The monolithic L1 thesis failed because it forced every application to pay for a single, expensive security budget. This created a zero-sum game for block space where high-throughput DeFi crowded out all other use cases, making L1s like Solana and Avalanche functionally single-purpose networks.
venture-capital-trends-in-web3
Blog
Why Venture Funds Are Pivoting from L1s to ZK Infrastructure
The modular blockchain thesis has turned execution layers into a commodity. This analysis explains why smart capital is flowing downstream to the proving and data availability layers, examining the technical moats and investment data driving the shift.
introduction
THE PIVOT
Introduction: The End of the Monolithic Dream
Venture capital is abandoning the 'one-chain-to-rule-them-all' thesis and aggressively funding the zero-knowledge infrastructure enabling a modular future.
The modular stack won by separating execution, settlement, and data availability into specialized layers. This allows ZK-rollups like zkSync and Starknet to inherit Ethereum's security while offering cheap, fast execution, a model validated by the dominance of Arbitrum and Optimism in TVL and activity.
Venture funds now target the picks and shovels, specifically ZK proving systems. The capital is flowing to teams building zkEVMs (Scroll, Polygon zkEVM), zk coprocessors (Risc Zero), and proof aggregation layers (Espresso, Succinct) that serve all rollups, not just one chain.
Evidence: In 2023, ZK infrastructure startups secured over $700M in funding, eclipsing new L1 raises. This capital is betting that the value accrual shifts from the base chain to the proving layer and interoperability protocols like LayerZero and Celestia that glue the modular world together.
key-trends
FROM L1 SPECULATION TO ZK FUNDAMENTALS
Executive Summary: The Three Pillars of the Pivot
Venture capital is shifting from funding redundant Layer 1 blockchains to investing in the zero-knowledge infrastructure that will define the next decade of scalable, private, and interoperable applications.
01
The L1 Saturation Thesis is Dead
The market has over 50 major L1/L2 ecosystems. New chains offer marginal differentiation at best, competing for a finite pool of developers and liquidity. The narrative has shifted from 'which chain' to 'what can be built across all chains'.
- Winner-Take-Most Dynamics: Ethereum, Solana, and a few others have captured >80% of developer mindshare.
- Diminishing Returns: Post-2021, new L1s have struggled to sustain TVL and user activity beyond initial incentives.
50+
Major L1/L2s
>80%
Dev Mindshare
02
ZK is the New Foundational Primitive
Zero-knowledge proofs are not just a scaling tool for rollups. They are becoming a universal cryptographic layer for trust-minimized interoperability, privacy, and verifiable compute, enabling new application paradigms impossible on vanilla blockchains.
- Vertical Integration: ZK tech stack (VMs, provers, coprocessors) creates defensible moats, unlike generic L1 clients.
- Market Signal: $3B+ in dedicated ZK-focused venture funding since 2022, targeting infrastructure, not applications.
$3B+
ZK VC Funding
Universal
Primitive
03
The Modular Stack Demands Specialists
The monolithic blockchain is fracturing into specialized layers: data availability (Celestia, EigenDA), execution (rollups), settlement, and proving. This creates massive, non-speculative investment opportunities in core infrastructure components that serve the entire ecosystem.
- Non-Consensus Risk: Investing in a prover network like RiscZero or a DA layer avoids the existential risk of a new L1 failing.
- Recurring Revenue Model: Infrastructure services generate fee-based revenue tied to ecosystem usage, not token speculation.
Specialized
Layers
Fee-Based
Revenue
market-context
THE SHIFT
Market Context: Execution is a Commodity, Proving is a Moat
Venture capital is abandoning L1 bets for ZK infrastructure because execution is now a cheap commodity, while cryptographic proof generation is the defensible, high-value layer.
Execution is a commodity. The EVM standard and high-performance VMs like Solana's SVM and Arbitrum Stylus create interchangeable execution environments. Building a new L1 no longer provides a technical moat.
ZK proofs are the moat. A validity proof from a zkEVM like zkSync Era or Scroll is a cryptographic guarantee, not a social consensus. This creates a trust-minimized foundation for scaling and interoperability that execution alone cannot.
The market values certainty. Investors fund RISC Zero and Succinct Labs because their general-purpose provers enable verifiable computation for any chain or app. The value accrues to the proof layer, not the execution client.
Evidence: The $7.3B total value locked in ZK Rollups (L2BEAT) and Polygon's $1B zk-focused fund demonstrate capital following the cryptographic primitive, not the virtual machine.
