Which Web3 projects do the crypto VC partners in Silicon Valley favor?

Source: The Generalist

Compiled by: Shenchao TechFlow

Which WEB3 projects are you most optimistic about and looking forward to in the future cycles?

This question was posed by The Generalist to investors from 15 Western crypto VCs or institutions, who provided various answers, showcasing their thoughts and where their "butts" are:

Cosmos-SDK makes customized application chains easier; the institutional crypto credit lending market has broad prospects, with Maple Finance growing rapidly; Notifi and Portabl are making on-chain information transmission and identity verification easier; the social moment of Web3 may be approaching, and investors see hope on Farcaster…

Here are all their responses, shared for content purposes only and not constituting any investment advice:

Regenerative Finance (ReFi)

Web3 provides us with powerful new tools to coordinate economic activities, and we can use this new power to address the most discussed climate crisis today.

Toucan Protocol is one of the founding projects in the regenerative finance (ReFi) space, aiming to leverage the power of Crypto and DeFi to fund environmental restoration efforts. (PS: USV is an investor in Toucan DAO)

The first area of focus for Toucan and other ReFi projects is bringing carbon credits on-chain. This simple first step opens up new use cases, such as using carbon as collateral in DeFi protocols and tokenizing carbon sequestration as NFTs.

The composability brought by tokenizing natural assets means that climate action can be embedded into other protocols and applications, which can unlock more use cases and demand. Looking ahead, new on-chain demand for carbon tokens can help support the development of a robust financing ecosystem for real-world environmental projects.

This is a critical moment for the ReFi movement. Ethereum is about to transition from proof of work (POW) to proof of stake (POS), resulting in a 99% reduction in energy consumption, which is likely to broaden the appeal of Crypto and Web3 to mainstream audiences. At the same time, Web3 infrastructure has matured to better accommodate more mainstream users.

Toucan and the ReFi movement are ready to seize this opportunity.

------Nick Grossman, Partner at Union Square Ventures (USV)

Farcaster

Since 2013, social and Crypto have been trying, but no one has successfully landed; we believe this will change, and why now?

One reason is that the penetration of crypto wallets is skewed in both user numbers and quality. Millions of people not only own crypto wallets but also use them frequently for various purposes. Crypto wallets have become a viable identity and login method for social products for the first time. Additionally, each wallet brings an on-chain "event feedback" that can serve as conversational material in social networks. For example, your participation in NFT minting can appear in your Feed.

Another important reason is that crypto-driven social networks can work, which is the path dependency of user growth in social networks. Successful social networks start with the right early user base. You can think of excellent early adopters as time travelers from the future, instinctively acting in ways that will resonate with the masses tomorrow.

A social network that can attract the right early user base and engage them can smoothly move toward success. We believe the crypto community is the most compelling early adopter group we have encountered, and a crypto-driven social network naturally has an advantage in nurturing this native community.

Building a crypto social network is "expert" level difficulty; it requires a great product, a well-thought-out underlying protocol, and the knack for community building.

We believe Farcaster shows all the right early signs.

------Alok Vasudev, Co-founder of Standard Crypto

NotiFi

In the Web2 realm, when users want to create a new account, they register with their email and password, which serves as the default communication channel for applications.

In Web3, because authentication and sign-ins are done via wallet addresses, developers cannot communicate with users. This has led to many "user notifications" being conducted through Discord or Telegram. They are vague and not targeted.

Notifi, founded by Paul Kim and Nimesh Amin, is building Twilio for Web3, starting with decentralized application (dApp) developers on Solana, NEAR, Ethereum, Aptos, and Sui ecosystems.

Notifi provides developers with a simple, embeddable notification layer that can be inserted into their existing DeFi, NFT, gaming, or DAO applications to communicate with users. Here are a few use cases Paul and Nimesh are working on:

• Notifications about new governance votes
• Notifications about governance action results
• Bid notifications in the market
• Liquidation notifications
• Entry and exit trade notifications

These notifications can be sent via email, text, or Telegram, with more channels to come.

