Original author: Kit
Original source: RootData
Encryption compliance shows signs of fatigue under AI technology changes
The cryptocurrency market is undergoing its second 4-year technology cycle transformation since the ICO wave in 2017, while the AI industry has entered its 10th development cycle with technological breakthroughs from GPT-3 to LLM. According to Moores Law, the crypto industry faces a cyclical test in 2025 - the total financing amount will drop from a peak of $31 billion in 2021 to $9.8 billion in 2024, a drop of 68%. At the same time, the financing scale of the AI field will exceed $110 billion in 2024, forming a distinct capital siphoning effect.
Behind this structural shift is the division of the technology maturity curve. Since the DeFi summer of 2020, the crypto industry has not seen a breakthrough technology narrative, while AI continues to release productivity dividends through the evolution of the Transformer architecture. The differentiation of the financing scale of the two essentially reflects the vote of capital on the potential of technology application - while crypto projects are still repeating the traditional path of issuing coins-exchanges, AI has achieved a commercial closed loop in the fields of medical care, manufacturing, education, etc.
The AI monsoon has not yet arrived, and crypto believers still need to work hard
Data from Q1 2025 shows that when the crypto community is still obsessed with the myth of AI MEMES and eager to emulate ELIZA, the first chatbot in AI history, to become the decentralized ELIZA in crypto history, institutional investment in the crypto field has shown a clear differentiation: the proportion of CEX and custody project financing has shrunk from 90% in the peak period after the DeFi summer and the collapse of FTX to 45%, while AI, DeFi and infrastructure projects have grown against the trend, accounting for 58% of the total financing during the period.
At the same time, the financing scale of AI-related crypto projects has shown dramatic fluctuations. Although there was a single-quarter investment boom of US$2.3 billion in Q3 2024, the figure fell back to US$780 million in Q1 2025, a decrease of 66%. This exposes the inherent contradiction of the AI+blockchain narrative: most current projects only stay at the conceptual grafting level and fail to solve core pain points such as AI model training and data rights confirmation. The scale of traditional AI primary investment has entered the industrys 4-year technology cycle since the advent of GPT 3, and its total investment amount has increased from an average of US$400 billion per year from 2017 to 2020 to an average of US$800 billion+ per year. In comparison, the growth of AI-related crypto financing is less than 1% of the growth of the above-mentioned traditional AI funding. How blockchain can cleverly combine AI technology to ensure that crypto believers can share in the AI funding overflow is worth pondering, and the acceleration of the total amount of AI crypto financing also shows that native crypto funds are willing to increase their efforts to find this hen that lays golden eggs. In short, crypto project founders should think about how to combine AI and infrastructure solutions to solve the current problems of ownership and credibility that are difficult to solve with CeFi or traditional AI.
The liquidity dilemma
The divergence between quantitative tightening and the issuance of on-chain stablecoins has exacerbated market distortions. In March 2025, the on-chain circulation of USDC exceeded a new high of $98 billion, but crypto venture capital attracted only $4.6 billion during the same period. This phenomenon of liquidity dam reveals a deeper contradiction - institutional funds prefer to allocate BTC spot through compliant channels such as ETFs rather than support early innovative projects. In fact, the amount of financing in the primary market of cryptocurrencies has fallen from the peak of $31 billion in financing in 2021 to a total financing amount of $9.8 billion in 2024, a decrease of 68%, while the number of financings has fallen from 1880 financings in 2021 and 2022 to 1544 in 2024, and the average financing amount has dropped from 15.7M in 2022 to 6.4M, a decrease of 59%. The liquidity of funds invested by crypto institutions in crypto start-ups is about to disappear due to the explosion of programmable blockchain technology and the dividends brought by the 2020 epidemic and quantitative easing.
Fundraising Dilemma: Founders’ Battle Royale Game
RootData data shows that the amount of crypto financing shrinks significantly as the project is in the later stages of financing. The 2021 cycle bonus period led to overvaluation. Today, the valuation of founder projects has been squeezed out in the A round or even the seed round. No institution is willing to publicly invest in the C round from Q3 2023 to Q4 2024. Strategic financing remains stable, while mergers and acquisitions and OTC transactions show that institutional funds are more willing to reach off-site agreements in a market with scarce liquidity.
It is worth noting that the median financing of all rounds has been rising steadily. In the scenario of a decline in the total amount of financing, this shows that funds are more willing to reduce the frequency of investment and increase the amount of investment. Just like a battle royale game, excellent capital reserves and bullets are fully bet on founder projects with better fundamentals and cash flow. At a time when AI technology and encryption technology are growing explosively, the competition between early encryption founders and start-up projects for gold coins in the hands of investors has become fierce. Of the 2,681 projects that have received seed round financing from 2017 to date, only 281 entered the A round (a promotion rate of 10.5%), and less than 30 projects finally reached the C round. This one in ten survival game reflects the systemic defects of early projects in the industry:
From valuation bubble to value return:
In the 2021 cycle, the median seed round financing amount was as high as US$4.7 million, but it has fallen back to US$400 in Q1 2025. As the total financing amount shrinks, its share continues to decline, indicating that investment institutions interest in crypto seed projects continues to decline.
The median amount of pre-seed rounds during the same period was $2 million, and it increased to $2.91 million in Q1 2025. As the total amount of pre-seed round financing increased, the median amount of financing also increased. Pre-seed rounds with higher risks but favorable prices are favored by more crypto institutions.
The total amount of A-round financing has shrunk, but the financing amount has increased from US$10 million to US$14.5 million in the same period. This shows that crypto projects that have obtained PMF and cash flow in the market have received more investment, while projects that have not successfully made profits have died in the seed round and have difficulty obtaining more funds.
