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The era of "mass coin distribution" on public chains comes to an end
Author: Dara_VC
Compiled by: Jiahua, ChainCatcher
The Grant (ecosystem funding) model of L1 has failed. It is not a failure that "needs fine-tuning," but a complete failure structurally, conceptually, and in terms of motivational consistency.
The L1 teams running these projects are either "blinded by their own involvement" or too worried about the negative impact of halting to admit it.
Where Did the Money Go?
NEAR once announced the establishment of an $800 million ecosystem fund, of which $250 million is specifically allocated for ecosystem funding over the next four years. Prior to this, NEAR had already distributed over $45 million in funding to more than 800 projects.
Avalanche has committed over $250 million in funding, dedicated to promoting the development of its ecosystem.
Aptos operates a milestone-based ecosystem funding model, with amounts ranging from $5,000 to $50,000, and funding for payment-related projects can go up to $150,000. BNB Chain provides up to $200,000 for each project.
Overall, across all major L1s, hundreds of millions of dollars have been poured into this "funding machine" over the past four years, potentially exceeding a billion dollars. As of 2024, there are over 50 active Web3 funding projects globally supporting various initiatives, covering public goods, DeFi, tools, AI, and infrastructure.
You might think that with such a large influx of funds, we should see a plethora of groundbreaking companies, unicorn protocols, and ecosystems that can truly retain liquidity and users in the long term.
However, that is not the case. TVL (Total Value Locked) is leaking, and developers are chasing the next incentive mechanism. The impressive data reported to the board last quarter looks embarrassing six months later. And the question that no one dares to ask publicly is: Where did all this money go?
Reclaiming the Original Intent of the Ecosystem Funding Model
Fairly speaking, the ecosystem funding model used to make sense. In 2020 and 2021, when L1s were genuinely trying to cold-start ecosystems from scratch, funding was a reasonable spark. You need developers before you have users, and you need protocols before you have liquidity. Funding can ignite the initial flywheel.
In the early stages of Web3 development, ecosystem funding played a crucial financial role. It supported open-source contributions, incentivized participation in new protocols, and allowed teams to build MVPs (Minimum Viable Products) without immediate monetization pressure. Funding is an ideal choice for ideation and experimentation.
"Spark" is the key word here. No one designed funding to be a permanent fuel. But this has become the reality for many ecosystems—a long-term "infusion" support that allows projects to survive on life support without ever forcing them to learn to breathe on their own.
The proliferation of projects relying on funding exposes critical limitations. Funding often encourages short-term thinking, with teams optimizing for funding rounds rather than sustainable operations. Projects may fall into a vicious cycle of writing proposals and soliciting sponsorships, paying less attention to building viable user bases or revenue-generating products.
The Hamster Wheel Trap of Going in Circles
A team sets its sights on a mid-tier L1—those with well-funded foundations, active funding committees, and, crucially, networks with lower competition for funding. They develop products that align with the current funding wishlist: DeFi tools, DEXs, NFT marketplaces, some form of "AI integration" (whatever that means in this cycle).
They submit a polished proposal, meet the KPIs outlined in the milestone structure, receive funding in batches, and create activity data that the foundation team can screenshot for quarterly reports.
A small group of mature teams repeatedly wins funding, opportunities, and attention. Even in systems like secondary financing, these same teams often dominate, keeping newcomers at bay.
Over time, smarter teams figure out this cartel dynamic and navigate it with ease. They build relationships with funding committees, become "insiders" in the ecosystem Discord, and position themselves as reliable recipients of recurring funding.
Then, when the ecosystem hits a ceiling, when TVL no longer grows, and when real liquidity remains on Solana and Ethereum (where the real users are), these teams make rational moves. They start evaluating the next active ecosystem, port their code, write new proposals, and then walk away.
Funding projects measure success by the amount of funding distributed or allocated, but this does not tell the whole story. TVL charts reveal the truth, developer retention data reveals the truth, and lifeless Discord channels reveal the truth.
The Unmentioned "Hostage" Dilemma
The ecosystem funding model creates a strange dynamic that is rarely discussed openly: it creates a hostage relationship, with both sides being hostages.
Foundations become hostages to their own metrics. They commit to deploying capital and must report ecosystem growth to their boards, and the simplest way to show growth is to provide more funding, more projects, and prettier data.
