Source: Bankless
Compiled by: Felix, PANews
Aleks Larsen and Spencer Bogart, General Partners at Blockchain Capital, recently joined the 'Bankless' podcast to discuss the inevitable trend of the crypto market transitioning from infrastructure to the application layer. Blockchain Capital pointed out that the widespread adoption of stablecoins has accumulated massive liquidity for on-chain finance, driving revenue growth for lending and trading protocols.
Furthermore, tokenizing stocks and venture capital funds will lead to an exponential improvement in the capital efficiency of the financial system. Although traditional finance and the crypto ethos grapple with compliance, the restructuring of the global financial system by tokenization technology is already unstoppable. PANews has compiled the highlights of the conversation.
Host: Spencer, I recall our first conversation in the industry was back in 2018 or 2019, discussing MKR's value capture model.
Spencer: Yes, at the time we were even considering buying MKR. Now, in 2026, the most modern projects like Hyperliquid, Lighter, and Venice still adopt the "buyback and burn" model pioneered by MKR. Despite endless debates in the past about the low capital efficiency of this model, it has arguably 'never lost' in practice.
Aleks: Absolutely. I was actually very critical of this model in the past, thinking that in the endgame, when only the last token remains, there must be substantial cash flow that can be directly distributed to holders; otherwise, it's difficult to build a valuation model. But now I think that was overthinking it. The 'buyback and burn' model works very well today.
Spencer: Exactly, the main reason is that unless the 'Clarity Act' passes, the legal rights of token holders remain very vague. In theory, as an investor, if you're a startup, I'd certainly hope you reinvest cash flow into new growth opportunities. But in reality, most crypto protocols haven't demonstrated the ability to expand across boundaries and succeed, so many token holders prefer the team to 'plant a flag in the sand,' clearly signaling to the market that 'we will forever buy back and burn.' This at least removes uncertainty.
Additionally, due to the mixed quality of early crypto tokens. Serious, high-quality projects must, from day one, use 'real money' to buy back and burn tokens to prove to the market that they are different. While this might not be the dominant model five years from now, at this stage, it's the most effective and credible commitment to align interests with token holders.
Host: There's a narrative now that 'crypto VC is dead,' with all the big funds expanding their investment scope to frontier tech like AI and robotics, but Blockchain Capital chose to double down during the industry downturn. And strangely, I see two extremes simultaneously: on one hand, traditional financial institutions are eager to dive into blockchain; on the other, crypto OGs are very pessimistic. How should we understand this rift?
Aleks: We're accustomed to zooming out, not over-focusing on price fluctuations during bull and bear cycles. This 'token bear market' is actually very special because it's accompanied by the most positive catalysts in history. We've seen the 'Genius Act' and the gradually clarifying 'Clarity Act.' Rules are being established, and traditional institutions are entering on a large scale.
More importantly, some applications have broken through the industry's information bubble and entered the mainstream: like prediction markets (projects like Polymarket, where many users don't even care if it's built on crypto tech) and stablecoins (providing extremely cheap cross-border dollar payments and remittance channels). These sectors have achieved strong unilateral growth even during the bear market. It's just that AI has absorbed all the market's attention over the past year or so, especially with the explosion of coding agents and open-source Claude 7-8 months ago, causing many to be distracted during low token prices.
Host: You often mention the 'S-curve.' Can you explain in detail where the crypto industry is on that curve now?
Aleks: The development trajectory of the crypto industry is highly similar to the internet. The internet commercialized starting in 1989, exploring for the first 10 years until 2000 when it had a few hundred million users, but it was still extremely difficult to use and bandwidth-limited. Then, from 2000 to 2005, came the broadband transition. I think the crypto industry has just experienced its own 'broadband transition.' Block space has become extremely cheap and abundant. In 2020, Solana was the first monolithic chain to demonstrate high performance and a scaling path, and by 2024, L2s truly became widely adopted, and even Ethereum is gradually achieving scaling. This has become the new normal for the industry.