VC INVESTMENT THESIS SHIFT
The Capital Flow: Tracking the Pivot
A quantitative breakdown of why venture capital is reallocating from new Layer 1 blockchains to Zero-Knowledge (ZK) infrastructure projects.
| Investment Thesis Metric | Generic L1 (2021-22 Cycle) | ZK Infrastructure (2024+) | Implied Market Signal |
|---|---|---|---|
Market Saturation (L1s) |
| < 10 credible players | Winner-take-most for infra |
Avg. Deal Size (Seed) | $15-30M | $5-15M | Capital efficiency focus |
Technical MoAT | Consensus + VM design | Circuit design + prover efficiency | Harder to replicate expertise |
Time to Production (Years) | 2-3 | 1-2 (leveraging existing L2s) | Faster ROI cycle |
Addressable Market | Single chain ecosystem | All chains (Ethereum, Solana, Bitcoin via L2s) | Horizontal vs. vertical scaling |
Revenue Model Clarity | Speculative (token/fees) | Fee-per-proof (e.g., =nil;, RiscZero) | Predictable SaaS-like metrics |
Primary Risk | Chain death (low liquidity) | Technical obsolescence (new proof systems) | Execution risk over market risk |
Exit Path Multiplicity | Token only | Token acquisition (zkRollups) or enterprise sale (e.g., =nil;) | Diversified investor optionality |
deep-dive
THE ZK PIVOT
Deep Dive: The Value Accrual Stack in a Modular World
Venture capital is shifting from monolithic L1 bets to ZK infrastructure because it captures value across the entire modular stack.
Venture funds target infrastructure monopolies. Monolithic L1s like Solana and Avalanche captured all value within their walled gardens. In a modular world, value fragments across execution layers, data availability layers, and shared sequencers. ZK technology is the new monopoly vector because it secures trust across all these fragmented components.
ZKPs are the universal trust layer. Zero-knowledge proofs provide cryptographic security for state transitions, data availability, and cross-chain messaging. This makes them essential for validiums, optimistic rollups with fraud proofs, and intent-based bridges like Across and LayerZero. Owning the ZK stack means owning the security budget of every chain that uses it.
The business model is superior. Investing in an L1 bets on one chain's adoption. Investing in zkEVM circuits or proof markets like Risc Zero bets on the adoption of modularity itself. Every new rollup on EigenDA or Celestia becomes a potential customer for ZK proving services, creating a recurring revenue flywheel.
Evidence: Capital follows provable scaling. The $100M+ rounds for zkSync, Scroll, and Polygon zkEVM dwarf recent L1 raises. These teams are building the AWS for blockchain security, not just another app chain. The valuation multiple expands with each new chain that adopts their proving standard.
protocol-spotlight
FROM L1 WARS TO ZK STACKS
Protocol Spotlight: The New Infrastructure Bets
The smart money is shifting from funding speculative L1s to building the zero-knowledge primitives that will secure and scale all chains.
01
The Problem: L1s Are Commoditized
New Layer 1 blockchains offer marginal improvements at best, competing on a saturated feature set. The real bottleneck is no longer consensus, but verifiable computation and secure interoperability across this fragmented landscape.\n- Market Reality: Over 50+ active L1s with <$100M TVL each.\n- Investor Fatigue: Diminishing returns on novel VM design.
50+
Active L1s
<$100M
Avg. TVL
02
The Solution: ZK Proof Aggregation (e.g., =nil;, RISC Zero)
Instead of running full nodes for every chain, ZK aggregation allows a single proof to verify the state of multiple systems. This is the foundational layer for trust-minimized bridges and light client scalability.\n- Key Benefit: Enables ~1-second finality for cross-chain messages via proofs, not committees.\n- Key Benefit: Reduces light client sync cost from ~1 GB to ~1 KB of proof data.
~1s
Cross-Chain Finality
1KB
Client Proof Size
03
The Solution: Universal ZK Coprocessors (e.g., Axiom, Brevis)
Smart contracts are isolated and historically blind. ZK coprocessors allow on-chain apps to perform complex, trustless computation over any chain's entire history, unlocking new DeFi and governance primitives.\n- Key Benefit: Enables on-chain trading strategies based on historical TWAPs or user reputation.\n- Key Benefit: Moves intensive logic off-chain, slashing gas costs by >90% for data-heavy operations.
>90%
Gas Reduction
Full History
Data Access
04
The Solution: Encrypted Mempools (e.g., Shutter Network)
Frontrunning and MEV are a multi-billion dollar tax on users. Encrypted mempools using threshold cryptography and ZK proofs hide transactions until they are included in a block, neutralizing many attack vectors.\n- Key Benefit: Protects DeFi users from sandwich attacks and arbitrage bots.\n- Key Benefit: Enables fair, MEV-resistant auctions like those in CowSwap and UniswapX.
$1B+
Annual MEV
>99%
Attack Reduction
05
The Bet: ZK Hardware Acceleration
ZK proof generation is computationally intensive, creating a centralization risk at the prover layer. Dedicated hardware (ASICs, FPGAs) is emerging to democratize access and drive down costs, similar to the evolution of Bitcoin mining.\n- Key Benefit: Cuts prover time from minutes to seconds, enabling real-time applications.\n- Key Benefit: Lowers cost per proof, making ZK-rollups cheaper than L1s for all users.