The Ethereum Foundation funded 105 projects before realizing it needed to pause open applications. The sheer number became a problem, overwhelming streamlined teams and making it impossible to assess real long-term impacts.
Even the most mature and trusted Ethereum ecosystem eventually had to stop and reflect... are we creating value, or merely generating activity?
The recipient teams are another hostage. Once you enter the funding cycle, your organizational structure will be built around it. Your roadmap becomes the funding proposal, and your KPIs become whatever the committee wants to see. You no longer make product decisions based on user needs, but based on what can secure funding.
Web3 founders and developers must recognize that success is not only measured by funding rounds or community hype; long-term impact comes from building infrastructure and applications that stand the test of time. Funding can be a spark, but it must never be the fuel.
The tragedy is that truly talented teams are trapped within it. They could create real value, but instead, they are optimizing funding applications and mingling in various Telegram groups to get noticed.
The True Role of Direct Equity Investment
Let’s compare this to L1's venture capital departments issuing real checks—investing in promising companies in the form of equity plus tokens.
Solana Ventures, as the strategic investment arm of Solana Labs, has a clear mission: to accelerate the development of the Solana blockchain itself, using its funds as leverage for ecosystem growth. The company often collaborates with game studios to co-design development partnerships.
It is not just an investor but also a partner in infrastructure and market entry, helping teams build Solana-native game economies and integrations.
This is a fundamentally different relationship from funding. When you accept equity and tokens, you are betting that this company will make an impact. This changes everything about how you interact with them. You are now on the same side of the table.
You want them to find product-market fit (PMF), you want them to complete real Series A funding, and you want their valuation to reach a billion dollars because that billion-dollar valuation matters more for your ecosystem's credibility, your token price, and the long-term narrative than the combined total of 50 funded recipients.
A16z Crypto invested $50 million in the core Solana protocol Jito in exchange for equity and tokens, with the explicit goal of fostering long-term alignment between the two companies. This is the right way. Not a $50,000 grant that requires a milestone report in 90 days.
This is a bet on a company that will truly make an impact, and it is a bet with real money and vested interests.
In 2025, global blockchain venture capital funding reached $35 billion, with firms like a16z Crypto and Pantera Capital leading multiple significant funding rounds. This is the pool that L1 venture capital departments need to compete for.
Developers Are Only Loyal to Users and Liquidity
Another strategic mistake of the ecosystem funding model is that it assumes developers' loyalty can be bought with non-dilutive capital. This is not the case.
In 2025, L1 activity will differentiate into various roles: Solana, BNB Chain, and Hyperliquid capture a large amount of speculative capital flow, while Ethereum solidifies its position as a settlement and data availability layer. The base layer continues to segment into specialized chains covering privacy, performance, and application chain coordination, making interoperability and cross-chain routing increasingly important.
The best builders already understand this. They are not loyal to any one chain; they are loyal to users and liquidity. They go where the users are, where there are exit mechanisms, and where there is real trading volume and capital flow.
And now, this is a multi-chain reality. The winners of the next cycle will be those protocols and applications that meaningfully integrate across multiple chains.
Layer-1 chains raised approximately $2.71 billion between 2023 and 2025, with nearly 48% of the funds flowing to early projects. Investors continue to support new execution environments but increasingly expect faster ecosystem delivery.
The market is getting smarter; they are abandoning ecosystems that rely solely on funding to support false activity. Now, the rewards go to real throughput, real users, and real revenue.
So what should L1's venture capital departments do? Enter the best companies early with equity and tokens, engage in true strategic participation in a multi-chain portfolio, and make your chain's integration a part of their roadmap rather than an optional add-on.
If you support a company that is bound to make an impact, you will collaborate with them to make your chain a natural home for their activities. You earn that loyalty by being the best technical environment for them to build products, not by renting it with funding checks.
A Billion-Dollar Company vs. 200 Zombie Projects
Scenario A: You deploy $10 million in funding over two years to 200 projects. Your quarterly board report has daily active user (DAU) data, some GitHub activity, and a bunch of comments from teams active on Discord to optimize funding KPIs.
