New Trends in Encryption from the Perspective of Institutions: Interpreting the Changes in the Grayscale List

In the rapidly changing field of encryption, the movements of institutional capital are often seen as important indicators for insights into the future. As a pioneer in the field of encryption asset management, Grayscale Investments updates its Top 20 asset list every quarter, which can be regarded as a "treasure map" of the encryption market from an institutional perspective, outlining a deep prediction of the adoption trends for the next stage of the market.

In the third quarter of 2025, this "treasure map" has quietly adjusted: the rising stars Avalanche and Morpho have jumped onto the list, while the former giants Lido DAO and Layer 2 star Optimism have unfortunately been eliminated. What changes in the winds of the encryption market does this ebb and flow reflect? Let us delve deeper and unveil the new narrative of cryptocurrency investment in 2025.

Signals of Structural Change

Avalanche: A strong pulse of on-chain vitality

Avalanche depicts a scalable and customizable blockchain future. Its unique consensus mechanism achieves high throughput, low latency, and decentralization, while the three-chain architecture ensures sub-second transaction finality, laying the foundation for large-scale applications.

In 2025, the trading volume of Avalanche's C-Chain soared from 250,000 to nearly 1.2 million, thanks to significant upgrades that reduced average transaction fees by over 90%, greatly stimulating on-chain activity.

Avalanche accurately captures the demand for gaming finance and enterprise-level applications, with multiple gaming projects launching on its subnet. It also actively embraces the traditional world by collaborating with mainstream cloud service providers to promote the tokenization of real-world assets, which is a key step for the Web3 economy to penetrate the mainstream.

Grayscale is optimistic about Avalanche due to its technological advancements, strategic ecosystem expansion, and the "multi-dimensional growth flywheel" formed by its integration with Web2. This indicates that the Layer 1 competition is shifting to a broader new track with real economic activities and the potential for Web2/Web3 integration.

Morpho: Revolutionary Decentralized Lending

Morpho is paving a new institutional path for decentralized lending. As a DeFi lending protocol based on Ethereum and Base chains, Morpho optimizes yields and ensures security through innovative mechanisms. Its protocol design focuses on low transaction fees and has undergone multiple rigorous audits.

Morpho performs excellently: annual fee revenue reaches 100 million USD, total locked value doubles to over 4 billion USD, firmly holding the second position in DeFi lending. On the Base chain, it has become the protocol with the largest TVL and active loan volume. Top investors have contributed over 69 million USD, demonstrating market confidence.

More significantly, a large trading platform has integrated Morpho into its main application, allowing users to borrow USDC by collateralizing with Bitcoin, which is one of the largest institutional-level adoption cases of DeFi to date. The release of Morpho V2 further demonstrates the determination to bring DeFi into traditional financial institutions.

The rise of Morpho validates its potential as a "DeFi institutionalization engine." It deeply understands the requirements of institutions for risk management and compliance, addressing the pain points of traditional finance entering DeFi through refined market design and support for permissioned markets. Grayscale favors it because it sees its ability to enhance DeFi efficiency, reduce risk, and effectively connect with traditional finance.

The Departure of Old Champions: A Farewell to Lido and Optimism

Lido DAO: The "Empire" of liquid staking faces headwinds

Lido DAO was once the undisputed "empire" giant in the Ethereum liquid staking space, managing about 33% of staked ETH. However, behind its success lies concerns over centralization risks: the "permissioned" validator set, the control of core privileges by the LDO token, and the incident in May 2025 where a validator's hot wallet was compromised, all serve as a wake-up call.

The Ethereum Shanghai upgrade in April 2023 allowed for ETH withdrawals, weakening Lido's advantage in liquidity. Users have more options, turning to centralized platforms or emerging non-custodial competitors. Re-staking innovations have also intensified competition.

Lido's removal is a reflection of Grayscale's reassessment of "centralization risk." After the Shanghai upgrade, Lido's "centralized" characteristics have become more prominent against the backdrop of intensified competition and clearer regulations. Grayscale may believe that its risk-reward ratio is no longer attractive. Lido's exit signifies that institutional investors are raising their evaluation standards for liquid staking, placing greater emphasis on decentralization, governance transparency, and potential regulatory risks.

Optimism: The grand vision of Layer 2, trapped in the "myth" of value capture.

As a leading Ethereum Layer 2 scaling solution, Optimism carries the important mission of enhancing transaction capacity, reducing Gas fees, and improving user experience. Its "superchain" vision has attracted multiple star projects through innovative technology. However, in terms of TVL and activity, it still lags slightly behind its main competitors.

The OP token is at the core of Optimism's decentralized governance structure. However, its revenue distribution model has a "myth": currently, the income of the sequencer goes to the foundation to fund public goods, rather than being directly distributed to token holders. Although there is hope for sharing in the future, this uncertainty affects the direct value capture of the token, causing institutional investors to have concerns.

In addition, the governance of Optimism is not without its challenges. Low voter participation and significant control over the voting process by core contributors and early investors indicate that the commitment to "decentralization" still has room for improvement in practice.

The removal of Optimism seems to be a profound questioning by Grayscale of its token "value capture mechanism." Grand ecological visions do not directly translate into clear token value. Institutional investors tend to prefer clear and direct paths for token value capture. Low governance participation and the concentration of voting power within the core team also increase the complexity and risks of institutional investment. In the face of fierce competition in the Layer 2 space, Grayscale may believe that OP will struggle to provide "more attractive risk-adjusted returns" in the short term.

