Why VCs want Decentralized AI

The evidence of VC interest in crypto x AI is undeniable. Just last week, Sentient announced a massive seed round of $85 million. This round included investments from heavyweights like Peter Thiel's Founders Fund, Pantera Capital, and Framework Ventures.

While both AI and crypto have garnered significant attention, some might dismiss their union as a passing trend caught in Crypto Twitter echo chambers. But as more and more of these projects catch the eyes of top investors, it's growing more and more likely that these projects are onto something.

Let’s break down why VCs are betting big on crypto and AI 👇

First Principles Thinking

The intersection of crypto x AI presents a unique opportunity: to build a new financial and AI ecosystem grounded in first principles with crypto’s values.

The world doesn't need another Instagram or a Nasdaq with a slightly lower latency. It needs entirely new ways to interact, collaborate, and exchange value. Crypto x AI has the potential to unlock this by building entirely new systems from the ground up.

This creates a wealth of new opportunities for startups and investors alike. VCs are always looking for the next big thing, and the intersection of crypto and AI is an investment opportunity worth getting excited about.

We all crave upside. Maybe you ape into memecoins, maybe you fund moonshot startups.

The Inevitable Rise

The influence of AI is undeniable. It's rapidly permeating every aspect of our lives, from chatbots to advanced tools, becoming an essential part of our work and daily routines. The dependence on AI is only increasing, creating a powerful network effect: the more we use it, the more valuable it becomes.

This dynamic isn't lost on VCs. As Pantera’s Cosmo Jiang puts it: "[10], 15, 20 years from now, everyone will be using AI," so saying you’re investing in an AI firm "will be as stupid as saying ‘I’m investing in a company that has a website.’"

This isn't just a speculative statement; it's a clear trend. Just like the internet, AI is on a clear path to mainstream adoption.

Broke: VCs pivoting to AI
Woke: VCs waiting til their crypto portcos pivot to AI
Pantera Capital....is raising a new fund of $1 billion. The fund said that all cryptocurrency companies will become AI companies in the next 10 to 20 years. It has invested 15% to 20% of its capital…
— fiskantes.lens ⭐️🩸 (@Fiskantes) June 19, 2024

And here's where it gets interesting: AI and crypto are becoming a powerful combo. Remember all that talk about onboarding a billion new crypto users? Forget human users; the future power users of crypto might be AI agents.

Experts believe the combined power of crypto and AI could add trillions to the global economy by 2030. By getting in early and backing the right players, VCs hope to capture a significant share of the massive value that will be created in this emerging space.

The harsh reality is that for most VCs, it’s possible the AI train has already left the station. The insanely high valuations of companies like OpenAI (valued at 80B), xAI (valued at 24B), and Anthropic (valued at over 18B) have priced out all but a handful of players from the big tech AI deals.

Crypto presents a compelling alternative – a backdoor to participate in the future of AI without needing to write a billion-dollar check.

AI is the last profitable vertical for venture capital ever & 90% of VCs are priced out of trad deals (OpenAI $100B, Anthropic$20B, even small size Sillicon Valley ones open at $1B+)
Crypto x AI makes sense cuz tokens are essentially business equities & are as liquid &… April 24, 2024
— dexter | gmAI arc (@dexter_cap) April 24, 2024

Moreover, VCs are buying crypto x AI tokens from the open market. For instance, Polychain, Digital Currency Group, and dao5 reportedly bought hundreds of millions of dollars worth of $TAO (Bittensor).

And perhaps the best part is that in the case of crypto x AI, there’s also an opportunity for retail investors to get in on the action.

The Trust Gap

The current state of AI resembles a high-stakes poker game with hidden cards. Companies like OpenAI develop billion-dollar solutions based on research locked away behind closed doors.

While this may benefit them, it creates a significant trust gap for VCs and the public. How can you trust a company like OpenAI when their own boardroom becomes a public drama?

i'm still mulling over the fact that the @OpenAI board fired @sama because he couldn't be trusted and the entire superalignment team quit over safety concerns
for months i've been wondering what actually happened and there's quite a lot of content out there for anyone who's…
— Eric Wall | BIP-420😺 (@ercwl) July 9, 2024

On the other hand, crypto x AI is all about open-source development fueled by tokens to coordinate the incentives. This way, we can build AI that serves everyone involved, and not the corporation or the state.

VCs are betting that the open-source approach will lead to faster innovation, a wider pool of talent, and ultimately, a much bigger pie for everyone involved.

Fear Of Missing Out?

The tech industry is no stranger to hype cycles, and the current buzz around crypto and AI is no exception. It’s a shot at making moonshot returns and this sometimes creates a sense of urgency or perhaps even FOMO.

Crypto x AI is a narrative that's hard to resist, even if the specifics remain a bit fuzzy. However, it's important to acknowledge the inherent uncertainty. VC investments are still educated guesses and the professionals are learning as they go along, too.

(This article was written by Arjun Chand for Bankless).