AllianceDAO 2024 Startup Research Report: 2/3 of startups are building on Ethereum, still focusing on infrastructure

Original Title: 2024 Crypto Startup Trends Report

Original Source: AllianceDAO

Original Compilation: Zen, PANews

AllianceDAO is a leading crypto accelerator and founder community, attracting the best crypto startups in the industry to our accelerator program, receiving over 3,000 applications each year. Since the AllianceDAO accelerator program is held twice a year, we report the data in two parts. In this report, Alliance provides trends observed from the application data and insights on what these trends may imply for the broader startup ecosystem.

Key Highlights: Key Trends Observed in Internal Data from 2021-2024:

Blockchain

1. Ethereum remains the primary ecosystem for startups (currently about 2/3 of startups are building here), while Solana (currently 18%, which once dropped to 8% after the FTX collapse) and Bitcoin (today 5%) have seen rapid growth over the past year and a half.

2. Within the Ethereum ecosystem, 59% of startups are currently building on Optimism Rollup (Optimism, Base, and Arbitrum).

3. Polygon is gradually losing startups, with Polygon zkEVM lagging behind Optimism Rollup in competition.

4. Base is the fastest-growing among all Ethereum L2s, now accounting for over 28% of startup activity, having started from zero in just one year.

What verticals are applicants building products in?

1. Growing verticals: Infrastructure, DeFi, Payments, AI combined with crypto.

2. Declining verticals: DAO and NFT.

Where are the founders located?

1. Europe (31%), the United States and Canada (29%), and Asia (27%) are currently the top three regions where startups are being built.

2. However, the proportion of startups from the United States and Canada has steadily declined in recent rounds, while the proportion from Asia and Africa is on the rise.

Keywords increasingly mentioned by project teams

Popular terms that have grown in the past 12 months include Fully Homomorphic Encryption (FHE), Chain Abstraction, meme, SocialFi, prediction markets, liquid staking, restaking, RWA, stablecoins, L1, L2, and L3.

Founder Background & Team Composition

1. Currently, 30% of founders applying to our accelerator have experience in big tech (S&P 500), and 12% of founders have studied at top schools (QS top 100 universities).

2. 39% of startups are composed of solo founders, and among companies with multiple founders, the proportion of equal equity distribution reaches 50%.

3. 72% of startups operate completely remotely (with no employees working on-site).

The following is the main text of the report.

Layer 1: Ethereum Dominates, Solana and Bitcoin Ecosystems Worth Watching

Ethereum remains the dominant ecosystem, attracting 62% of crypto startups applying to Alliance. Additionally, Solana has rebounded to a current application rate of 18% after hitting a low in the second half of 2022. Interestingly, the Bitcoin ecosystem is also attracting more and more developers, now accounting for nearly 5% of all applications.

The number and quality of startups building within each ecosystem remain the best indicators for predicting the performance of that ecosystem over the next 1-2 years. After all, startups need to build products, and products ultimately drive usage, on-chain metrics, attention, and price trends.

Solana is currently the most momentum-driven ecosystem. According to our data, the number of startups on Solana hit a low in the second half of 2022. This may be directly related to the collapse of FTX, as FTX played a crucial role in Solana's early development. Since then, both the price of SOL and Solana's on-chain metrics have begun to rebound. Many of the top products being built on Solana were actually established during the bear market and the FTX crisis. Tensor, Kamino, Solflare, and Pump are some popular applications built on Solana by Alliance alumni. Based on current trends in startup choices, we believe Solana will continue to attract startups and users over the next 1-2 years.

Meanwhile, the Bitcoin ecosystem is attracting more and more startups, starting with the launch of Ordinals in 2023. The early hype around this non-fungible token standard has sparked various experiments with alternative token standards like BRC20 and Runes. Efforts aimed at significantly enhancing Bitcoin's programmability, such as BitVM and dozens of Bitcoin L2 solutions, have also emerged. We are also seeing many DeFi projects that originated on Ethereum, such as decentralized exchanges, lending platforms, and stablecoins, beginning to replicate on Bitcoin. While the hype around the Bitcoin ecosystem may peak after the latest halving in April 2024, this is also the period of highest attention from entrepreneurs in Bitcoin's history.

