Analysis of Institutional Investment Trends in the Crypto Market: Insights from Grayscale's Top 20 List

In the rapidly changing world of encryption, the movements of institutional capital are often key clues to insight into the future. As a pioneer in the field of crypto asset management, the quarterly updated Top 20 asset list from a well-known investment institution can be regarded as a "treasure map" of the crypto market from an institutional perspective, outlining a deep prediction of the "factual adoption trend" for the next stage of the market.

In the third quarter of 2025, this "treasure map" quietly adjusted: the rising stars Avalanche (AVAX) and Morpho (MORPHO) jumped onto the list, while the former giants Lido DAO (LDO) and the Layer 2 hopeful Optimism (OP) regrettably exited. Amidst this ebb and flow, what shifts in the crypto market are hidden? Let's delve deeper and uncover the new narrative of crypto investment in 2025 behind this seemingly ordinary list change.

Signals of Structural Reform

Avalanche (AVAX): Strong Pulse of On-chain

Avalanche depicts a scalable and customizable blockchain future. Its "Avalanche 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 the Etna upgrade which reduced average transaction fees by over 90%, greatly stimulating on-chain vitality.

Avalanche precisely captures the demand for GameFi and enterprise-level applications, with multiple games launching on its Subnets. It also actively embraces the traditional world, collaborating with several Web2 giants to promote the tokenization of real-world assets, which is a key step for the Web3 economy to penetrate the mainstream.

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

Morpho (MORPHO): "Transformers" style decentralized lending

Morpho is charting a completely new institutional path for decentralized lending. It is a DeFi lending protocol based on the Ethereum and Base chains, optimizing yields and ensuring security through "Morpho Vaults" and isolated markets. The protocol design focuses on low transaction fees and has undergone multiple audits.

Morpho has achieved remarkable results: annual fee income reached $100 million, total locked value (TVL) doubled to over $4 billion, firmly sitting in the second position of DeFi lending. On the Base chain, it is the largest protocol in terms of TVL and active loan volume. Top investors have invested over $69 million.

More significantly, a major 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 signifies the determination to bring DeFi into traditional financial institutions.

The rise of Morpho validates its potential as a "DeFi institutionalization engine." It has a deep understanding of the requirements for risk management and compliance from institutions. By refining market design and supporting licensed markets, it addresses the pain points of traditional finance entering DeFi. An institution favors it precisely because it enhances DeFi efficiency, reduces risk, and can effectively connect with traditional finance.

Farewell to the Old Guard: Goodbye to Lido and Optimism

Lido DAO (LDO): The liquidity staking "empire" faces headwinds

Lido DAO was once the undisputed "empire" giant in the Ethereum liquid staking space, managing about 33% of staked ETH. However, behind this success lies concerns over its centralization risks: the "permissioned" validator set, the control of core privileges by the LDO token, and a certain event in May 2025 have raised alarms.

In April 2023, the Ethereum Shanghai upgrade allowed ETH withdrawals, weakening Lido's "moat" in terms of 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 a certain institution's reassessment of "centralization risk". After the Shanghai upgrade, Lido's "centralized" characteristics have become more pronounced against the backdrop of intensified competition and clearer regulations. This institution may believe that its risk-reward ratio is no longer attractive. Lido's exit marks a higher standard of evaluation for institutional investors regarding liquid staking, placing greater emphasis on decentralization, governance transparency, and potential regulatory risks.

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

Optimism, as a leading Layer 2 scaling solution for Ethereum, carries the responsibility of enhancing transaction capacity, reducing Gas fees, and improving user experience. Its vision of a "Superchain" has attracted several star projects through OP Stack. However, in terms of TVL and activity, it still unfortunately lags behind its competitors.

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

In addition, the governance of Optimism has not been smooth sailing. Low voter participation and the significant control over the voting process by core contributors and early investors leave room for improvement in the "decentralization" commitment in practice.

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

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

The "tide" of institutional funds: from Bitcoin to the vast deep sea of diversified applications

In the first quarter of 2025, institutional interest in digital assets continues to soar. Surveys show that as many as 86% of institutional investors surveyed have already held or plan to allocate to digital assets, with nearly 60% (59%) planning to invest more than 5% of their AUM in encryption. The successive approvals of Bitcoin and Ethereum ETFs are like opening the doors of the mainstream financial world to encryption, with one Bitcoin ETF even setting the record for the fastest growth in history.

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

Institutional investment is transitioning from a mere "Bitcoin belief" to a broad deep sea of "diversified allocation" and "application scenarios landing". The inclusion of Avalanche and Morpho in a certain institution's rankings is a profound reflection of the trend of institutional investment "from point to surface" and "from speculation to application."

The "Evolution of DeFi": From "Primitive Growth" to "Refined Survival"

In 2024, the total locked value (TVL) of DeFi surged by 129%, and the trading volume of decentralized exchanges (DEXs) skyrocketed by 872%. DeFi is developing yield-bearing stablecoins to attract traditional finance. Trends such as embedded finance, automation, and artificial intelligence/machine learning (AI/ML) 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 enrich product forms, seamlessly integrating with traditional finance. The explosive growth of derivative DEXs and the institutional path of Morpho indicate that DeFi is meeting the complex trading and risk management needs of institutions. An institution's preference for Morpho recognizes the trend of DeFi's "self-evolution and external integration", optimistic about 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, like Ethereum's "highway", significantly enhance its scalability and reduce user costs. Optimistic Rollups and ZK-Rollups are the mainstream technologies. The Layer 2 market is highly competitive, with multiple projects competing in terms of TVL and the number of protocols. Optimism is committed to building an interoperable ecosystem through its "superchain" vision and OP Stack, attracting several heavyweight projects.

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

The "filter" of regulation: compliance, the "ticket" for institutional funds to enter.

In 2025, the regulatory environment for cryptocurrencies in the United States gradually becomes clear, acting as a "filter" for institutional funds entering the crypto market. The U.S. Securities and Exchange Commission (SEC) issues new guidelines clarifying that "protocol staking" is not a securities offering. The U.S. Congress passes legislation that eliminates certain reporting obligations for DeFi platforms.

The clarification of regulations is a key "catalyst" for institutions to enter the crypto market on a large scale, and 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. The removal of Lido may be partly due to concerns over its "licensing system" and governance centralization. As a strictly regulated asset management company, a certain institution places great emphasis on compliance in its investment decisions. This indicates that from 2025 onwards, compliance has upgraded to become the "ticket" for attracting institutional capital.

Summary

The adjustment of a certain institution's Top 20 asset list clearly outlines the evolution path of institutional investment in the crypto market by 2025. It focuses on the project's technological innovation, 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 GameFi/enterprise-level applications, as well as expectations for the development of DeFi lending towards institutional-level and compliance. 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 crypto 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-grade 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 cryptocurrency world, this list provides valuable strategic guidance. Investors should go 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.