The crypto industry is facing a severe wave of elimination, and a vertical segmentation strategy may be the way to break the deadlock.

The crypto industry is gradually starting to avoid discussing how grand the narrative is, and instead focusing on the sustainability of the economic model. The reason is simple: when institutional funds start to get involved in the crypto space, economic fundamentals will become extremely important, and crypto entrepreneurs need to reposition themselves in a timely manner. The crypto industry has passed its infancy and is entering a new stage, where the revenue base determines the success or failure of a project. Humans are shaped by and composed of emotions, among which nostalgia is particularly prominent. This attachment to the old normal makes us easily resistant to technological changes. Let's call it "cognitive inertia": the inability to break away from old ways of thinking. When the underlying logic of an industry changes, early adopters always cling to the past. When the electric light was invented, some people lamented that oil lamps were better; in 1976, Bill Gates had to write an open letter responding to the grievances of geeks who were unhappy with his development of paid software. Today, the crypto space is experiencing its own moment of cognitive inertia. In my spare time, I always think about how the industry will evolve. The dream of "DeFi Summer" has now appeared, and Robinhood has issued shares on the blockchain. When the industry crosses the chasm, how should founders and capital allocators act? As internet edge users begin to use these tools, how will the core crypto narrative evolve? This article attempts to explain how to generate monetary premiums by distilling economic activity into compelling narratives. Let's dive in. The traditional crypto playbook is no longer effective. Venture capital can be traced back to the whaling era of the 19th century. Capitalists invested in ships, crews, and equipment, and successful voyages often yielded tenfold returns. But this meant that most expeditions ended in failure, either due to bad weather, shipwrecks, or even crew mutiny, but one success could be very rewarding. Today's venture capital is the same. As long as there is one super project in the portfolio, it doesn't matter if most startups fail. The common thread connecting the whaling era and the app explosion of the late 2000s is market size. Whaling was viable as long as the market was large enough; developing apps was viable as long as the user base was large enough to form a network effect. In both cases, the density of potential users created a market size sufficient to support high returns. On the other hand, the current Layer 2 ecosystem is dividing a market that is already small and increasingly competitive. Without volatility or new wealth effects (such as meme assets on Solana), users lack the incentive to cross-chain. This is like traveling from North America to Australia to hunt whales. The lack of economic output is directly reflected in the prices of these tokens. The angle to understand this phenomenon is through "protocol socialism": protocols subsidize open-source applications through grants, even if they have no users or economic output. The criteria for these grants are often social affinity or technical fit, which evolves into a "popularity contest" funded by token hype rather than an effective market. When liquidity was abundant in 2021, it didn't matter whether tokens generated enough fees, whether users were mostly bots, or even whether there were any applications. People were betting on the hypothetical probability of protocols attracting massive users, like being able to invest in Android or Linux before they took off. The problem is that in the history of open-source innovation, there have been few successes in tying capital incentives to forkable code. Companies such as Amazon, IBM, Lenovo, Google, and Microsoft directly incentivize developers to contribute to open source. In 2023, Oracle was actually the main contributor to Linux kernel changes. Why would for-profit organizations invest in these operating systems? The answer is obvious: they use these foundations to build profitable products. AWS relies in part on Linux server architecture to generate tens of billions of dollars in revenue; Google's open-source Android strategy has attracted manufacturers such as Samsung and Huawei to jointly build its dominant mobile ecosystem. These operating systems have network effects that are worth continuous investment. For three decades, the scale of economic activity supported by their user base has formed an influential moat. Comparing today's Layer 1 ecosystem: DeFillama data shows that of the more than 300 existing Layer 1s and Layer 2s, only 7 chains have daily fees exceeding $200,000.00, and only 10 ecosystems have a TVL of over $1 billion. For developers, building on most Layer 2s is like opening a store in the desert, with scarce liquidity and unstable foundations. Unless you throw money at