Crypto and AI: Skepticism from Venture Capitalists

While the potential of projects at the intersection of crypto and AI has driven large-scale investment from retail and VCs, two prominent venture capitalists have expressed skepticism towards the potential of crypto projects to disrupt major AI players during this cycle, urging builders to “follow the incentives.”

Concerns on Crypto’s Viability

“Crypto has a problem of taking things that exist really, really well off-chain and making them worse on-chain, then selling them to those already on-chain,” noted Rob Hadick, general partner at crypto-focused VC firm Dragonfly. He emphasized that much of what is happening in the AI/crypto crossover seems to reflect this trend.

Speaking at The Block’s first Emergence conference in Prague, the panelists concluded that the most significant value AI will offer to crypto is enhancing developers’ coding efficiency, given the importance of software development in the crypto landscape.

“AI is a massive software, technical revolution,” stated David Pakman, managing director at CoinFund. He highlighted that AI utilization could improve software development across various decentralized applications, including infrastructure, security, and user functionality.

The Challenge of Centralized Players

However, in terms of competing with large centralized AI players like OpenAI, Anthropic, Microsoft, and Facebook, both VCs largely agreed that decentralized AI systems are unlikely to overtake these giants in the current cycle.

“We [Dragonfly] prefer to see a bit of product-market fit… we are quite skeptical about the potential market for decentralized training, doing anything around models on-chain, or ML on-chain,” Hadick remarked. Although Dragonfly has made a few investments, they’ve focused on edge computing and local models for specific latency-insensitive workloads.

Pakman shared Hadick’s skepticism about decentralized projects disrupting centralized players this cycle. However, he commended the innovators attempting to create alternative systems. “If we wish for a future of highly centralized AI, we should stick to our current path,” he observed. “But if we envision a future where compute resources to train large AI models are more decentralized, we should explore how Web3 can democratize access to tech stacks or hardware.”

AI Agents: Overhype or Opportunity?

While other VCs at Emergence expressed excitement about AI agents—programs designed to complete complex tasks without continuous human oversight—Hadick expressed skepticism towards the agent-centric projects.

“We have made one investment in the agent side… it may be a winner-take-most or winner-take-all market,” he cautioned. He predicted significant venture capital losses in this space and compared the agent hype to the excitement around crypto gaming projects in 2021.

Pakman had a slightly different view, discussing how an agent-driven future could facilitate synergy between AI and crypto.

“In crypto, we often point to the next trend rather than celebrating successful innovations,” he observed. He cited the establishment of crypto in payments and money transfers as one intersection where AI agents could thrive, needing to interact with money for tasks. “Crypto is an optimal platform for agent-to-agent and human-to-agent payments.”