------ Edith Yeung, Partner at Race Capital

Portabl

When it comes to authentication, we live between the Web2 and Web3 worlds, and the cumbersome authentication required to access your bank account has not carried over to your web3 wallet.

We believe that as regulations, consumer, and business winds change, this suboptimal state will shift toward self-sovereign identity. For example, earlier this year, eight states in the U.S. announced support for digital storage of driver's licenses, with Apple's wallet app serving as the backend authorization agent.

These shifts hint at an intriguing emerging future where users own their data, control data sharing, and move seamlessly between Web2 and Web3.

The 6MV team is excited about our recent investment in Portabl, which addresses self-sovereign identity and authentication issues. The company has created a universal digital identity that allows consumers to selectively disclose their verified financial identity wherever they need it—ensuring privacy and security. Vendors will reduce learning costs to two clicks and automate 75% of maintenance, monitoring, and auditing costs.

A consumer-centric financial identity should be persistent, transferable, and portable. Only when we break free from the one-to-one relationship between accounts and verification can modern open finance succeed.

------Mike Dudas and Michelle Dhansinghani, Investors at 6MV

Axelar

Just recently in 2020, Bitcoin and Ethereum were the only meaningful blockchain applications. However, in the past two years, the block space on these two chains has filled up, and we have rapidly entered a multi-chain world, with the growth of higher TPS public chains (L1) like Solana, Flow, and Avalanche. We believe this explosion of complexity is just beginning. The blockchain ecosystem will evolve into a vibrant network with a few key general-purpose chains and hundreds or thousands of specialized application chains.

The key to unlocking this potential is interoperability, allowing different computer networks to communicate and collaborate. In an interoperable crypto world, developers will be able to build native multi-chain applications and experiences. At the same time, users will be able to seamlessly move assets and transmit data on-chain.

Cosmos may be the standard bearer for interoperability. Founded in 2017, the "internet of blockchains" is sometimes characterized as a competitor to Ethereum, but the two are conceptually quite different.

Ethereum is a single general-purpose blockchain where applications are built on native smart contracts, while Cosmos is a framework for launching new blockchains using the Cosmos SDK. Cosmos chains use a proof-of-stake consensus algorithm called Tendermint and can connect using a bridging protocol called Inter-Blockchain Communication (IBC). Cosmos Hub is the first Tendermint-based blockchain at the center of this network, providing services to other blockchains that belong to the "cross-chain" (the extended network of blockchains interacting with Cosmos), including asset routing and inter-chain staking.

The vision of Cosmos is inherently more decentralized than a single L1 and may be more resilient, as evidenced by its relatively strong performance after the collapse of the largest Cosmos chain, Terra.

Moreover, its architecture allows institutions to launch chains customized for their specific use cases or to establish chains that can provide services for the entire ecosystem. In the long run, it can integrate with a broader L1 ecosystem, including Ethereum. Although it hasn't garnered as much publicity as other cross-chain ecosystems, Cosmos has strong grassroots momentum.

We see excellent technical talent building the next wave of infrastructure in the Cosmos ecosystem, including portfolio companies of North Island Ventures (NIV) like Polymer, Lava, and Stride, which we believe is a leading indicator. Additionally, we are starting to see application chains being launched, the most notable being dYdX's announcement to move from Ethereum to Cosmos to create its own application chain.

At the same time, new protocols like Axelar are making substantial progress in achieving greater interoperability. Axelar is an L1 whose primary purpose is to transfer assets across chains, enabling developers to build multi-chain dApps. An early example is AxelarSea, a cross-chain NFT marketplace. Recently, frequent hacks of cross-chain bridges have raised widespread skepticism about this field, questioning whether a cross-chain world will be realized (even Vitalik believes the future is multi-chain but not cross-chain). However, we believe these hacks are primarily due to the fact that most cross-chain bridges deployed so far are highly centralized or were rushed to market.