We are optimistic about Bitcoin's prospects as a startup ecosystem, as the current wealth stored in Bitcoin exceeds $1 trillion, prompting the market to explore how to utilize this wealth in meaningful or interesting ways. However, we must also point out that Ethereum and Solana remain far ahead, and Bitcoin's technical limitations may prevent it from providing a differentiated experience for developers and users.

It should be noted that despite recently losing some attention to Solana and Bitcoin, Ethereum remains the most active ecosystem, capturing nearly 2/3 of Alliance applicants' attention. Currently, most startups are building products on Ethereum L2 in a highly competitive market.

Ethereum Layer 2: Base Emerges, Optimism Rollup Continues to Lead

In the early history of Alliance, startups were almost entirely building on Polygon. However, Optimism Rollup (such as Optimism, Base, and Arbitrum) has consistently gained attention over the past three years. Today, they collectively account for 59% of startups building on Ethereum L2. Notably, Base was only launched in 2023 and currently accounts for 28% of startup activity on Ethereum L2.

According to our own data and data from L2Beat, Optimism Rollup has proven to be a better product than ZK Rollup. Overall, Optimism Rollup offers lower fees and a better developer experience, which in turn attracts more users and startups. Nevertheless, we have also encountered some outstanding founders building infrastructure and applications on ZK Rollup (such as Starknet and ZKSync). If tools improve or these founders find product-market fit, ZK Rollup may begin to attract more founders and end-users, but given the current dominance of Optimism Rollup, this remains to be seen.

Polygon has gradually lost market share of startups building on Ethereum over the past three years. Polygon is not just a blockchain, but the vast majority of startup and user activity occurs on Polygon POS, which is a sidechain of Ethereum. The decline in market share is understandable, as Polygon POS was actually the only mature and available solution for scaling Ethereum a few years ago. Today, Polygon has invested heavily in Polygon zkEVM, but it still lags significantly behind Optimism Rollup compared to other ZK Rollups.

Finally, it is worth mentioning Base. We knew a year ago that Base would become one of the most important L2s, thanks to Coinbase's brand and distribution capabilities. But they have exceeded our expectations, becoming the second-largest destination for Ethereum startups after Polygon.

Vertical Distribution: Infrastructure Continues to Grow, DeFi Remains Popular

What products startups are building is another interesting trend we can track from application data. Please note that our attempts to categorize product verticals are inherently subjective and may not be perfect. For example, these categories are not mutually exclusive and are custom. A startup can operate in both gaming and NFT sectors simultaneously. Therefore, while long-term trends are interesting, please take these numbers with caution.

The public impression is that there is too much infrastructure and not enough applications, which aligns with our application data—indeed, the proportion of startups choosing to build infrastructure has continued to grow over the past three years.

One of the main reasons for the growth of infrastructure may be that historically, infrastructure tokens have been highly valued. This has led more startups to pursue infrastructure projects, while more venture capital has flowed into infrastructure, further driving more startups. This outcome is a misallocation of a large amount of knowledge and financial capital, but it has also resulted in more scalable blockchains, which should benefit future application developers.

Meanwhile, DeFi has become one of the most popular categories over the past year. Despite many venture capitalists believing that "DeFi is dead," the number of DeFi startups has actually increased over the past 18 months. Nevertheless, DAOs and NFTs remain the least popular product categories. We believe this makes sense, as many DeFi projects have experienced death in NFTs (many DAOs treat their NFTs as governance tokens), and the value of NFTs themselves seems unable to form in the market.

Nonetheless, NFTs still attract some interesting startups, especially in the art sector, and we believe this impact will continue. We predict that future startups will focus on providing infrastructure for more applications and products, such as SocialFi, Web3 gaming, and on-chain data aggregation, which will further drive the sustainability of the Web3 ecosystem.

Geographical Distribution: Rise of Eurasia, Diminishing North American Advantage

One of the most interesting trends we analyzed is the primary geographical distribution of startup founders.

In the first half of 2024, we saw the proportion of founders from the United States and Canada drop to a historic low of only 29%. This proportion has decreased compared to the second half of 2021, when applicants from the United States and Canada exceeded 45%.