The "Barometer" and "Structural Change" of Encryption Investment in 2025

Institutional funds' "tide": from Bitcoin to the vast deep sea of diversified applications

In the first quarter of 2025, institutional interest in digital assets continues to rise. Surveys show that as much as 86% of surveyed institutional investors have held or plan to allocate digital assets, with nearly 60% planning to invest more than 5% of their AUM in encryption. The successive approvals of Bitcoin and Ethereum ETFs are like opening the door to the mainstream financial world for encryption, with one large asset management company's Bitcoin ETF even setting the record for the fastest growth in history.

This tidal wave has long surpassed the two "islands" of Bitcoin and Ethereum. Data shows that 73% of investors already hold alternative encryption currencies, with DeFi participation expected to triple within two years. The tokenization of real-world assets and the adoption of stablecoins are accelerating, with a total market value reaching $234 billion, and multiple protocols are dedicated to connecting DeFi with traditional finance.

Institutional investment is moving from a simple "Bitcoin faith" to a broader deep sea of "diversified allocation" and "application scenario landing." The inclusion of Avalanche and Morpho in the Grayscale rankings is a profound reflection of the trend of institutional investment "from point to area" and "from speculation to application."

The "Evolution Theory" of DeFi: From "Barbaric Growth" to "Refined Survival"

In 2024, the total locked value of DeFi surged by 129%, and the trading volume of decentralized exchanges for derivatives skyrocketed by 872%. DeFi is developing yield-bearing stablecoins to attract traditional finance. Trends like embedded finance, automation, and artificial intelligence/machine learning are reshaping the landscape. The success of Morpho is a microcosm of innovation in DeFi lending.

DeFi is undergoing an "evolution" from "wild growth" to "refined survival". Layer 2 and AI/ML applications aim to address pain points and enhance efficiency. Yield-bearing stablecoins and embedded finance have enriched product forms, seamlessly integrating with traditional finance. The explosive growth of derivatives DEX and Morpho's institutional path indicate that DeFi is meeting the complex trading and risk management needs of institutions. Grayscale's favor towards Morpho is an acknowledgment of the trend of DeFi's "self-evolution and external integration", with optimism towards protocols that can enhance efficiency, reduce risk, and connect with traditional finance.

Layer 2's "Racing": A Comprehensive Contest of Ecology, Technology, and Value Capture

Layer 2 solutions, akin to Ethereum's "highway", significantly enhance its scalability and reduce user costs. Optimistic Rollups and ZK-Rollups are mainstream technologies. The Layer 2 market is highly competitive, with multiple projects vying for leading positions in terms of TVL and number of protocols.

The competition for Layer 2 has shifted to a comprehensive contest of "ecosystem building capabilities" and "token value capture models." The removal of Optimism precisely illustrates that even with grand ecological visions, if the token value capture mechanism is not clear enough or has centralization risks, it is difficult to gain long-term favor from institutions. Grayscale's evaluation of Layer 2 has gone beyond surface indicators and delved into long-term sustainable value creation and distribution mechanisms.

Regulatory "filter": compliance, institutional funds' "ticket to entry"

In 2025, the regulatory environment for cryptocurrencies in the United States gradually becomes clearer, acting as a "filter" for institutional funds entering the crypto market. Regulatory agencies issue new guidelines clarifying that "protocol staking" is not considered a securities offering. The U.S. Congress passes legislation that eliminates certain reporting obligations for DeFi platforms.

Regulatory clarity is a key "catalyst" for institutional large-scale entry into the encryption market, and it also serves as a precise "filter." It reduces the legal and operational risks for institutions and encourages more compliant entities to enter the PoS ecosystem and DeFi. However, clear regulations also mean stricter compliance requirements. Lido's removal may be partly due to concerns over its "licensing system" and governance centralization. Grayscale, as a strictly regulated asset management company, places a high emphasis on compliance in its investment decisions. This indicates that from 2025 onwards, compliance has become an "entry ticket" for attracting institutional capital.

Conclusion

The adjustment of the grayscale Top 20 asset list clearly outlines the evolution path of institutional investment in the encryption market by 2025. It focuses on technological innovation of projects, real application scenarios, sustainable value capture models, and decentralized governance practices. The inclusion of Avalanche and Morpho represents the market's recognition of the explosive potential of high-performance public chains in gaming finance/enterprise-level applications, as well as expectations for the development of DeFi lending towards institutional-grade and compliance-oriented growth. The exclusion of Lido DAO and Optimism warns of the centralized risks of liquid staking and the impact of value capture uncertainty in Layer 2 token economic models on institutional attractiveness.

Summary of the core investment logic for the encryption market in 2025:

• Application-driven Layer 1/Layer 2: The future belongs to public chains and scaling solutions that can attract large-scale users and enterprise-level applications through technological innovation.
• Institutional-level DeFi infrastructure: The market favors DeFi protocols that can address the pain points of traditional finance and connect the on-chain and off-chain worlds.
• Clear value capture and decentralized governance: Tokens must have a clear, sustainable value capture mechanism and effective decentralized governance.
• Compliance First: Projects that actively embrace compliance and reduce legal risks will be favored by institutions.

For participants in the encryption world, the Grayscale rankings provide valuable strategic guidance. Investors should move beyond short-term speculation and conduct in-depth research on project fundamentals, technological innovations, ecosystems, token economics, and compliance. Project builders need to create healthy and sustainable economic models while achieving technological breakthroughs, strengthen decentralized governance, and actively integrate with the traditional financial world to seize institutional funding opportunities. In 2025, the encryption market is transitioning from "barbaric growth" to "meticulous cultivation"; understanding the structural beauty behind this transformation is key to grasping the future.

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