Two years later, half of the projects are either dead or have migrated to places with real liquidity. Your TVL stagnates, and developer retention data is dismal. You report "funded over 200 projects" and then pray no one asks about their whereabouts.
Scenario B: You take the same $10 million and deploy it in the form of direct equity plus tokens to 10 truly promising companies in your ecosystem, creating an integration roadmap that binds their success to your chain.
You provide real strategic support—not chasing milestone reports but introducing recruitment, token economics design, and go-to-market strategies. Three years later, one company reaches a valuation of $1 billion, and two others are valued at $200 million each.
That billion-dollar company is proof that can change everything. It changes how other builders think about building products in your ecosystem, how venture capitalists think about writing checks in your ecosystem, how exchanges view your chain's projects, and how liquidity providers (LPs) view your tokens.
The narrative gravity brought by a truly groundbreaking project is immense, and its compounding effect is something that 200 "zombie" projects surviving on funding can never reach.
In just the first quarter of 2025, blockchain and crypto startups raised $4.8 billion, marking the strongest quarter since the end of 2022. Startups that can prove their utility, compliance, and scalability not only attract funding but also draw strategic partners and long-term support.
Smart capital has begun to flow to real companies that can create genuine outcomes. L1 venture capital departments need to integrate into this trend rather than running parallel funding projects that isolate themselves from it.
Kill the vanity metrics. Stop reporting the number of funded projects, and start reporting the valuations of portfolio companies, the TVL of invested companies, and developer retention rates that are genuinely tied to organic growth rather than those tied to incentive programs.
Strictly differentiate between infrastructure funding and corporate investment. Some things are worth funding—truly open-source public goods, core infrastructure, security research. These are genuine public goods that benefit everyone in the ecosystem without needing a business model. But what about a DeFi protocol or a gaming application? That is a company. Invest in it like you would invest in a company.
Those Who Keep Throwing Money Will Eventually Exit
The L1 landscape in 2026 will be vastly different from that in 2021. The total market capitalization of the L1 sector stabilizes above $2.96 trillion, and competition has shifted from theory to practical applications, stablecoin payments, gaming, perpetual contract DEXs, creator tools, and specific application chains. Winners are pulling ahead through throughput, fees, decentralization, and developer appeal.
The funding era made sense during the cold start phase. That era is over. What remains is the true competition for the best builders, the best protocols, and the most genuine economic activity. You cannot win this competition by being the most generous funding committee.
You win because you have a group of truly great companies that choose your chain (often among many options) because it is the best place to build, and they stay because you are the right long-term partner.
L1s that figure this out in the next 18 months will look visionary. Those that still treat funding projects as their primary ecosystem development strategy will ultimately reveal their true nature: they have mistaken activity for value creation and have paid hundreds of millions for this self-deception.
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From a September 2025 TechCrunch report to being live in April 2026, this architecture saw no changes.
In a February 9, 2026 tweet, Musk pledged to undergo rigorous security tests of X Chat before its launch on X Chat and to open source all the code.
As of the April 17 launch date, no independent third-party audit has been completed, there is no official code repository on GitHub, the App Store's privacy label reveals X Chat collects five or more categories of data including location, contact info, and search history, directly contradicting the marketing claim of "No Ads, No Trackers."
Not continuous monitoring, but a clear access point.
For every message on X Chat, users can long-press and select "Ask Grok." When this button is clicked, the message is delivered to Grok in plaintext, transitioning from encrypted to unencrypted at this stage.
This design is not a vulnerability but a feature. However, X Chat's privacy policy does not state whether this plaintext data will be used for Grok's model training or if Grok will store this conversation content. By actively clicking "Ask Grok," users are voluntarily removing the encryption protection of that message.
There is also a structural issue: How quickly will this button shift from an "optional feature" to a "default habit"? The higher the quality of Grok's replies, the more frequently users will rely on it, leading to an increase in the proportion of messages flowing out of encryption protection. The actual encryption strength of X Chat, in the long run, depends not only on the design of the Juicebox protocol but also on the frequency of user clicks on "Ask Grok."
X Chat's initial release only supports iOS, with the Android version simply stating "coming soon" without a timeline.