Axelar is not a centralized point-to-point bridge but a comprehensive proof-of-stake network built by some of the smartest people we have encountered in the crypto space. (That said, I still recommend that everyone exercise extreme caution when using cross-chain bridges in the coming years.)

If something like Axelar proves to be secure and robust, it can abstract complexity for developers, making dApps "portable" (thereby reducing reliance on a single chain) and addressing scalability challenges, potentially becoming the ultimate meta-chain. Perhaps most beneficially, it can end the tribal wars of marketing between blockchains.

In the long run, L1s will become interchangeable commodity service providers, selling block space in automated markets, and application developers will not have to choose between chains; most users will not know or care what chain their dApp or assets are on.

Thus, interoperability can not only solve the practical problems faced by developers and users but also create a more decentralized blockchain ecosystem with less ideological fragmentation. Achieving this vision will take several years, but the impact of this evolution has hardly been explored.

------Travis Scher, Co-founder of North Island Ventures

Institutional Unsecured Lending

Last year, over $1 billion was lent to cryptocurrency market makers on DeFi lending platforms designed for enterprise clients. Now, product-market fit has been proven, with the potential for exponential growth.

In many ways, this trend is a natural evolution. The development of DeFi has primarily benefited platforms like MakerDAO that offer over-collateralized loans.

This product is well-suited for individual users but is difficult to scale. While it is easier to grow, under-collateralized loans do not make sense for this segment, at least until digital identity and credit scoring are more widely adopted.

However, institutions have the capacity to handle the issue of under-collateralized loans. Projects like Maple Finance, Clearpool, and TrueFi have rapidly emerged by providing licensed, fully KYC-compliant liquidity pools to enterprises.

These organizations connect liquidity providers seeking high stablecoin interest with creditworthy companies seeking transparent on-chain loans. Wintermute, Folkvang, and other cryptocurrency market makers adopted this product early on to support on-chain trading activities for demand-side players, and the entry of players like Jane Street and Nexus Mutual has also facilitated the expansion of institutional lending pools.

Notably, DeFi lending pools have performed relatively well in recent months, highlighting the opacity of the "CeFi" lending market amid the collapses of Luna and Three Arrows Capital.

I am pleased to see lending platforms expanding beyond the crypto capital markets and supporting non-crypto businesses. One example is Yaydu, a growth financing platform for online sellers that borrows from DeFi lenders like Centrifuge, with Goldfinch and Credix also focusing on this area in emerging markets.

------Etienne Brunet, Investor

Blowfish

Almost all crypto security work is concentrated on core consensus, smart contracts, and wallets.

We have fortified our blockchains so that they cannot be easily attacked by 51% attacks or DDoS attacks; we audit and test our smart contracts so that they cannot be hacked and keep funds secure; we use hardware wallets and keep keys offline to ensure user accounts remain safe. You only need to look at the recent Slope wallet vulnerability to understand why these measures are necessary.

However, if the interfaces used to access blockchains are opaque and vulnerable, then these efforts are in vain. After all, most people access decentralized applications through hosted websites rather than calling smart contracts programmatically themselves.

Today, signing transactions is both dangerous and confusing. When you attempt to transact through a website, your wallet prompts you to sign a hash of data, which is essentially a string of random numbers and letters that is nearly impossible to verify unless you generate the transaction yourself and ensure that the website's proposal is indeed what you want to approve. A malicious website can easily propose a transaction different from what you think you are approving. Unless you are a very savvy user, you are unlikely to notice, as it looks like a random sequence of characters. This exact attack style occurred with BadgerDAO, where a malicious website deceived users into signing transactions and transferred their funds to hackers.

Crypto cannot achieve mass adoption through such elusive interfaces, which is why I am excited about services like Blowfish and Harpie that provide users with the tools they need to protect themselves.

Blowfish is a human-readable transaction simulation service that takes transaction data and outputs a simple, easy-to-read version of the transaction. For example, it can summarize that the transaction you are about to approve is exchanging 1 ETH for 1000 USDC. Before signing, you will see this in your wallet, preventing you from accidentally approving a malicious transaction.

