YZi Labs' Equity Focus: A Signal for a More Disciplined Crypto VC Cycle

YZi Labs' pivot to equity investments is a direct response to a market flooded with tokens. Head of the firm, Ella Zhang, has explicitly advised portfolio projects to focus on product-market fit before issuing tokens, warning that tokens without sustainable utility risk losing value and often become a distraction for founders. This stance signals a retreat from the speculative frenzy that defined the sector.

The backdrop is one of explosive token creation. In 2025 alone, the number of listed cryptocurrencies surged nearly fivefold, with well over 20 million new digital assets entering circulation. This wasn't a single bubble but a sustained wave of issuance, driven by low barriers to entry and speculative behavior. The sheer volume of new tokens created a saturated ecosystem where utility and durability became scarce.

This environment coincided with a broader shift in venture capital. While total crypto VC funding held up, it became heavily concentrated in later-stage deals, leaving early-stage founders with a tougher environment. The rise of institutional vehicles like digital asset treasuries drew capital away from direct startup investment. YZi Labs' equity focus is a disciplined reaction to this reality, offering founders a path to capital without the immediate pressure to launch a token in a market already drowning in them.

The Funding Flow Reality: Equity vs. Token as Capital Formation

The capital formation landscape in crypto has fundamentally shifted. While traditional venture investment held up in dollar terms at about $18.9 billion in 2025, it became highly concentrated in late-stage deals, leaving early-stage founders with a tougher environment. This concentration was driven by a major alternative: digital asset treasuries (DATs). According to The Block Pro data, DAT firms raised roughly $29 billion through most of 2025, offering institutional investors a simpler path to crypto exposure than backing startups directly.

This flow of capital into DATs drew funds away from direct venture investment, contributing to a sharp decline in deal volume. Venture deal count fell roughly 60% year over year, dropping to about 1,200 transactions. The result was a market where capital is being deployed with a much higher bar for proof of concept, favoring businesses with product-market fit over speculative token projects. Investors expect this discipline to persist into 2026, with token sales continuing to play a supporting role in capital formation.

The bottom line is a bifurcated funding ecosystem. One path leads through equity to proven, often regulated, businesses like stablecoin issuers and exchanges. The other path, through token sales, is now a secondary option for projects that have already demonstrated traction. For founders, this means the era of raising capital simply by launching a token is over. The flow of money is now disciplined, favoring operational substance over narrative.

Catalysts and Risks: The Path to a More Sustainable Ecosystem

The disciplined equity approach championed by YZi Labs faces a critical test from external forces. The temporary stabilizing effect provided by the passage of the GENIUS Act and Federal Reserve rate cuts in 2025 created a window where longer-term VC investment could be supported. These macro and policy inflection points helped stabilize sentiment for a few months, offering a more favorable backdrop for capital deployment into proven businesses.

Yet the market's dominant drivers in 2025 were macro, positioning, and flows, not fundamentals. This environment, where speculative capital can still dominate, remains a key risk. The overwhelming majority of tokens experienced deep drawdowns, with the median token declining 79%. In such a market, the pressure to issue a token for fundraising may return if regulatory clarity fails to materialize or if macro flows shift. The structural headwinds facing tokens, particularly around value accrual and investor rights, have not been resolved.

The bottom line is that YZi Labs' equity focus is a disciplined bet on a more sustainable ecosystem. It succeeds only if the current macro tailwinds hold and regulatory frameworks provide the clarity needed to de-risk traditional venture capital. If not, the very conditions that made equity a sensible alternative-market saturation and speculative volatility-could quickly reassert themselves, undermining the discipline the firm is promoting.