Meanwhile, the proportion of startups from Asia and Africa has reached historic highs, at 26% and 5%, respectively. Overall, North America, Europe, and Asia still dominate, with startup application proportions in each region ranging between 25% and 33%. The decline in U.S. applicants is a concerning trend, which may be attributed to two reasons. First, the increasing regulatory uncertainty in the U.S. and the "enforcement regulation" strategies taken by the SEC, CFTC, and the U.S. Treasury have led U.S. founders to relocate overseas or shift to other industries (such as AI). Second, the real-world adoption rate of cryptocurrencies in developing countries is steadily rising, especially the use of stablecoins as a hedge against local fiat currencies and as a form of cross-border and censorship-resistant payment. This further attracts more startups from these regions.

Whether the first trend will continue remains to be seen, especially if the upcoming November elections lead to a new government. However, the second trend is unlikely to slow down in the short term, as stablecoins are indeed solving real problems for everyday people in developing countries. This is particularly important, as public and social media-driven discussions often center around the U.S., viewing cryptocurrencies as merely speculative tools. While speculation has driven cryptocurrency adoption in the Global North, in the Global South, stablecoins are driving the popularity of cryptocurrencies.

Popular Terms Among Startups: Fully Homomorphic Encryption, Chain Abstraction, Meme

The cryptocurrency space has undergone multiple hype cycles, typically every four years. However, within each cycle, various product areas have also experienced multiple smaller hype cycles.

By analyzing the keywords mentioned in Alliance applications, we gain insights into the trends of a specific period. We refer to these keywords as "crypto buzzwords" and categorize them for a more detailed visualization of their trends. Please note that all charts in this section are on a logarithmic scale. Zero-Knowledge Proofs (ZK), Fully Homomorphic Encryption (FHE), Trusted Execution Environments (TEE), and Multi-Party Computation (MPC) are some key privacy-related technologies used in crypto. Notably, while ZK can be used for privacy protection (e.g., in Zcash and Tornado Cash), its current primary application is scalability.

Privacy

ZK has remained the most mentioned term for some time. FHE has seen an increase over the past year. This data aligns with the trends we see in public discourse. The first application of ZK in crypto was Zcash in 2016. However, it only became a household name in 2021. In fact, in 2021, Vitalik wrote, "optimistic rollups are likely to win in general EVM computation, but in the medium to long term, ZK rollups will win in all use cases." In our view, the consistent rise of ZK from 2021 to 2023 can be traced back to this single event.

User Experience

The mention of "bridges" has remained relatively stable over the past three years. Meanwhile, "account abstraction" saw a significant rise in the second half of 2021, while "chain abstraction" rapidly grew in 2022. Mentions of "intent-based" have recently surged but seem to have peaked. "Chain abstraction" is essentially a rebranding of cross-chain bridging. Therefore, its rise is related to the stagnation of "bridges." Meanwhile, the emergence of "account abstraction" is related to EIP-4337, popularized by Vitalik in 2021. Many crypto buzzwords can be traced back to the founders of Ethereum.

Consumer Applications

In the consumer applications and gaming sectors, "NFT," "metaverse," and "GameFi" peaked in the second half of 2022 and then sharply declined. "X to earn" has also shown a similar downward trend, although the decline is less pronounced. "SocialFi" and "meme" are some new terms that emerged in 2021 and continue to show growth.

The speculative frenzy around NFTs in 2022 has likely been replaced by memecoins, as the latter have lower unit prices and higher liquidity due to their fungibility. "X to earn" and "GameFi" peaked with the rise of Axie Infinity, but surprisingly, the decline of "X to earn" has not been significant. Finally, "SocialFi" has seen a resurgence in the second half of 2023, likely related to the success of Friend.tech.

Yield

"Liquid staking" has been gaining attention since 2021, while "restaking" has been steadily rising since 2022. On the other hand, mentions of "lending" have remained relatively stable over time, although they peaked in the second half of 2022.

Trading

"Automated Market Makers" (AMM), "derivatives," and "decentralized exchanges" (DEX) have generally shown an upward trend over the past three and a half years. In contrast, "Maximum Extractable Value" (MEV) peaked in the second half of 2022 and has since lost popularity among entrepreneurs. Launchpads regained momentum after a slight slowdown in 2023. Overall, trading-related keywords are on the rise, as this is one of the few applications in crypto with a clear product-market fit. The recent rise of "launchpad" may be related to the success of Alliance alumni Pump.fun.