it, there is no reason for users to come. Ironically, most applications are doing just that, under pressure from grants, incentives, and airdrops. Developers are not competing for a share of protocol fees, which are precisely a symbol of protocol activity. In this environment, economic output becomes secondary, and gimmicks and performances are more eye-catching. Projects don't need to be truly profitable, they just need to appear to be building. This logic works as long as someone buys the coin. Being in Dubai, I often wonder why there are token drone shows or taxi advertisements. Do CMOs really expect users to emerge from this desert nest? Why are so many founders so keen on "KOL rounds"? The answer lies in the bridge between attention and capital injection in Web3. Attract enough eyeballs, create enough FOMO (fear of missing out), and you have a chance to get a high valuation. All economic behavior stems from attention. If you can't consistently attract attention, you can't convince others to talk, date, collaborate, or trade. But when attention becomes the only pursuit, the cost is obvious. In the current era of AI-generated content, Layer 2s are following the same old script, and endorsements from top VCs, listings on major exchanges, random airdrops, and fake TVL games are no longer effective. If everyone repeats the same routine, no one can stand out. This is the harsh reality that the crypto industry is gradually waking up to. In 2017, even without users, it was still feasible to develop on Ethereum because the underlying asset, ETH, could skyrocket 200x in a year. In 2023, Solana reproduced a similar wealth effect, with its underlying asset rebounding about 20x from the bottom and spawning a series of meme asset crazes. When investors and founders are enthusiastic, the new wealth effect can sustain crypto open-source innovation. But in the past few quarters, this logic has been reversed: individual angel investments have decreased, founders' own funds are struggling to survive the financing winter, and large financing deals have plummeted. The consequences of application lag are directly reflected in the price-to-sales (P/S) ratio of mainstream networks. The lower this value, the healthier it usually is. As the Aethir case study below shows, the P/S ratio decreases as revenue increases. But this is not the case for most networks, where new token issuances maintain valuations while revenue stagnates or declines. The table below selects a sample of networks built in recent years, and the data reflects the economic reality. Optimism and Arbitrum's P/S ratios are maintained at a more sustainable 40-60x, while some networks have values as high as 1000x. So, what is the way forward? Revenue replaces cognitive narrative. I have been fortunate to be involved in several crypto data products early on. Two of the most influential are: Nansen: the first platform to use AI to tag wallets and show fund flows Kaito: the first tool to use AI to track crypto Twitter product sentiment and protocol creator influence The timing of their releases is intriguing. Nansen was born in the midst of the NFT and DeFi craze, when people were eager to track whale movements. I still use its stablecoin index to measure Web3 risk appetite. $Kaito was released in Q2 2024 after the Bitcoin ETF craze, when fund flows were no longer critical and public opinion manipulation became the core, and it quantified the allocation of attention during a period of shrinking on-chain transactions. $Kaito has become a benchmark for measuring attention flow, completely changing the logic of crypto marketing. The era of using bots to inflate numbers or fabricating metrics to create value is over. Looking back, cognition drives value discovery, but it cannot sustain growth. Most of the "hot" projects of 2024 have plummeted 90%, while those applications that have been steadily working for years can be divided into two categories: vertically segmented applications with native tokens, and centralized applications without native tokens. They all follow the traditional path of product-market fit (PMF). Take the TVL evolution of $Aave and Maple Finance as examples. TokenTerminal data shows that $Aave has spent a cumulative $230 million to build its current $16 billion lending scale; Maple has built a $1.2 billion lending scale with $30 million. Although the two currently have similar revenues (P/S ratios of approximately 40x), the difference in revenue volatility is significant. $Aave invested heavily in building a capital moat early on, while Maple focused on the niche market of institutional lending. This is not to judge which is better, but it clearly shows the great divergence in the crypto space: on one end are protocols that invested heavily in building capital barriers early on, and on the other end are products that are deeply rooted in vertical markets. Maple's Dune dashboard A similar divergence also appears between Phantom and Metamask wallets. DeFiLLama data shows that Metamask has generated a cumulative $135 