States and Japan.
I have always hoped to keep the team under 20 people. Now AI can help accomplish a lot of research and auxiliary work without needing many employees. At the same time, I prefer flat management, hoping to communicate directly with each colleague every week; a larger team would actually reduce efficiency.
After investing in nearly 300 projects, founder integrity is more important than technology
Cat Brother: After so many investments, what do you think is the most important criterion for selecting projects?
Dashan: If I were to choose again, the first thing to consider is whether the founder is honest, followed by the trend of the sector and the timing of the investment.
We have fallen into many pits in the past. Some project founders had untrue resumes, financing materials were exaggerated, or they did not fulfill their promises. Sometimes we know the team is boasting, but seeing well-known institutions participating, we still invest with a mindset of following the trend to make money, which often results in significant losses.
More troublesome is that even if a project successfully issues tokens and the price increases, investors may not necessarily make money. Some teams do not unlock tokens as agreed, some hide financial conditions, and some even privately sell tokens, leading to investors unable to exit normally.
Thus, project success and investor returns are two different matters. Whether the founder is trustworthy is more important than technical ability and fundraising background.
Cat Brother: How should the timing of investment be judged?
Dashan: The lifecycle of many niche cryptocurrency sectors is only a few months to a year or two. In the past, many technological concepts ultimately did not form real demand, but directions like DeFi, DEX, and asset tokenization have proven to have long-term value.
For instance, zero-knowledge proofs are inherently valuable, but that does not mean every technology needs to establish a separate public chain and issue tokens. Many technologies can be integrated into existing ecosystems as infrastructure.
We have also made money in sectors that were eventually disproven because we entered early and exited timely. But I believe that truly successful investments should be when investors obtain returns while the project actually solves problems and exists long-term.
Investing too late might lead to taking over, while investing too early might mean missing market maturity. Finding the right timing is crucial.
Projects running away, defaulting; nearly 30% of investments encounter problems
Cat Brother: Among the nearly 300 invested projects, how many are still operating normally?
Dashan: We did a survey in the first half of this year, and there are still fewer than one-third of the projects that are operating well, continuously developing, trading tokens normally, and are financially capable of supporting long-term growth, about 60 to 70 projects.
If we include those that successfully issued tokens and performed normally but have since stopped being active due to operational difficulties, the overall compliance situation should exceed half.
However, about 20%-30% of projects involve running away, going to zero, defaulting, or harming investor rights, which is a very high proportion.
Many of these issues are related to founder integrity. Some teams, after obtaining financing, did not manage the funds as agreed; some aimed to hyped and cash out from the start; and some ceased communication after running out of funds.
Cat Brother: When projects default, how do you usually protect your rights?
Dashan: If the amount is small, we may have to give up because cross-border litigation costs are very high. But if it involves a larger amount, we will take legal measures.
We once had a lawsuit in the U.S., spending over $900,000 on legal fees, eventually recovering over $1.3 million. Although profits are limited after deducting costs, it at least shows that we will hold them accountable.
There are also projects that used the name Waterdrop Capital for publicity without authorization to attract retail investors to buy tokens. In such cases, we have even voluntarily reported to the police, clarifying that we had not participated in the investment.
These experiences have made us place greater emphasis on due diligence, including checking founders' backgrounds, financial conditions, and credit records.
Significantly reducing Crypto investments in 2026, turning to AI and chips
Cat Brother: How many projects did Waterdrop Capital invest in 2026? Why reduce Crypto investments?
Dashan: This year, we invested in more than a dozen projects, with only about three or four being purely cryptocurrency-related—all the others mainly focus on AI and chips.
Even these few cryptocurrency projects mainly revolve around real applications like AI Agent, Agent payments, and tokenized stocks.
We've reduced investments in the crypto primary market, but the overall investment amount has actually increased, just that more funds are directed towards AI and chips.
Since 2024, we've been researching these new directions. Blockchain has developed for over a decade, and the infrastructure is now relatively mature, with no particularly major breakthroughs in underlying technologies in the past two to three years. As VCs, we need to seek new technological opportunities.
Cryptocurrency is no longer the main character; the future should serve AI
Cat Brother: Do you think the shift of cryptocurrency VCs towards AI is a trend in the industry?
Dashan: I think more importantly, the positioning of cryptocurrency has changed.
