The cryptocurrency market is undergoing a fundamental shift, with investment opportunities increasingly concentrated in applications rather than protocols. In a wide-ranging discussion with Richard Galvin, a veteran crypto investor and Executive Chairman of DACM, we get a glimpse into how professional investors are repositioning their portfolios for the next phase of market evolution.

The Protocol Paradox

The crypto ecosystem has followed a development pattern similar to other disruptive technologies throughout history. As Galvin explains, "The first thing that disruptive tech builds out is the infrastructure layer... but there's a long history of that process getting extremely crowded and over-funded."

This pattern has played out dramatically in crypto:

• Initial scarcity of block space drove high fees
• Market responded by funding numerous new protocols
• Supply of block space now exceeds demand
• Fee compression across most protocols

The result is what Galvin describes as an "oversupply of block space," particularly with the development of Layer 2 solutions that allow new capacity to be spun up almost at will. This has significant implications for valuations, as many protocols are trading at multiples around 400 times cash flow - levels that are difficult to justify given the competitive landscape.

The Applications Opportunity

While protocols face increasing competitive pressures, applications built on top of these protocols are showing remarkable strength:

• Market Share Resilience: Core applications like Uniswap and RV have maintained their dominant positions despite numerous competitors
• Fee Stability: Unlike protocols that have had to slash fees to remain competitive, successful applications have maintained their fee structures
• Network Effects: Leading applications are becoming platforms themselves, with others building on top of them

Some applications are showing extraordinary growth metrics. Radium, for example, saw swap volumes increase 44x year-over-year, while generating $17.5 million in buybacks in December alone. As Galvin notes, "What tech assets delivered 4000% growth year on year and trading on a PE of 40? It's just non-existent."

The AI Intersection

The convergence of AI and crypto presents another significant opportunity, particularly around data infrastructure and validation:

• Data Collection: Projects like GRASS are using token incentives to build live AI databases
• Identity Verification: As AI-generated content proliferates, blockchain-based verification becomes increasingly important
• Model Verification: New projects are emerging to provide proof that AI models are genuine and performing as advertised

Deep Infrastructure Opportunities

One of crypto's unique strengths is its ability to rapidly bootstrap network effects through token incentives. Galvin highlights Geodnet as an example - a project that built a more accurate GPS network in 18 months that took traditional companies 20 years to develop, by incentivizing network participants with tokens.

Investment Implications

For investors, several key themes emerge:

• Valuation Focus: Look for applications generating real cash flows trading at reasonable multiples
• Network Effects: Prioritize applications that demonstrate staying power and growing network effects
• Infrastructure Scale: Consider projects using token incentives to build real-world infrastructure
• AI Integration: Look for genuine intersections between AI and crypto, particularly around data and verification

Market Inefficiencies

The crypto market continues to present unique opportunities due to structural inefficiencies:

• Imbalance between VC funding and liquid market capacity
• High initial valuations followed by dramatic price declines
• Opportunity to acquire assets at distressed prices with strong fundamentals

As Galvin notes, "If you're trading based solely on pricing in crypto, your mood changes about seven times a day." The key is having a fundamental framework that lets you look through the noise to identify real value.

Looking Ahead

The crypto market appears to be entering a new phase where:

• Applications command higher valuations than general-purpose protocols
• Real cash flows matter more than theoretical utility
• Token incentives continue to prove powerful for network building
• AI integration creates new opportunities for verification and data infrastructure

For investors, the challenge is maintaining conviction through volatility while identifying applications that can maintain their competitive advantages. As Galvin's experience with Solana demonstrates (buying at $0.22, riding it to $250, back to $8, and up again), the rewards for patient capital in crypto can be extraordinary - but require both strong conviction and a sound analytical framework.