Good morning. Niamh Rowe in today for Jeff John Roberts. Curious about the social media platform that’s raised one of the largest rounds of the year, I spent my evening scrolling on Farcaster. Last month, the company announced it had raised $150 million, led by Paradigm, with participation from a16z crypto, Haun, and USV, among others. With a valuation of $1 billion, it’s the largest investment in Web3 social media to date.

It felt a bit like falling down the rabbit hole of that heavily meme’d corner of X that’s saturated with price charts and “.eth” suffixes (a.k.a. Crypto Twitter). And, at least for now, that is ostensibly what Farcaster is: Web3’s answer to X.

But the back end is very different. As a decentralized protocol built atop Ethereum, developers can utilize its smart contracts—the protocol’s rule book—to build new social media applications on top of it. It also means that users have ownership of their data. You post casts, not tweets, and pay $5 annually to store your data on-chain. One of its unique selling points is its Frames feature, which allows apps to run within posts, meaning users don't have to leave the site to access them. The platform’s ability to look, smell, and feel like X, with the added benefits of scalability and data ownership, is why venture capitalists are so excited about it, sources told me.

Zach Bruch, founder of the Web3 casino MyPrize, told me he’s not surprised by those stats: With infrastructure projects now in the rearview, investors are wanting to create a “war chest" to crack this new era of consumer-focused crypto.

But Farcaster is not the first Web3 social startup, and by no means will it be the last. And its user experience doesn't exactly reinvent the wheel. So the funding feels puzzling. And it gets even more confusing when you look at the user adoption. On Tuesday, there were just over 50,000 active users, according to Dune data. In terms of engagement, the number of casts (or posts) was just under 30,000. That same day, the number of reactions showed an 83% decline since the protocol’s peak, just two months ago. So why did a company with the same number of users as a niche Discord server reach a $1 billion valuation?

Seth Ginn, managing partner of CoinFund, said that the fact that Web3 social projects come and go—generating “spurts of excitement” before receding—tells investors “there’s something there,” but the right person hasn’t yet been able to pull it off. And Ginn thinks Farcaster’s founder, Dan Romero, is the person to do it. He’s “probably the most impressive entrepreneur of this age...they're betting on Dan.” But he acknowledged “the jury's still out” on whether Farcaster will provide enough of a differentiated user experience to sustain growth.

But a more cynical explanation for why the valuation has gotten so high is crypto VCs playing ball.

“If VCs still have LP capital left to deploy, and they put $150 million to work instead of giving it back, that means they get to collect an additional $20 to $30 million in management fees for themselves,” tech founder Liron Shapira wrote on X. “$1 billion before even derisking the path to 500,000 DAUs is so uncalibrated that something isn’t right with the VCs - grift or incompetence,” he added. One source, who requested anonymity due to the constraints of his business, told me that, like most protocols, he expects that Farcaster will launch a token, and investors will be keen to capture the fully diluted value of it—regardless of whether there is liquidity. In lieu of perpetually eyeing their next fund, VCs want to deploy surplus capital fast in order to generate seemingly impressive returns, and tokens offer an avenue to tout this.

Niamh Rowe
[email protected]
@niamhrowe7

This story was originally featured on Fortune.com