Harpie takes a different approach by monitoring for potential malicious transactions from user accounts in the memory pool and preemptively pulling the funds from user accounts to a new, isolated account.

Overall, we are excited about the narrative of reducing user and application exposure to attacks by providing more transparent tools.

------ Tom Schmidt, Partner at Dragonfly Capital

Maple Finance

Maple Finance is the largest institutional lending market on Ethereum and Solana. So far, it has facilitated approximately $1.5 billion in loans for leading crypto trading firms and market makers like Alameda Research, Wintermute, and Amber Group.

The spread and consequences of Three Arrows Capital show that institutional lending and capital markets are opaque, inefficient, and rife with conflicts of interest. Lenders have almost no transparency regarding who the borrowers are, the concentration of counterparties, and how yields are generated when providing funds. Celsius is the most shocking case in this regard, as the company had effectively been bankrupt for a long time (without lenders' knowledge), gambling with customers' funds.

At its core, blockchain and Crypto solve the problems of coordination and incentives. Maple provides a transparent on-chain process to facilitate institutional lending. Borrowers are funded by various loan pools managed by representatives of the liquidity pool—experienced underwriters bring expertise and publish collateral to adjust incentives and buffer first-loss reserves.

Each loan includes publicly available information such as the borrower's name, loan amount, issuance date, interest rate, and collateralization ratio. Each loan pool provides public data on historical performance, credit losses, and borrower risk to enable lenders to make informed decisions. This transparency brings more accountability and better write-offs.

While CeFi peers like Genesis, BlockFi, and Celsius suffered massive losses in 2022, Maple's lending pools have proven resilient, with losses on cumulative loans of less than 1%.

In the next decade, crypto rails will modernize existing financial infrastructure. This has already begun with the widespread adoption of stablecoins, gradually replacing traditional banking, wire transfers, and payments. Institutional capital markets and lending are the next frontier and one of the largest untapped opportunities, with crypto lending being a market exceeding $100 billion, while traditional corporate lending is $100 trillion. Maple Finance is well-prepared to meet this challenge.

------ James Ho, Co-founder of Modular Capital

Cosmos SDK

There are two extreme views on the fate of cryptocurrencies. One view is that all activities will converge into a universal execution environment—a "single chip" or "world computer"; the other view is that there will be many specialized execution environments, each with its own designs and trade-offs—a "multi-chain" perspective. The key is to strike a balance between the synchronous composability offered by a single chain and the specialization provided by multi-chain. I believe projects will increasingly choose specialization, and the Cosmos SDK provides the best toolkit for deploying specific application chains.

In my view, specialization has two main benefits: lower and more predictable resource costs and customizability.

If it is the former, projects on a monolithic chain compete for block space with all other dApps, which means they inevitably face uncertainty in resource costs; for example, a popular NFT mint may render their dApp unusable. In the long run, this is unsustainable for many dApps (like games).

If it is the latter, projects inheriting from a monolithic blockchain launch must accept a series of design decisions, including the platform's consensus model, security, runtime, virtual machine, and so on. In contrast, applications deploying their own chains (or choosing within existing specialized application chains) can customize the components of their stack to optimize their use cases. We have already seen many such examples: Osmosis's MEV resistance, dYdX's order book, Injective's L1 command/bridging, and many others.

The downside of specialization is the cost of deployment and the lack of synchronous composability. In terms of cost, while specialized chains will never be as easy to deploy as smart contracts on existing chains, I believe that as the Cosmos SDK matures and inter-chain security comes online, this gap has significantly narrowed and may continue to do so. The latter allows Cosmos Hub to share security with other blockchains.

So, the fundamental trade-off is synchronous composability. There are two main counterarguments to this. First, it can be argued that only a few types of applications can truly benefit from it, primarily DeFi use cases, for which token re-collateralization is crucial. For most other dApps, I believe that as long as there are strong cross-chain tools to transfer assets and ensure a seamless user experience when interacting with different dApps, asynchronous composability can work well.

