How to Raise Crypto VC, Investing in DePIN, Network States, and the Electro Dollar with Anirudh Pai

This episode features Dragonfly Capital's Anirudh Pai revealing the critical signals crypto VCs seek—demonstrable long-term demand and customer validation—while exploring the frontiers of DePIN, the shift towards 'Electro Dollars,' and the potential of network states.

Securing Crypto VC Attention: Proving Long-Term Demand

• Anirudh Pai, Partner at Dragonfly Capital, emphasizes that the primary challenge for crypto founders seeking investment is demonstrating genuine, sustainable demand for their product or service. While short-term narratives or "metas" might attract fleeting interest, Dragonfly prioritizes founders with a clear vision for long-term utility. The strongest validation comes directly from users; Anirudh notes, "...if people come to us and they have a kind of strategy for that... some of their customers come to us and like 'Hey you got to talk to these people' that is probably like the best buy signal."
• Key Insight: VCs like Dragonfly look beyond hype for evidence of "pent-up demand and induced demand," indicating a product solves a real, persistent problem.
• Founder Contact: While warm introductions are preferred as they involve social capital endorsement, Anirudh stresses that Dragonfly reviews pitches from all channels (Twitter, Telegram, LinkedIn, email), seeking high-integrity, foundational projects.
• Strategic Implication: Crypto AI founders must focus intensely on building something users genuinely need and are vocal about, as this customer validation is paramount for securing top-tier VC interest.

An Investor's Process: Balancing Structure and Serendipity

• Anirudh describes his process as balancing structured work (meetings, research, portfolio support) with dedicated time for learning and unstructured exploration. He reads avidly and prioritizes conversations with new people to gain diverse perspectives, acknowledging the danger of seeing patterns where none exist. He highlights the importance of serendipity in sourcing deals, advocating for leaving room for chance encounters and "irrational" time allocation to discover unique viewpoints that might lead to significant opportunities.
• Investor Philosophy: Anirudh believes that true investment edge comes not from rigid processes but from embracing randomness and unexpected insights. He stresses the importance of self-care (like sleep) to sustain performance in the demanding, 24/7 crypto market.
• Actionable Insight: For investors and researchers, cultivating serendipity—attending diverse events, engaging with people outside immediate circles, allowing unstructured time—can be a crucial strategy for uncovering non-obvious opportunities and avoiding herd mentality.

Navigating Investment Biases: Learning from Crypto's Past Cycles

• The conversation touches upon the challenge of pattern matching in investing, particularly relevant for sectors like DePIN (Decentralized Physical Infrastructure Networks – networks using token incentives to coordinate the deployment and operation of physical hardware infrastructure). Anirudh notes that past negative experiences, such as the failed IoT and supply chain crypto projects of 2017-2018, create "scar tissue" that can bias investors against revisiting similar ideas. He references Marc Andreessen's view that many failed ideas eventually work, emphasizing that timing is critical and investors must constantly re-evaluate assumptions based on changing data, technology, and market conditions.
• DePIN Context: Early crypto attempts at physical infrastructure projects largely failed, leading to skepticism. However, Anirudh argues against letting past failures dictate current investment decisions.
• Strategic Consideration: Investors must actively combat historical biases and assess DePIN or other frontier crypto projects on their current merits, considering technological advancements, market readiness, and evolving regulatory landscapes. Being early can be wrong, but dismissing ideas solely based on past failures is equally risky.

DePIN Deep Dive: From Skepticism to Frontier Technology

• Anirudh shares his initial skepticism about DePIN, citing regulatory hurdles, competition from established giants (like hyperscalers), and the optimization challenges in commodity markets. However, witnessing the rapid growth and strong community formation around projects, particularly in wireless, shifted his perspective. He observes that the user passion resembles early Bitcoin or Ethereum communities, where using the technology becomes part of one's identity and ideology.
• Key Observation: The tangible nature and strong community engagement in some DePIN projects are overcoming initial investor skepticism. Anirudh notes, "...it reminds me a lot of like early ETH early Bitcoin of people who have just made it their identity..."
• Market Trend: DePIN represents a move towards crypto applications grounded in real-world utility and physical infrastructure, potentially broadening crypto's appeal beyond purely financial applications.