Looking back at the internet, the broadband transition didn't lead to an immediate explosion; it waited for the mobile explosion from 2006-2010 to bend the S-curve upward. If 2015, the birth of Ethereum, represents the starting 'clock,' we are only 10 to 11 years into development. Among 700 million crypto holders, perhaps only 10% are active on-chain users, because it's only in the last 2-3 years that truly user-friendly, consumer-grade technology stacks (like embedded wallets, social recovery, spending limits, and passwordless logins) that don't require users to be cryptographers have truly matured and become widespread.
Therefore, we are currently in the 2003-2004 phase of the internet, the 'flat bottom of the S-curve' after broadband adoption but before the mobile explosion. Once edge applications like stablecoins and prediction markets thoroughly penetrate the center, the S-curve will experience an upward inflection point.
Host: Perhaps our generation was too young and impatient in 2021, thinking we could change the world tomorrow, but technology and infrastructure need time to mature. However, this still doesn't fully explain why the OGs are so disheartened.
Spencer: It's a psychological 'growing pain.' When a startup reaches the IPO stage, early core employees often miss the times when they were 'rebellious pirates' and can't stand the company becoming a compliant giant to succeed. It's like having a friend who discovers a very niche, individualistic band, but when that band explodes and is embraced by the mainstream, he feels regret instead, claiming 'I only like their early albums.'
Aleks: Yes, industry conferences are now full of people in suits, everyone talking about permissioned channels, compliance, and access, not cypherpunk. But finance is inherently a highly regulated sector; you can't grow big without playing by the rules.
However, the decentralization and neutrality of Ethereum and Bitcoin still have an extremely strong underlying appeal for institutions because they provide better trust assumptions. The cypherpunk dream hasn't died; it's just operating in a low-key, more scalable form as the underlying network for the financial system. We are genuinely upgrading the plumbing of the global financial system. While it may not sound as 'sexy' as it used to, the efficiency gains will tangibly benefit everyone.
Host: Indeed. And you mentioned a detail earlier: for the first time in history, traditional institutions are proactively delving into and deploying crypto assets during a price decline, without market frenzy narratives. Also, in 2025 and 2026, the industry seems to have completely moved beyond the 'investing in infrastructure for infrastructure's sake' cycle. What does this represent in terms of industry evolution?
Spencer: In 2019, interacting with Uniswap could cost a few dollars or even over ten dollars in friction costs. At that time, severely insufficient block space was the industry's biggest bottleneck. This led capital, driven by market fervor, to over-invest in infrastructure, resulting in today's situation of severe oversupply of block space, with many blocks sitting empty. But abundant, cheap block space is an absolute prerequisite for application developers to flourish.
The data is very clear. In 2021, over 70% of fees paid by users went to the infrastructure layer. In 2025, the total fees at the application layer surpassed the infrastructure layer for the first time in history. This means that with the sharp drop in transaction costs, value is finally shifting upward in the protocol stack (to the application layer). A healthy ecosystem shouldn't allow the underlying communication infrastructure to extract the vast majority of monopoly rents. This is precisely the traditional banking rent model we're trying to break with crypto technology.
Host: So, is this the so-called 'fat application theory' replacing the earlier 'fat protocol theory'?
Aleks: Exactly. The underlying protocol layer shouldn't capture massive profits because the essence of blockchain is to reduce intermediary extraction and improve efficiency. But the higher-level logic is 'thin protocol, large market': even if your take rate is extremely low, once you expand the underlying market size of global finance by an order of magnitude, the total absolute value captured will still be enormous.
Host: That's interesting. If we migrate this 'fat protocol to fat application' reasoning to the AI field, does AI investment and evolution follow similar patterns?
Aleks: The similarities are striking. In crypto, teams raised billions in valuation with just a whitepaper. This is identical to how AI Labs now easily secure sky-high valuations based on research vision and star-studded teams. In crypto, we look at testnet TPS and Benchmarks; in AI, it's various Model Benchmarks. In crypto, exchange listings provide liquidity; in AI, it's getting distribution channels through hyperscale cloud providers.