Secondly, specialization does not necessarily mean deploying a chain for a single application but rather that a cluster of applications can work well together or facilitate a specific use case. For example, while Osmosis is generally seen as an automated market maker (AMM) chain, it is evolving into a DeFi chain with various dApps deployed on it, including money markets, stablecoins, and vaults.

We believe that applications benefiting from composability will naturally tend to cluster on specialized chains, effectively allowing dApps that need it to "opt-in" to composability.

For these reasons, I expect this space to evolve into a mesh network of interconnected specialized chains organized around specific use cases. DYdX is the first notable example, but in the next 12 months, I believe we will see a large number of dApps migrate to specialized chains built using the Cosmos SDK.

------ Jose Maria Macedo, Partner at Delphi Digital

Space and Time

Space and Time is a blockchain-secure, decentralized, enterprise-grade database and analytics platform. It offers high-performance and tamper-proof SQL analytics and performs machine learning on large-scale streaming datasets.

Space and Time's novel SQL proof protocol uses zero-knowledge proofs (zk-proof) to enable applications to generate analytical insights in a decentralized, low-cost, and tamper-proof manner. We believe Space and Time will become a core layer of the Web3 stack, comparable to a decentralized Snowflake.

------ Tim Khoury, Investor at Digital Currency Group

Web3 Social Networks

Over the past few decades, social networks have had a profound impact on society, influencing culture, information, relationships, and work, giving rise to new forms of communication and entirely new professions. Through Web3, we believe they have the opportunity to go further, unlocking entirely new consumer experiences and aligning the interests of users and developers with those of the platforms.

This open social stack, built on permissionless protocols, is a nascent phenomenon. But at scale, the open social stack will bring various benefits related to freedom and agency for users and developers: the portability of data to other applications, the composability of experiences and content, and the introduction of token incentives.

Early Web2 social networks closed off competitive interfaces and applications that leveraged their data (e.g., TweetDeck). In contrast, the open social graph lowers the barrier for third-party developers to create novel experiences and customized interfaces, ultimately translating into broader user choice.

These benefits are not merely philosophical. Users can benefit from decentralized social networks that offer more engaging or useful new experiences. For example, a Web3 social network that provides token rewards can grant economic benefits for various activities, such as predicting which content will take off, while Web3 social networks like Mirror help creators monetize their work through NFTs and community fundraising. Many social networks have compelling experiences in showcasing user tastes and curation (e.g., Tumblr and Instagram), and their Web3 counterparts can allow users to showcase their hobbies in games and display their digital assets; OnCyber and Context already provide this functionality.

New content formats—images, memes, videos, text—have become the foundation of new social networks and platforms, with companies like Foundation, Sound, and Catalog emerging as social platforms built around NFTs.

Building a Web3 social network is not without challenges; scaling remains an issue, but data layers like Ceramic provide a foundation for new social applications. The continued growth of protocols like XMTP enables information transmission between wallets, which will unleash on-chain communication. Open social algorithms also provide an opportunity to create markets under the unilateral control of centralized platforms, such as content moderation and fact-checking.

Cryptocurrency is fundamentally financial: everything built on cryptocurrency networks has potential value. But it is also inherently social; it is networked and involves contributors and participants globally. In the coming years, we expect the growth of social infrastructure and applications to realign the interests of all stakeholders.

------ Li Jin, Co-founder of Variant

Railgun

Railgun is a set of smart contracts that enable zero-knowledge proof verification, allowing users to store, trade, exchange, and communicate in a private manner, as well as interact with any other smart contracts. Railgun supports ETH, ERC-20, and NFTs and operates on Ethereum, Polygon, and BNB Chain, with upcoming support for Solana, Polkadot, and NEAR.

Privacy transactions are key to achieving greater adoption of Web3. Without solutions like Railgun, a single transaction or owned NFT could leak user information, including their wallet balance and entire transaction history, and DeFi transactions could be front-run by bots, with trading strategies identified and copied. Railgun's solution is compliant and can provide read access to auditors and regulators as needed.