RWA

Startups applying to Alliance have seen a continued rise in mentions of "payments," "stablecoins," and "RWA." As mentioned earlier, stablecoin-based payments are among the few applications in crypto that have demonstrated product-market fit, especially in emerging markets.

Scalability

In the scalability domain, "L2" and "L3" show strong growth trends, while "L1" peaked in the second half of 2022 and has since stagnated. Since the second half of 2021, new buzzwords have emerged, including "data availability," "appchain," and "sidechains."

Efforts to scale blockchains, particularly in the case of Ethereum, have increasingly leaned towards modularity in recent years. Vertically, we are gradually advancing towards L2 and L3 layers and extending downward to specialized data availability layers. Horizontally, more and more appchains are emerging. Finally, the rise of "sidechains" in this data is relatively surprising, perhaps related to the successes of Polygon and Ronin.

Founder Background & Team Composition

Founder Background: Successful Founders Rarely Have Elite Backgrounds

In our latest cohort of applications, about 30% of applicants reported having experience at large tech companies (note: we define "large tech companies" as those in the S&P 500). This proportion has remained relatively stable since 2022; however, compared to 2021, when nearly 50% of applicants came from large tech companies, this number has significantly decreased.

Why the decrease? This may be related to the decline in U.S. applicants due to regulatory issues (as the U.S. is home to large tech companies). Additionally, the bull market in 2021 resembled a "gold rush," attracting many individuals from non-crypto fields into the crypto industry in an attempt to profit. Finally, in 2024, interest in cryptocurrencies among tech workers may be rapidly shifting towards other industries like AI. In fact, during the last bull market, we saw several Alliance startups pivoting to AI.

Moreover, among our applicants, the proportion of founders who graduated from "top schools" (QS top 100 universities) peaked in 2021 and has remained stable since. The trend of top schools has been remarkably similar to that of large tech companies over the past few years, remaining relatively unchanged, so there isn't much to discuss regarding trends.

But are founders from elite educational and professional backgrounds more likely to succeed?

If you look at a sample of all founders in the crypto space, it is evident that there is a correlation between attending top schools or working at large tech companies and future success. However, when we observe the most successful companies in our accelerator and the most successful companies in the entire crypto industry, very few come from elite backgrounds.

We discuss possible reasons for this in detail in "What Does It Take to Be a Great Crypto Founder?" In short, cryptocurrency is an counterintuitive technology, and many founders from traditional elite backgrounds may struggle to understand it from first principles. While this situation may change over time, this perspective still holds true at present.

Team Composition and Work Mode: Nearly 75% Fully Remote

Analyzing the team composition in our data can help us understand the structure of crypto startups. While this does not necessarily reveal which composition produces the most successful teams, we share what we believe to be the ideal situation based on experience.

In our latest cohort of applications, 39% of startups were founded by solo founders. Historically, solo founders have faced bias from venture capitalists; however, data shows they can achieve extraordinary results: research has found that about 20% of unicorns are founded by solo founders. Additionally, they often have key employees who may not be referred to as co-founders but still have significant influence in certain cases.

Among startups with two or more co-founders, about half (45%) have equity distributed equally, while the other half do not. When equity distribution is unequal, startups with exactly two founders are most likely to distribute equity in a 60-40 or similar ratio, such as 51-49, followed by 70-30.

In startups with three or more founders, we observe that almost any form of equity distribution is acceptable; however, equal distribution or a single founder holding the majority of equity (≥50%) is the most common scenario. The main reasons for unequal equity distribution among founders are to reward those who i) initially funded the startup with personal funds; ii) contributed ideas (including effort and contributions); or iii) hold the most decision-making power.

We do not have strong opinions on this, but for founders who start their ventures around the same time, we generally tend to advise them to distribute equity equally, as successful entrepreneurship is a decade-long journey, although it is understandable that in certain cases equal distribution may not always be reasonable, as illustrated by the reasons above.

Our data indicates that nearly 75% of startups today operate fully remotely (i.e., with no employees working on-site). This proportion is quite significant overall, although it is not surprising given the global nature and relative scale of the crypto industry.

The COVID-19 pandemic may have changed the way we work, but at Alliance, we prefer face-to-face teams or at least co-working co-founders and key employees. Face-to-face team communication is more efficient and quicker, which in turn fosters a stronger team culture, creativity, and accountability.