Failed Token Economics:
Series B projects are facing liquidity pressure from token unlocking, and the lack of secondary market capacity has led to a vicious cycle. According to RootData data, most projects unlock token funds without new liquidity injection, and each unlocking will bring millions of levels of selling pressure.
Technology iteration fault:
The financing bubble in 2021 caused failed projects to be concentrated in the hot tracks of the previous cycle, such as cross-chain bridges and NFT platforms, and failed to keep up with new trends such as ZK-Rollup, modular blockchain and AI. LPs did not make positive profits in the fund structure and sought to cut off their arms to survive, and the total amount of institutional activities (such as OTC and mergers and acquisitions) continued to rise.
Fundraising difficulties: the scale has dropped precipitously
According to RootData data, the total amount of crypto institutional fundraising plummeted from a peak of $22 billion in 2022 to $2 billion in 2024, a drop of 91%. This rate of decline far exceeds the decline in the scale of Nasdaq technology stock financing during the same period (35%). Insufficient macro liquidity, the hundred-year-old crypto token issuance and institutional IRR decline have led to a sharp decline in the interest of institutional LPs and independent investors in crypto project financing. This may reflect from the side that the lack of AI innovation in the crypto industry in this cycle has not attracted the attention of incremental funds outside the industry.
Quarterly data confirms the downward trend: After Q2 2024 (BTC halving cycle), the amount of funds raised fell back to US$420 million, which is equivalent to the level before the rise of DeFi in 2020. The bull market in this cycle did not bring incremental funds to crypto institutional fundraising.
Head institutions suffered setbacks: A16Z suffered a setback after three consecutive years of successful fundraising from 2020 to 2022, and Paradigms new fund size in 2024 shrunk by 72% from its historical high in 2021
After the crypto public financing market cooled, the volume of private placement and OTC transactions grew by 35% against the trend. In Q4 2024 and Q1 2025, financing completed through OTC reached US$1.9 billion, with mergers and acquisitions and OTC accounting for 75% of the total amount during the period. The prevalence of this under-the-table transaction reflects the anxiety of institutional investors about liquidity - through customized token unlocking terms and repurchase agreements, the impact of market fluctuations on the portfolio can be minimized.
The risk of breaking the price immediately after going online
The slogan short the token once its launched is prevalent in the crypto community during this period, which indirectly reflects the negative reaction and rejection of institutional projects by independent crypto investors. According to RootDatas collection of institutional crypto tokens launched on Binance and the final financing performance of projects, under the 3+1 unlocking general YC rules, institutions face severe exit pressure:
a. The first phase of unlocking needs to achieve 5-10 times the profit before the overall cost can be covered in the first phase of unlocking
b. Data shows that since Arbitrum in 2021, there are very few projects that institutions with later financing rounds can expect to recover their costs without any hedging strategies.
c. Among the newly issued tokens in 2024, more than half of the projects have FDV less than 5 times the last round of financing, which directly leads to:
Institutions will have to bear a -50% actual book loss if they unlock the first 10%
Subsequent unlocking triggers a chain of selling pressure
This also indirectly confirms the hidden reason for the rise of the above-mentioned institutional transactions - the decline in token portfolio returns. In short, this is already the case for tokens listed on Binance, and institutions are even more miserable for tokens that can only be listed on T1 and T2 exchanges with depleted liquidity.
Crypto investment tends to be rational
Based on RootDatas data on the number of days from seed round to Series A financing and their square variance in the crypto financing market. We found that from 2017 to 2020, the average number of days to the next round of financing gradually increased, reaching a peak in Q4 2018 (1087.75 days). This reflects the slow pace of financing for early projects in the crypto industry and low liquidity. The variance was higher between 2017 and 2020, with a peak in Q4 2017 (578.63 days), indicating that there is greater uncertainty in the timing of project financing. During the ICO and DeFi wave from 2017 to 2019, the crypto industry was in an exploratory stage and the quality of projects was uneven. The financing cycle of some projects was prolonged due to the immaturity of the token economic model.
After 2021, the number of days to the next round of financing has dropped significantly, falling to 317.7 days in Q1 2023 and further shortened to 133 days in Q3 2024. This shows that as the market matures, the financing efficiency of high-quality projects has improved and capital allocation has become more concentrated. Since 2021, the variance has gradually decreased. This shows that the market has entered a rational development stage and the financing cycles between projects have become more consistent. Since 2021, institutional investors have been more inclined to support top projects. The concentration of funds in the seed round and the A round has increased, allowing high-quality projects to complete the next round of financing faster. At the same time, capital has gradually abandoned projects that lack innovation and profitability, accelerating the survival of the fittest in the industry.
Summarize
The crypto industry is undergoing a transition from early chaos to rational development. Since 2021, both curves have shown a continuous downward trend. The decline in the number of days and variance for the next round of financing not only reflects the improvement in capital allocation efficiency, but also highlights the industrys preference for high-quality projects. In the next few years, projects that can quickly adapt to market demand, combine emerging technologies such as AI, and achieve commercial closed loops will become the focus of capital pursuit.
In summary, the current market has higher requirements for profitability and product-market fit (PMF). Founders need to quickly verify the business model in the seed round to shorten the subsequent financing cycle. Institutional investors should focus on high-potential projects that can complete multiple rounds of financing in a short period of time. Such projects usually have clear growth paths and strong execution capabilities.
The author believes that the liquidity tightening generally believed by the crypto community is not the main reason for the poor performance of the crypto financing market or even crypto prices. 2024 is the first year of compliance in the crypto industry, and it is also a turning point for more mature institutions to enter the market. The fact that crypto founders have not perfectly submitted the closed-loop answers of AI and crypto technology to crypto native investors is the main reason for the poor performance of cryptocurrencies in this round of AI and crypto technology cycle, or the liquidity overflow from the explosion of AI applications.