------ Tim Khoury, Investor at Digital Currency Group

Decentralized Software Supply Chain

Building crypto software faces many challenges, requiring developers to rethink traditional web2 or open-source development processes. While we can retain some best practices, such as code reviews, continuous integration, unit testing, and analytics, we need to introduce new technologies due to increased security demands and the permanent nature of decentralized applications.

Web3 software is more akin to launching satellites into space than delivering a new AI photo filter. This has given rise to a field of smart contract security tools, companies, and protocols that help facilitate this new software supply chain. In particular, we have seen activity around auditing, bug bounties, static analysis, and formal verification.

• Auditing Firms. Due to the catastrophic costs of failures in crypto systems, auditing firms will continue to grow. In traditional technology, audits are a rare luxury for large companies looking to improve security, but in crypto, they are absolutely necessary for projects of all sizes. The auditing field will encompass everything from small expert teams specializing in consensus systems or zero-knowledge proofs to more decentralized products like code4rena, which conducts auditing competitions to crowdsource finding vulnerabilities.

• Bug Bounties. While it is common in traditional technology to offer security researchers four to five-figure bounties, with some trillion-dollar companies raising bounties to seven figures, crypto bug bounties have broken records. Leading web3 bug bounty platform Immunefi is pioneering this new norm, having paid out over $40 million in bug bounties, with an additional $130 million in bounties available for sharp security experts to claim. The scale of these incentives creates more secure protocols and provides long-term sustainability for developers seeking security careers.

• Static Analysis and Formal Verification. Another area worth noting is the improvement of tools throughout the software development lifecycle. Developer frameworks like Ape, Foundry, and Hardhat make it easier to write unit tests and hook tools, such as Slither for static analysis and Echidna for smart contract fuzz testing. Formal verification products like Certora enable developers to ensure their contracts are reasonable at the specification level and to identify critical errors before and after deployment.

By using a mix of these approaches, tomorrow's software supply chain can continue to become more secure and battle-tested, hopefully making today's vulnerabilities a rare occurrence.

------Curtis Spencer, Co-founder of Electric Capital

Sudoswap

Sudoswap is a decentralized, fully on-chain NFT exchange that operates through an AMM model. It allows for multiple custom liquidity pools to be set up for the same collection, with pricing determined by its bonding curve. Sudoswap enables instant liquidity, tighter spreads, cheaper pricing, no royalties, trading fee income, and automated dollar-cost averaging for incoming and outgoing payments.

NFTs are containers that can represent any unique asset on-chain. This applies to many assets beyond profile pictures, from financial contracts to real-world assets. Coupons, tickets, in-game items, and memberships can all be NFTs. Sudoswap's on-chain composable protocol will improve the market microstructure of this space, reducing information asymmetry and enhancing capital efficiency.

------Tim Khoury, Investor at Digital Currency Group

Application Frenzy

In recent years, the crypto world has focused on foundational layer innovations. We have seen L1s like Ethereum, Solana, and Avalanche gain much attention and investment, and we have also seen some feedback: many applications underperform relative to the platforms they are on (L1).

This situation should change in the coming years, as the value of foundational layers is only tied to the protocols and products built on top of them. As multi-chain infrastructure matures, we are also seeing applications expand their reach, launching on multiple chains and building infrastructure to increase the availability of their products.

The adoption and price appreciation of these protocols have been hindered by poor token structures, a lack of regulatory clarity around tokens, and governance issues. Governance issues have plagued some of the more successful applications, such as SushiSwap. We have seen a plethora of experiments with token structures and genuine attempts to convert amorphous DAO-like structures into operational entities built in a decentralized manner. Some names I am watching that have successfully achieved this include Aave, Convex, Frax, GMX, and Gains Network.

With clearer token structures, better regulatory clarity, and stronger governance emerging, crypto applications will gain stronger momentum.

------Avi Felman, Head of Digital Asset Trading at GoldenTree