million in fees since April 2023, while Phantom has generated $422 million since April 2024. Although Solana's meme coin ecosystem is larger, this points to a broader trend in Web3. Metamask, as a veteran product launched in 2018, has unparalleled brand awareness; while Phantom, as a latecomer, has reaped rich rewards due to its precise layout of the Solana ecosystem and excellent products. Axiom takes this phenomenon to the extreme. Since February of this year, the product has generated a cumulative $140 million in fees, with $1.80 million yesterday alone. Last year, most of the application layer revenue came from trading interface products. They don't indulge in "decentralized" performances, and directly address the essential needs of users. Whether it can be sustained remains to be seen, but when a product generates approximately $200 million in revenue in half a year, "whether it needs to be sustained" becomes the question instead. To think that crypto will be limited to gambling, or that tokens will have no need to exist in the future, is like believing that the US GDP will be concentrated in Las Vegas, or that the internet will only have pornography. Blockchain is essentially a financial rail, and as long as products can use these rails to facilitate economic transactions in segmented and disordered markets, value will be created. The Aethir protocol perfectly illustrates this point. When the AI craze broke out last year, there was a shortage of high-end GPU rentals. Aethir built a GPU computing power market, and its customers also include the gaming industry. For data center operators, Aethir provides a stable source of income. To date, Aethir has generated approximately $78.00 million in cumulative revenue since the end of last year, with profits exceeding $9.00 million. Is it "hot" on crypto Twitter? Not necessarily. But its economic model is sustainable, even though the token price is low. This divergence between price and economic fundamentals defines the crypto space's "vibecession," with protocols with few users on one end and a few products with surging revenue but token prices that don't reflect it on the other. The Imitation Game The movie *The Imitation Game* tells the story of Alan Turing cracking the Enigma machine. There is a memorable scene: after the Allies decipher the code, they must restrain the urge to act immediately, as an early reaction would reveal the fact that the code had been broken. The market works the same way. Startups are essentially a cognitive game. You are always selling the probability that the future value of the company will exceed its current fundamentals. When the probability of improving the company's fundamentals increases, the equity value increases accordingly. This is why signs of war will push up Palantir's stock price, or Tesla's stock will skyrocket when Trump is elected. But the cognitive game can also work in reverse. Failure to effectively communicate progress will be reflected in the price. This "lack of communication" is breeding new investment opportunities. This is the era of great divergence in crypto: assets with revenue and PMF will crush those without a foundation; founders can develop applications based on mature protocols without issuing tokens; hedge funds will strictly scrutinize the economic models of underlying protocols, as exchange listings no longer support high valuations. The gradual maturation of the market will pave the way for the next wave of capital inflows, and traditional equity markets are beginning to favor crypto-native assets. Current assets have a barbell structure, with meme assets such as fartcoins on one end and strong projects such as Morpho and Maple on the other. Ironically, both attract institutional attention. Protocols like $Aave that build moats will continue to survive, but what is the way forward for founders of new projects? The writing on the wall has pointed the way: Issuing tokens may no longer be ideal. An increasing number of trading interface projects without VC support have achieved millions of dollars in revenue Existing tokens will be strictly scrutinized by traditional capital, resulting in fewer investable assets and creating crowded trades Mergers and acquisitions of listed companies will be more frequent, introducing new capital to the crypto space beyond token holders and venture capital These trends are not new. Arthur of DeFiance and Noah of Theia Capital have already shifted to revenue-oriented investing. The new change is that more traditional funds are starting to get involved in crypto. For founders, this means that focusing on niche markets and extracting value from small user groups can bring huge profits, because there are pools of funds waiting to acquire them. This expansion of capital sources may be the most optimistic development in the industry in recent years. The question that remains is: can we break free from cognitive inertia and soberly respond to this shift? Like many critical questions in life, only time will tell. [Foresight News]