In the global smartphone market, Android holds about 73%, while iOS holds about 27% (IDC/Statista, 2025). Of WhatsApp's 3.14 billion monthly active users, 73% are on Android (according to Demand Sage). In India, WhatsApp covers 854 million users, with over 95% Android penetration. In Brazil, there are 148 million users, with 81% on Android, and in Indonesia, there are 112 million users, with 87% on Android.
WhatsApp's dominance in the global communication market is built on Android. Signal, with a monthly active user base of around 85 million, also relies mainly on privacy-conscious users in Android-dominant countries.
X Chat circumvented this battlefield, with two possible interpretations. One is technical debt; X Chat is built with Rust, and achieving cross-platform support is not easy, so prioritizing iOS may be an engineering constraint. The other is a strategic choice; with iOS holding a market share of nearly 55% in the U.S., X's core user base being in the U.S., prioritizing iOS means focusing on their core user base rather than engaging in direct competition with Android-dominated emerging markets and WhatsApp.
These two interpretations are not mutually exclusive, leading to the same result: X Chat's debut saw it willingly forfeit 73% of the global smartphone user base.
This matter has been described by some: X Chat, along with X Money and Grok, forms a trifecta creating a closed-loop data system parallel to the existing infrastructure, similar in concept to the WeChat ecosystem. This assessment is not new, but with X Chat's launch, it's worth revisiting the schematic.
X Chat generates communication metadata, including information on who is talking to whom, for how long, and how frequently. This data flows into X's identity system. Part of the message content goes through the Ask Grok feature and enters Grok's processing chain. Financial transactions are handled by X Money: external public testing was completed in March, opening to the public in April, enabling fiat peer-to-peer transfers via Visa Direct. A senior Fireblocks executive confirmed plans for cryptocurrency payments to go live by the end of the year, holding money transmitter licenses in over 40 U.S. states currently.
Every WeChat feature operates within China's regulatory framework. Musk's system operates within Western regulatory frameworks, but he also serves as the head of the Department of Government Efficiency (DOGE). This is not a WeChat replica; it is a reenactment of the same logic under different political conditions.
The difference is that WeChat has never explicitly claimed to be "end-to-end encrypted" on its main interface, whereas X Chat does. "End-to-end encryption" in user perception means that no one, not even the platform, can see your messages. X Chat's architectural design does not meet this user expectation, but it uses this term.
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Found a "meme coin" that skyrocketed in just a few days. Any tips?
TAO is Elon Musk, who invested in OpenAI, and Subnet is Sam Altman
Soaring 50 times, with an FDV exceeding 10 billion USD, why RaveDAO?
1 billion DOTs were minted out of thin air, but the hacker only made 230,000 dollars
After the blockade of the Strait of Hormuz, when will the war end?
Before using Musk's "Western WeChat" X Chat, you need to understand these three questions
The X Chat will be available for download on the App Store this Friday. The media has already covered the feature list, including self-destructing messages, screenshot prevention, 481-person group chats, Grok integration, and registration without a phone number, positioning it as the "Western WeChat." However, there are three questions that have hardly been addressed in any reports.
There is a sentence on X's official help page that is still hanging there: "If malicious insiders or X itself cause encrypted conversations to be exposed through legal processes, both the sender and receiver will be completely unaware."
No. The difference lies in where the keys are stored.
In Signal's end-to-end encryption, the keys never leave your device. X, the court, or any external party does not hold your keys. Signal's servers have nothing to decrypt your messages; even if they were subpoenaed, they could only provide registration timestamps and last connection times, as evidenced by past subpoena records.
X Chat uses the Juicebox protocol. This solution divides the key into three parts, each stored on three servers operated by X. When recovering the key with a PIN code, the system retrieves these three shards from X's servers and recombines them. No matter how complex the PIN code is, X is the actual custodian of the key, not the user.
This is the technical background of the "help page sentence": because the key is on X's servers, X has the ability to respond to legal processes without the user's knowledge. Signal does not have this capability, not because of policy, but because it simply does not have the key.
The following illustration compares the security mechanisms of Signal, WhatsApp, Telegram, and X Chat along six dimensions. X Chat is the only one of the four where the platform holds the key and the only one without Forward Secrecy.
The significance of Forward Secrecy is that even if a key is compromised at a certain point in time, historical messages cannot be decrypted because each message has a unique key. Signal's Double Ratchet protocol automatically updates the key after each message, a mechanism lacking in X Chat.