In the past, we believed that blockchain would completely change traditional finance and even replace some institutions on Wall Street. But now it seems that although Bitcoin, DeFi, etc. have made significant progress, blockchain has not entirely changed the traditional financial system.
I now believe that cryptocurrency is more suitable to be the infrastructure of the digital economy rather than the main character. The future main character might be AI, especially the AI agent economy.
Blockchain should think about how to serve AI, including payments between agents, data security, privacy protection, and operational records.
I no longer have faith in those projects that cycle internally only within cryptocurrency, such as developing new public chains for fundraising, or solely relying on issuing tokens and marketing to attract users.
More worthwhile directions to focus on in the future include RWA that serves traditional finance and infrastructure that serves AI.
Opportunities in AI Agent Payments, Data Privacy, and Zero-Knowledge Proofs
Cat Brother: What specific directions are worth paying attention to?
Dashan: The first is data privacy and AI safety. Many governments, hospitals, schools, and enterprises want to use AI but are hesitant to directly hand over sensitive data to large models.
Blockchain, encryption technology, and zero-knowledge proofs can help protect data and record key operations, making AI systems more transparent and auditable. These technologies may combine in the future with specialized hardware and computing power; we have already invested in some related projects.
Another important direction is AI agent payments. For ordinary users, traditional payment tools like credit cards and Alipay are convenient enough and do not necessarily require cryptocurrency.
But agents are different. They lack traditional identities and bank accounts and find it difficult to complete KYC like humans. In the future, agents may frequently purchase data, computation, and other services from each other, which require automated payment and settlement, where crypto might be a more natural solution.
To some extent, many of the blockchain infrastructures we've built in the past may not have been prepared for humans but rather for future AI agents.
Cat Brother: When might AI agents truly drive cryptocurrency development?
Dashan: I think we need to wait for AI agents to become widespread first. Currently, agents can book tickets, write research reports, send emails, and even execute blockchain transactions, but there are still not many high-frequency users.
Once agents enter work and life on a large scale, demands for payments, identity verification, data security, and operational audits will truly arise.
This process may take one to three years, but could also be faster. The next round of opportunities for cryptocurrency development may emerge after the widespread adoption of AI agents.
Part Two: Xiaoyang from a Small Cryptocurrency VC — Project Disappearances, Difficult Exits, and Investment Halts
20 million dollar fund, investing in over 70 projects in 2024
Cat Brother: Can you introduce the scale, team, and investment strategy of your fund?
Xiaoyang: We are a small VC with a scale of about 20 million dollars, mainly investing in early projects in the fields of cryptocurrency and cutting-edge technology, including infrastructure, DeFi, AI, data security, and privacy.
Investment stages primarily focus on Pre-Seed and Seed, with funds coming from individual LPs, family offices, and other VCs, and our team consists of about 10 people.
The fund began investing around 2023, and I joined in 2024. In just 2024, we invested in over 70 companies, cumulatively investing in about 100 projects.
But in 2025, we invested in fewer than 10 projects, primarily focused in the first quarter. After that, we halted all new investments, not just in crypto but also in other areas like AI.
Why halt investments? About one-third of projects can hardly operate normally
Cat Brother: Why did you suddenly stop investing after 2025?
Xiaoyang: Mainly because we already have about 100 projects in our current portfolio that require a great deal of effort to manage. At the same time, we have a clearer understanding of the risks associated with early investments, and the fund manager’s attention gradually shifted towards other matters.
Since 2025, some invested projects have gradually ceased operations or scaled back their businesses. Even if a sector itself has potential, it does not mean that every team can successfully produce a product or secure the next round of financing.
Therefore, we decided to pause new investments and focus on the existing projects, helping them seek collaboration opportunities and connect resources.
Cat Brother: Among the current approximately 100 projects, how many are still operating?
Xiaoyang: Based on actual tracking, about two-thirds are still in operation. However, some are just barely holding on and may not last much longer.
More seriously, over half of the projects struggle to maintain effective communication with investors. Some teams still update on X but respond rarely to messages; we can only judge whether they are still operating through their official website and social media.
The number of projects that can continuously report progress to investors is much fewer than those that appear to still be operating.
Long-term uncontactable project parties, small VCs struggle to protect their rights
Cat Brother: If project parties do not reply, how do you handle it?
Xiaoyang: We try to reach out via email, instant messages, and other contacts, but there are some teams that simply do not respond no matter what.
