There’s a lot of empty rhetoric online about crypto x AI. But we’re seeing evidence that each can improve the other. In this edition, our investment partner Daniel lays out AI’s resource problem—and how crypto solves it. Jesse looks at the boom of AI “agents” onchain and sees it as a potential starting point for truly autonomous DAOs. Then Daniel suggests two tools that protocols can use to deal with “squishy/dynamic problems” DAOs aren’t suited for.
If you’re a founder, keep reading because further down, as our investors Alana and Derek explain what projects they’re looking for in 2025.
Finally, we’ve got the stories behind some of the most impactful projects in crypto: Morpho, Phantom, World, and Farcaster.
Enjoy!
Why (Good) AI Needs Crypto
In a 2024 poll by Pew Research Center, 64% of Americans said they believe social media has a negative rather than positive impact on the country, 78% said social media companies have too much power and influence in politics today, and 83% said it’s very or somewhat likely that these platforms intentionally censor political viewpoints they disagree with. Disdain towards social media platforms is one of the few issues that unites Americans.
Looking back at how the social media experiment has unfolded over the past 20 years, it seems inevitable that we would end up here. You know the story. A handful of big tech companies captured initial attention and, most importantly, user data. While there was initially hope that this data would be open, these companies quickly changed course by shutting off access after using that data to build impenetrable network effects. This basically leads us to the current state of affairs, where fewer than ten big tech social media companies exist as little fiefdoms in an oligopoly with no incentive to change because the status quo is extremely profitable. It’s closed and anti-competitive.
Examining how the AI experiment is currently playing out, I feel like I’m watching the same movie on repeat, but much more is at stake this time. A handful of big tech companies have amassed the GPUs and data to build foundation AI models and have closed off access to these models. It’s already effectively impossible for a new entrant (that doesn’t raise billions of dollars) to build a competing version because the barriers to entry are so high — pretraining a foundation model costs billions of dollars in compute capital expenditures alone, and the same social media companies that won from the last technological boon are using their control over proprietary user data to build models competitors cannot. We are full steam ahead towards recreating what we did with social media in AI: closed and anti-competitive. If we continue down this path of closed AI, a few tech companies will have unthrottled control over access to information and opportunities.
Read the full article on our website to see how crypto addresses this issue.
DAOs 2.0
In 2014, Vitalik defined a DAO as follows:
"an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automaton itself cannot do…"
"Automation at the center, humans at the edges"
The reason “automation at the center” is so important is closely related to Nick Szabo’s concept of social scalability:
"Social scalability is the ability of an institution…to overcome shortcomings in human minds and in the motivating or constraining aspects of said institution that limit who or how many can successfully participate."
In 2020-2022, we saw a wave of DAOs that were not this: they were more like co-ops, with humans at the center, and little to no automation. And like most co-ops they failed to coordinate at scale.
Today we are seeing a wave of AI agents doing things onchain, with varying degrees of automation. Many of these agents are tokenized, meaning they have capital at their disposal, and a network of owners—at least some of which are human—at the edges, who have capabilities the models don’t.
The way I’ve been thinking about the emergence of these “agents” onchain is the true beginning of DAOs 2.0, where agents have the potential to put the “A” back in DAO.
Read the full article on our website to learn about which elements can be automated.
When All You Have Is a Hammer, Everything Looks Like a Nail
We’re still living with the vestiges of a 2019 conception of DAOs as a hammer, and all squishy/dynamic problems a protocol can encounter as a nail. We’ve learned by now that this is asking too much of DAOs. We now have new tools in the toolbox that should be used to handle these problems more elegantly. Two I’m excited about are (1) free market parametrizing and (2) zkTLS.
Free market parameterizing is using market forces to set dynamic parameters that otherwise need constant maintenance by a DAO. Morpho is a great example of this in action. Rather than following Aave’s burdensome process of having a DAO manually determine interest rates, Morpho made it so anyone can permissionlessly deploy a lending market, set the risk parameters they wish, and competitive forces work to dynamically adjust these rates. Other projects should think about how free market dynamics can automatically set these types of parameters rather than putting the burden on DAOs.
I also want to replace the use of DAOs as arbiters of truth; it’s slow, complicated, and hard to decentralize in practice. For example, Polymarket’s UMA dispute resolution oracle has as its backstop a vote by UMA tokenholders (and if that fails, centralized admin functionality). You know what would be cleaner, trustless, and decentralized? Using zkTLS with a neutral onchain verifier to resolve the market. Imagine the market of “Who will win the House in 2026 according to apnews.com’s homepage” and any user being able to resolve the market by providing a zkTLS proof straight from AP News’ homepage. Companies like Pluto are already showing this tech is here, now, and we can solve hard oracle questions with cryptographic rigor.
What We’re Looking for in 2025
Here are some project types we’re eager to fund
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... and how to get involved below
From the Archive
Recent and relevant pieces from us
Daniel: What Are Agents Good At?
AI agents can do at least four things really well. They can meet humans where they are, even nudge them forward, and aggregate and synthesize tons of data. But for early crypto agents, the thing that might stand out most is their ability to entertain.
Alana: Reflections on the State of Crypto – H2 2024
There were three big inflection points for crypto in the second half of 2024: the election of a pro-crypto president and Congress, the Hyperliquid airdrop, and Truth Terminal—an AI agent that brought $GOAT to life.
Watch This
Fireside chats and product updates from portfolio companies at our LP Day
Paul and Jesse discuss the decisions that went into Morpho’s design, its pivot to a protocol, and the direction onchain lending is headed.
Brandon sits down with Jesse to discuss Phantom’s origins as a Solana wallet, its rapid addition of new features, and how he thinks Phantom’s business model will evolve.
Alex shares with Jesse how World has grown by seeing AI’s potential impact early on, embracing an ambitious vision, and not being afraid to tackle formidable technical challenges.
Farcaster Update with Horsefacts
Engineer Horsefacts explains Farcaster vs. Warpcast, why we need a permissionless social protocol, the two features that drove Farcaster’s growth in 2024, and three new elements Farcaster is exploring for 2025 and beyond.
If this newsletter gave you ideas (or prompted more questions), we want to hear from you. Give a shout to anyone on the Variant team.
Thanks for reading. We’ll see you next issue.
Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.
