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Venture Capital Funds and Smart Contract Networks — Why the Promised Land Failed to Deliver

There is no certainty any technology will succeed but we can assume that every piece of technology has a purpose and if developed and promoted correctly it can achieve its grand purpose.

There is a lot of talk lately about Venture Capital (VCs) and the effect they bring in the cryptocurrency sphere.

Jack Dorsey expressed his dissaproval on Web3 generalizing the open source architecture of Web3 with private entities and VC funds, claiming web3 won’t ever escape their grip.

VCs and Business Incubators are funds, usually pooled funds from various sources that seek for startup businesses and provide liquidity that would cover the cost for expansion and development.

There are issues with this type of funding, though, since VCs push for either an IPO or the sale of the startup to one of the market leaders, after the startup attains a particular size or certain targets have been reached.

Such funding also exists in the crypto world, and we watch today VC-backed networks rise into market caps we didn’t expect.

The example of Solana

Solana is an example of a VC-backed blockchain project. Solana and plenty of companies working inside this ecosystem have received funding cumulatively reaching $2 billion, which was enough to make this crypto asset rise into the top-5 in market cap terms during the cryptocurrency market heyday.

Solana suddenly started trending in 2021, and the funding was followed by strong advertising support and promotion in social media by CT influencers and video content creators on YouTube.

A project we knew nothing about in 2020, all of the sudden became a top one for the cryptocurrency industry.

The funding of some crypto startups was disanalogous to the market proportions and focused on projects with certain features, those projects structured to operate as companies rather than decentralized networks.

Interestingly, VC funding skipped most of the successful PoW blockchain networks and didn’t focus on the decentralization aspect.

VCs were focused on startup networks that can host Web3 applications and Smart Contracts (Defi, NFTs).

There is a big question mark on the decentralization aspect and its significance to VCs.

Mining decentralization is a crucial factor for blockchain networks. It produces immutability, and censorship resistance to blockchain networks. The failure to achieve decentralization reduces these elements and devalues the networks.

Security of a blockchain depends on various factors today, and while with PoW it is simple to understand how decentralization works, PoS networks depend on multiple stakeholders and validators.

Solana has centralization issues and while this was mentioned in the various source since its beginning. However, decentralization wasn’t a feature VCs were interested in.

BSC, Polygon And More

Polygon and BSC are similar to Solana networks. Polygon has received funding in several rounds with the latest deal achieved funding by Sequoia reaching $450 million.

BSC has also plenty of collaborations with VC funds and incubators around the world but mostly based its success on the overwhelming resources and the profitable model of the Binance exchange.

Most of the smart-contract networks follow Ethereum’s path of success and rebrand themselves as trends change to achieve part of the market they previously avoided.

Fantom, Terra Luna, Harmony, Avalance are some examples that proceeded with a similar approach achieving various deals and multiple rounds of VC funding.

Participation in multiple blockchain conferences, between 2020–2021 was decisive in achieving such deals at a time the interest in cryptocurrencies and smart contract networks was increasing.

All these networks have a common pattern. The founders are a controlling force, the networks are centralized and we witness how they behave at times of failure, and the VCs are “pumping” the tokens’ price with enormous funding for the size of these startups.

A second feature most smart networks have in common is the introduction of a native token. Instead of using a re-tokenized version of ETH, they all created a native token used on the platforms for gas (fees for each transaction).

Supposedly, all these networks were a scaling solution to Ethereum, although as we witness lately, two of the top of them (Polygon and Solana) face multiple difficulties to keep the networks up and running.

IOTA is a historic example. It was yet another over-hyped new project in 2017, although in development since 2014. IOTA was advertised as a breakthrough in the industry since it wasn’t running a network with a different format to the blockchain. “Tangle” was supposed to be fast, feeless, secure, and decentralized.

It wasn’t anything of the above, though. A wallet was hacked, money was lost, and the devs simply took down the network for two weeks until they could fix the exploit while trying to recover the lost funds.

In Conclusion

We shouldn’t be surprised that Solana and Polygon networks face DDoS attacks that slowed down transactions and made these networks unusable on multiple occasions.

This is the price of centralization. The blockchain networks and any similar tech, since it always deals with the transfer of value, it has to be decentralized.

The word “trust” is so significant that Satoshi mentioned it 14 times on the whitepaper. Blockchain networks preserve value from the trustless features they contain.

Of course, this is a brilliant argument against the Lightning Network as well, a network that leans towards centralization with 99% of transactions controlled by financial hubs, with regulated KYC-enforced practices.

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