Since our single investment amounts are relatively small, they may not hold as much importance in the eyes of the project parties compared to larger funds.
Legal measures are also difficult. Even if they reply and tell you that the project is still being developed, it is hard to verify actual progress. When they completely go dark, it's even more challenging to gather evidence to take action.
So I feel that small VCs are in a very weak position in post-investment management.
Cat Brother: How do you assess projects during early investments?
Xiaoyang: We place a lot of emphasis on the founders and the team, with many projects coming from long-term collaborations or referrals from acquaintances.
In early-stage investments, it is crucial to invest in people; we hope that even if the initial direction fails, the founders have the capability to pivot.
But we also assess whether the technology solves real problems and whether there is a sustainable revenue model; advanced technology does not guarantee project success.
Fund returns are nearly flat; actual exit returns may be worse
Cat Brother: After investing in about 100 projects, is the fund overall profitable or losing money?
Xiaoyang: From a book perspective, there's a bit of profit, but the margin is not large, basically close to breakeven.
If we consider the actual operating situation of the projects and the amount that can genuinely be exited in the future, I believe losses may exist.
The main problem is that many tokens have not been unlocked or projects have not reached the exit stage. Book valuations do not equal the actual amount that can be realized.
Early-stage VCs generally rely on a few successful projects to cover losses from other investments. We are somewhat fortunate that our portfolio includes over 20 pure AI projects, some of which are performing well. If these projects can exit smoothly in the future, the overall return may still be positive.
Cat Brother: Which projects have the best returns? Have there been any complete losses?
Xiaoyang: Currently, projects like Caplabs, Prime Intellect, and Excel Labs show decent book returns, many of which come from the AI field.
In terms of losses, we invested nearly 300,000 dollars in an AI graphics analysis project related to the fashion industry, but its valuation eventually went to zero, resulting in almost no return.
This shows that AI is not a guaranteed direction; early-stage investments always carry very high uncertainty.
No investment plans for the next year or two; Cryptocurrency VCs are slowing down
Cat Brother: Do you consider resuming investments in the future? How are other Cryptocurrency VCs doing?
Xiaoyang: To my knowledge, we should not resume new investments this year and the next at least. We still need to track several dozen projects and will focus our energy on the existing portfolio.
Although we've halted investments, the team has not experienced layoffs because of this.
From what I've encountered, many cryptocurrency VCs are reducing their investment frequency, and some have not invested in new projects for a long time. Some funds have made personnel adjustments, while others maintain their original teams.
I have also heard of some funds facing dissolution due to serious losses, but this information has not been verified and cannot represent the entire industry.
Cat Brother: What investment directions do you still favor in the future?
Xiaoyang: We focus more on genuine user needs, technological implementation, and sustainable revenue rather than short-term fads.
Currently, we are particularly interested in AI generation, data technology, smart financial infrastructure, and fields like film and television. However, paying attention to these directions does not mean we will immediately resume investments.
Star project raises tens of millions but ultimately halts operations
Cat Brother: After working at this VC for more than two years, what has been your biggest feeling?
Xiaoyang: Many projects do not actively communicate with investors after fundraising. Some teams do not proactively update progress and even do not reply when investors inquire.
We do not only want to supervise projects; we also hope to help them connect with resources and partners. But some teams are unwilling to establish long-term collaborative relationships with investors.
For small VCs, this situation is particularly evident. When the project's financing goes smoothly and market attention is high, our investment amounts are small and it is hard to gain enough influence.
Cat Brother: Are there any typical cases?
Xiaoyang: We once invested in a well-known project that raised tens of millions of dollars and garnered high market attention, but then halted operations.
At that time, we had meetings with the team and asked about basic business progress and operational conditions, but their attitude was very poor. We posed several questions consecutively, and they directly responded with “inconvenient to disclose.”
Although our investment amount was not large, as investors, we should at least have the right to understand the project's basic situation. Looking back, I am not surprised that this project eventually failed.
Cat Brother: Is this lack of respect for investors common?
Xiaoyang: In fact, it is not common. Most projects, even if replies are not timely, at least maintain a basic level of respect.
But for small VCs, it becomes very difficult to handle such situations. Especially when the project's fundraising is large and the market attention is high, it is hard for us to demand regular reports.
I also wonder if large VCs face these same problems, or if it is easier for project parties to neglect us simply because our investment amounts are too small.
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