After analyzing the X Chat architecture in June 2025, Johns Hopkins University cryptology professor Matthew Green commented, "If we judge XChat as an end-to-end encryption scheme, this seems like a pretty game-over type of vulnerability." He later added, "I would not trust this any more than I trust current unencrypted DMs."
From a September 2025 TechCrunch report to being live in April 2026, this architecture saw no changes.
In a February 9, 2026 tweet, Musk pledged to undergo rigorous security tests of X Chat before its launch on X Chat and to open source all the code.
As of the April 17 launch date, no independent third-party audit has been completed, there is no official code repository on GitHub, the App Store's privacy label reveals X Chat collects five or more categories of data including location, contact info, and search history, directly contradicting the marketing claim of "No Ads, No Trackers."
Not continuous monitoring, but a clear access point.
For every message on X Chat, users can long-press and select "Ask Grok." When this button is clicked, the message is delivered to Grok in plaintext, transitioning from encrypted to unencrypted at this stage.
This design is not a vulnerability but a feature. However, X Chat's privacy policy does not state whether this plaintext data will be used for Grok's model training or if Grok will store this conversation content. By actively clicking "Ask Grok," users are voluntarily removing the encryption protection of that message.
There is also a structural issue: How quickly will this button shift from an "optional feature" to a "default habit"? The higher the quality of Grok's replies, the more frequently users will rely on it, leading to an increase in the proportion of messages flowing out of encryption protection. The actual encryption strength of X Chat, in the long run, depends not only on the design of the Juicebox protocol but also on the frequency of user clicks on "Ask Grok."
X Chat's initial release only supports iOS, with the Android version simply stating "coming soon" without a timeline.
In the global smartphone market, Android holds about 73%, while iOS holds about 27% (IDC/Statista, 2025). Of WhatsApp's 3.14 billion monthly active users, 73% are on Android (according to Demand Sage). In India, WhatsApp covers 854 million users, with over 95% Android penetration. In Brazil, there are 148 million users, with 81% on Android, and in Indonesia, there are 112 million users, with 87% on Android.
WhatsApp's dominance in the global communication market is built on Android. Signal, with a monthly active user base of around 85 million, also relies mainly on privacy-conscious users in Android-dominant countries.
X Chat circumvented this battlefield, with two possible interpretations. One is technical debt; X Chat is built with Rust, and achieving cross-platform support is not easy, so prioritizing iOS may be an engineering constraint. The other is a strategic choice; with iOS holding a market share of nearly 55% in the U.S., X's core user base being in the U.S., prioritizing iOS means focusing on their core user base rather than engaging in direct competition with Android-dominated emerging markets and WhatsApp.
These two interpretations are not mutually exclusive, leading to the same result: X Chat's debut saw it willingly forfeit 73% of the global smartphone user base.
This matter has been described by some: X Chat, along with X Money and Grok, forms a trifecta creating a closed-loop data system parallel to the existing infrastructure, similar in concept to the WeChat ecosystem. This assessment is not new, but with X Chat's launch, it's worth revisiting the schematic.
X Chat generates communication metadata, including information on who is talking to whom, for how long, and how frequently. This data flows into X's identity system. Part of the message content goes through the Ask Grok feature and enters Grok's processing chain. Financial transactions are handled by X Money: external public testing was completed in March, opening to the public in April, enabling fiat peer-to-peer transfers via Visa Direct. A senior Fireblocks executive confirmed plans for cryptocurrency payments to go live by the end of the year, holding money transmitter licenses in over 40 U.S. states currently.
Every WeChat feature operates within China's regulatory framework. Musk's system operates within Western regulatory frameworks, but he also serves as the head of the Department of Government Efficiency (DOGE). This is not a WeChat replica; it is a reenactment of the same logic under different political conditions.
The difference is that WeChat has never explicitly claimed to be "end-to-end encrypted" on its main interface, whereas X Chat does. "End-to-end encryption" in user perception means that no one, not even the platform, can see your messages. X Chat's architectural design does not meet this user expectation, but it uses this term.
X Chat consolidates the three data lines of "who this person is, who they are talking to, and where their money comes from and goes to" in one company's hands.
The help page sentence has never been just technical instructions.
App