Minutes→Seconds
Prover Time
10-100x
Cost Efficiency
06
The Endgame: ZK as the Universal Settlement Layer
The thesis is that all chains and scaling solutions will eventually settle via ZK proofs to a base layer (like Ethereum), not via their own security. This makes ZK infrastructure the highest-leverage investment in the stack.\n- Key Benefit: Converges security of rollups, validiums, and app-chains to a single root.\n- Key Benefit: Creates a $10B+ market for proof services, verification, and hardware.
$10B+
Market Potential
1
Settlement Root
counter-argument
THE PESSIMIST'S VIEW
Counter-Argument: The Bear Case for ZK Infrastructure Investing
The shift to ZK infrastructure is a crowded, technically premature bet on a future that may not materialize as expected.
The market is oversaturated. Every major VC fund now has a ZK thesis, creating a capital bubble around a technology still in its infancy. This mirrors the 2021 L1 boom, where capital outpaced developer traction and sustainable demand.
ZK tech is not production-ready. The prover performance gap between academic papers and mainnet deployment is vast. Projects like Polygon zkEVM and zkSync Era struggle with high proving costs and latency, making them impractical for most dApps.
The killer app is missing. There is no ZK-native application driving adoption. Unlike DeFi for Ethereum or NFTs for L1s, ZK infrastructure lacks a compelling, user-facing use case beyond incremental privacy or scaling improvements.
Evidence: The total value locked in ZK-rollups is a fraction of Optimistic counterparts. Arbitrum and Optimism dominate because their simpler tech offers a better developer experience today, not in five years.
takeaways
THE ZK PIVOT
Takeaways: For CTOs and Capital Allocators
The L1 narrative is saturated; the next wave of alpha is in the zero-knowledge infrastructure enabling them.
01
The L1 Scaling Thesis is Dead
New monolithic chains face insurmountable liquidity and developer fragmentation. The market has consolidated around a few winners (Ethereum, Solana) and the modular stack.\n- Capital Efficiency: Funding another EVM clone offers <10x ROI vs. funding core ZK primitives.\n- Defensibility: L1 moats are now about ecosystem, not tech. ZK tech is the new technical moat.
<10x
ROI Delta
~5
Winning L1s
02
ZK is the Universal Settlement Layer
Zero-knowledge proofs are becoming the trust layer for all of crypto, not just scaling. This creates infrastructure demand across the stack.\n- Interop: Projects like Polygon zkEVM, zkSync, and Starknet need performant provers and shared sequencers.\n- Verification: Every rollup and validium needs a ZK verifier contract, a massive, recurring fee market.
1000+
Future Rollups
Base Layer
Demand Driver
03
The Prover Race is the New Hardware Race
ZK proof generation is the computational bottleneck for scalability. Specialized hardware (GPUs, FPGAs, ASICs) will capture the bulk of value in the modular stack.\n- Performance: A 10-100x speed-up in proof generation directly translates to lower costs and better UX for all ZK L2s.\n- Market Size: Analogue to the mining ASIC boom, but serving protocols like EigenLayer, Espresso, and every rollup.
10-100x
Speed Up
Hardware
Value Capture
04
Privacy is the Next Narrative Catalyst
Regulatory pressure on mixers like Tornado Cash creates demand for programmable privacy via ZK. This isn't just about hiding transactions, but confidential DeFi and compliant institutional onboarding.\n- Product Market Fit: Applications in RWA tokenization, on-chain gaming, and enterprise require selective disclosure.\n- Tech Readiness: zkSNARKs (used by Zcash, Aztec) are battle-tested; new frameworks like Noir lower development barriers.
RWA & Gaming
Key Verticals
Aztec, Noir
Key Entities
05
Modularity Creates ZK Middleware Opportunities
The decoupling of execution, settlement, data availability, and consensus creates new composable services that rely on ZK proofs for trust minimization.\n- Shared Sequencers (e.g., Astria, Espresso) need ZK fraud proofs for cross-rollup security.\n- Interop Layers (e.g., Polygon AggLayer, LayerZero) use ZK proofs for light-client bridging and universal state proofs.
Composable
Service Model
Astria, AggLayer
Key Entities
06
The Capital Multiplier: Funding Infrastructure, Not Gambles
Investing in ZK infrastructure is a portfolio-wide beta bet on the entire modular ecosystem, not a binary bet on a single chain's adoption.\n- Downside Protection: Core infrastructure (provers, SDKs, VMs) has utility even in bear markets.\n- Upside Capture: Success of any major ZK rollup (Starknet, zkSync Era) or appchain directly accrues value to the underlying infrastructure providers.
Portfolio Beta
Investment Thesis
Ecosystem-Wide
Value Accrual
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