Host Perspective: Tangibility and User Experience as DePIN Catalysts

• The host shares their personal entry into crypto via Helium, a wireless DePIN project. The tangible nature of setting up a physical hotspot to provide connectivity, coupled with clear token incentives and a user-friendly onboarding process, made the value proposition immediately understandable, unlike more abstract crypto concepts. This highlights the power of DePIN in allowing users to earn their first crypto through contribution rather than solely purchasing it, lowering the barrier to entry.
• User Experience Insight: DePIN's potential for mainstream adoption is significantly enhanced by tangible products and simple, intuitive user experiences, contrasting sharply with the complexity often found in DeFi or L1/L2 interactions.
• Actionable Takeaway: DePIN projects that prioritize ease of use, clear value propositions, and tangible interaction are likely better positioned for broader adoption.

The Hardware Renaissance: Enabling Grassroots DePIN Innovation

• Anirudh connects the rise of DePIN to the increasing accessibility and commodification of hardware manufacturing, including advancements like 3D printing. This trend shifts away from centralized production (like Apple's model) towards enabling individuals to tinker, build, and participate in hardware networks from home. This echoes the "homebrew" culture that catalyzed earlier waves of technological innovation.
• Technological Enabler: Lower costs and easier access to hardware development tools empower individuals and small teams to contribute to DePIN networks, fostering bottom-up innovation.
• Research Angle: Researchers could explore the impact of hardware commodification on the decentralization, resilience, and cost-effectiveness of various DePIN models.

The Rise of Electro Dollars: Energy, Economics, and Crypto's Future

• Anirudh introduces the concept of the "Electro Dollar," contrasting it with the historical "Petro Dollar" system that underpinned US dollar dominance via oil trade. He posits that the next economic era may involve currency or value systems intrinsically linked to, or proven by, electricity and power consumption, reflecting a shift towards modernization and potentially AI-driven economies. This ties into the broader theme of upgrading financial infrastructure for transparency and efficiency, potentially addressing complexities and opacities seen in traditional finance (e.g., 2008 crisis).
• Petro Dollar: A term describing the system where oil exports were primarily priced in US dollars, reinforcing global demand for USD.
• Electro Dollar Concept: A theoretical future where value is tied to or verified by electrical power, relevant in an increasingly digitized and energy-intensive world (especially with AI).
• Connection to Stablecoins: Anirudh links this to stablecoin adoption, driven partly by a desire for transparency (in the West) and a hedge against hyperinflation (globally).
• Strategic Insight: The increasing energy demands of AI and computation may create new economic models where energy itself, or proof of its consumption/generation, becomes a fundamental value layer, potentially integrated with crypto networks. Investors should monitor DePIN projects focused on energy and compute.

Comparing DePIN Sectors: Wireless vs. Energy Challenges and Opportunities

• The host and Anirudh discuss the differences between wireless and energy DePIN sectors. The host argues that wireless DePIN benefited from key regulatory tailwinds (like CBRS spectrum deregulation – Citizens Broadband Radio Service, allowing shared commercial use of spectrum previously reserved for the US Navy) and technological shifts (like eSIMs – embedded SIM cards enabling easier carrier switching). These factors haven't yet materialized to the same extent in the highly regulated energy sector, where building decentralized transmission infrastructure faces significant legal and practical hurdles.
• Wireless Advantages: Regulatory changes (CBRS) and tech advancements (eSIMs) created fertile ground for wireless DePINs like Helium.
• Energy Challenges: Energy markets face stricter regulations, particularly around transmission, making decentralized contribution models more complex than in wireless. Setting up personal energy transmission to neighbors is often legally prohibited and impractical.
• Investor Consideration: While energy is a massive market, DePIN solutions face higher regulatory and infrastructure barriers compared to wireless or compute. Progress may be slower, requiring different scaling strategies and potentially longer investment horizons.