But there's a huge difference. Token prices in crypto are a completely public and transparent sentiment thermometer. Once the narrative breaks, a token can drop 90% in a month. The bubble and downward pressure in AI are currently hidden in private capital markets. It might not crash directly like Crypto but manifest as down rounds, talent drain, etc.
Host: Will the AI application layer explode like Crypto's?
Spencer: Absolutely. As Palantir Technologies CEO Alex Karp emphasizes, having models and intelligence alone cannot directly produce the results enterprises want. Someone must go to the front lines to translate intelligence into actual workflows and outputs.
Interestingly, AI VCs have recently panicked about 'software having no moat.' We, as crypto VCs, find it quite amusing because the crypto industry has been dealing with a brutal environment for the past 10 years where 'everything is open-source, anyone can fork the code at any time, and there is no software moat.'
Aleks: General model weights will gradually commoditize, but the 'harness' - how to use them to solve real problems - will not. In complex, hardcore fields where 'no error is allowed' (like semiconductor manufacturing, complex tax audits, etc.), applications leveraging frontier models plus fine-tuning, supplemented with proprietary enterprise datasets and closed-loop feedback, will build moats so deep that general models cannot breach them.
Host: Back to RWA tokenization. As the first generation of the most successful RWA, what insights has the development of stablecoins given us?
Spencer: Few people know that Blockchain Capital is the only venture capital firm that invested in all three major stablecoin issuers (Tether, Circle, Paxos) a decade ago. Today, the total stablecoin market cap is around $300 billion. I'm almost over 90% certain that by 2030, this number will skyrocket to several trillion dollars (even two trillion). Previously, stablecoins were driven by a retail flywheel, but now each new flywheel turn comes with institutional push, 'onboarding' traditional stocks, money market funds, and government bonds onto the chain because the capital efficiency of a global, 24/7, programmable underlying network is just too high.
The core of stablecoins is far more than just a 'payment product'; their stickiness is extremely high. Once dollars are on-chain, the vast majority of funds settle and are injected as working capital into lending, exchanges, and other on-chain ecosystems, catalyzing massive economic activity. We conducted precise quantitative analysis: Every $1 billion in net new stablecoin issuance creates about $122 billion in economic activity on-chain within a year. This $1 billion directly delivers approximately $19 million in recurring protocol revenue to downstream on-chain protocols within a year.
Host: So, besides stablecoins, how will the eagerly anticipated 'stock tokenization' evolve?
Spencer: Stock tokenization will have two waves. The first wave is about access. Global investors (especially non-US users) have an extremely strong demand for convenient, frictionless, one-click trading of US stocks. The second wave is about composability. Once my Apple stock token is on-chain, countless lending services, securities lending protocols can openly compete to offer me the best collateral rates and yields. This is the ultimate manifestation of capital efficiency.
Currently, there are mainly two competing approaches. One is the X-Stocks model represented by Backed (acquired by Kraken). It issues debt instruments through a Cayman SPV to track stocks. The benefit is that it's completely permissionless, requires no KYC, and can freely circulate in DeFi. But the fatal flaw is that you own a debt owed by the SPV, not actual shares in Apple. For large institutions with tens of billions, this credit and legal risk is unacceptable. The other is a compliant channel for direct ownership of shares. This requires us to compromise on permissionlessness.
Host: So, does this mean the 'suit-wearing bigwigs' of traditional finance and the 'pirates' of crypto must have one side compromise?
Spencer: No need. We don't necessarily have to force them to merge. Those tens of trillions in traditional stocks can operate in 'sidecar mode' alongside the main public blockchain. They may have regulatory fences but exist parallel to purely permissionless DeFi liquidity pools. This will actually greatly accelerate the liquidity of pure cypherpunk systems because the massive funds sitting in stock tokens can be converted to ETH with one click and operate in purely decentralized, permissionless contexts.
