Crypto Application Cycle: Investing in the Next Wave of Innovation

Introduction: The Shift in Crypto Investment Focus

In the late 1990s, internet investments centered around infrastructure like fiber optic networks and ISPs. Companies like Cisco saw massive growth. Similarly, the crypto industry initially focused on infrastructure, but we're now witnessing a shift towards applications.

Part 1: The End of the Infrastructure Era?

The early years of crypto were dominated by scaling block space and addressing the blockchain "trilemma." However, with advancements like EIP-4844, the cost of block space has significantly decreased, making it a highly replaceable commodity. This has led to a shift in value capture towards applications that can directly handle traffic, boost conversions, and generate cash flow.

Revenue Layer Evolution

During the infrastructure cycle, L1/L2 protocol valuations were based on technical strength, ecosystem potential, and network effects. Token value capture models were often indirect. In contrast, applications capture value directly through fees, subscriptions, and service charges. This creates a tighter feedback loop where revenue can be used for token buybacks, dividends, or reinvestment for growth.

Data shows that applications are capturing an increasing share of value, reaching around 80% this year. Furthermore, the price performance of application tokens is increasingly correlated with their revenue data, indicating that the market is now directly linking protocol revenue and buyback behavior to token value.

Part 2: A Golden Age for Asian Developers

Electric Capital's 2024 Developer Report reveals that Asian developers now comprise 32% of global blockchain developers, surpassing North America. Asian teams, particularly those from China, have proven their ability to iterate quickly, validate demand, and execute localization and growth strategies. These capabilities align well with the nature of crypto.

Asian teams have a structural advantage in the crypto application cycle. They're able to deliver globally competitive crypto applications faster. Rabby Wallet, gmgn.ai, and Pendle are examples of Asian teams making a global impact. We anticipate a market shift from US-led narratives to an Asia-first product approach, followed by expansion into Europe and America.

Early-Stage Investing in the Application Cycle

Trading, asset issuance, and financialization applications still have the best product-market fit. Examples include Hyperliquid, Pump.fun, and Ethena. When investing in niche sectors, consider investing in the sector's beta, focusing on projects that will benefit from the sector's growth. For instance, instead of investing in a specific prediction market, invest in tools that support prediction markets in general.

Once you have a product, the next step is reaching a broad audience. Besides social login, aggregated trading frontends and mobile devices are crucial. For applications in the application cycle, mobile will be the most natural touchpoint for users. Wallets also play a vital role, evolving from asset management tools into Web2 browser-like gateways.

For infrastructure, blockchains created from scratch are losing relevance. However, infrastructure that supports applications can still capture value. This includes infrastructure providing custom multi-chain deployment and app-chain building, companies offering user onboarding services, and cross-chain bridges.