Overcoming DePIN Roadblocks: User Experience and Scalability

• A key roadblock identified is the friction often involved in using DePIN networks, specifically requiring users to acquire and spend the network's native token. Anirudh and the host agree that abstracting this away—allowing payment via fiat/credit cards with token burns happening on the backend—is crucial for adoption, mirroring standard Web2 checkout experiences. The conversation highlights that DePIN projects are still learning and need to adopt best practices from both Web2 and successful crypto projects.
• Critical Improvement: Simplifying the payment/usage process by accepting traditional payment methods is essential for DePIN user adoption.
• Actionable Insight: Investors should favor DePIN projects demonstrating a clear focus on seamless user experience and removing crypto-specific friction for end-users.

Innovating in DePIN: The Medallion System for Localized Markets

• Anirudh mentions an emerging concept in DePIN: the "Medallion System" (being explored by projects like GEODNET and Daylight). This system aims to create tradable, geographically specific claims on network resources (like bandwidth or energy in a specific area, e.g., Lower Manhattan). This allows for localized supply/demand dynamics and provides investors with geographically targeted exposure, moving beyond generalized network tokens.
• Medallion System: A proposed mechanism to tokenize and trade access/capacity rights for DePIN resources within specific geographic zones.
• Potential Impact: This could enable more sophisticated pricing, hedging, and investment strategies tailored to local market conditions within DePIN networks. Researchers could analyze the economic design and market implications of such systems.

Strategic DePIN Growth: Demand-Led Models and Ecosystem Collaboration

• The discussion highlights a shift towards more sustainable DePIN growth models, moving away from purely supply-side incentives. Examples like Hivemapper and drone mapping networks only onboarding suppliers once demand (e.g., a paid contract) exists in an area are cited. Anirudh emphasizes Dragonfly's ethos of supporting builders collaboratively, viewing the DePIN space as a positive-sum game where projects like Helium, Spexi, and Hivemapper benefit from each other's success.
• Demand-Led Growth: A more sustainable approach where network supply expansion is directly tied to validated user demand, mitigating token inflation issues.
• VC Role: Anirudh sees VCs as crucial "transmission mechanisms" connecting founders with markets, policymakers, and customers, fostering ecosystem collaboration.
• Investor Takeaway: Prioritize DePIN projects employing demand-led growth strategies and demonstrating strong ecosystem partnerships, indicating a focus on long-term sustainability.

Exploring Network States: The Praxis Vision for New Ways of Living

• Anirudh discusses his interest in "network states" and new models of governance and living, stemming from his experience with perceived stagnation in traditional innovation hubs like the Bay Area. He mentions his involvement with Praxis, a project aiming to build a new city focused on shared values and attracting residents seeking alternatives. He contrasts this with earlier new city projects that failed to generate sufficient demand, highlighting Praxis's focus on community and shared purpose as key differentiators.
• Network State: A concept popularized by Balaji Srinivasan, referring to a digital community with a shared sense of identity and purpose, potentially manifesting physically.
• Praxis: A specific project aiming to build a new city based on these principles.
• Future of Work: Anirudh connects this to the changing nature of company formation, potentially requiring less capital and fewer employees due to AI, necessitating new environments that foster innovation among like-minded individuals.
• Relevance: While distinct from Crypto AI, the concept of network states intersects with crypto's focus on decentralized governance and community building, potentially offering new testbeds for crypto-economic systems and AI integration in societal organization.

This discussion underscores the shift towards tangible value and sustainable demand in crypto, particularly within the burgeoning DePIN sector. Investors and researchers must scrutinize projects for real-world utility and robust user validation, while closely monitoring innovations in physical infrastructure (energy, compute, wireless) and emerging governance models like network states for future growth vectors.