Dialogue with Lattice Fund Co-founder: Why is it always difficult for retail investors to profit in the crypto market?

整理 \& 编译：深潮 TechFlow

主持人：Jason Yanowitz， Blockworks 创始人；Santiago R Santos，Investor

嘉宾：Regan Bozman，Lattice Fund 联合创始人；Mike Zajko，Lattice Fund 联合创始人；

播客源：Empire

导言

In this episode, Mike and Regan from Lattice Fund delve into the structural issues shaping this cycle. They discuss why retail investors struggle to achieve significant returns, the evolution of token distribution methods, and the impact of venture capital on market dynamics. The conversation then shifts to emerging opportunities in DePin and the ever-changing landscape of L1 and L2. Finally, they explore the growing importance of token distribution and audience engagement for new blockchain projects.

Key points include:

• The current market cycle is driven more by macroeconomic factors than by new crypto-native innovations. This makes the market feel different from before, lacking new applications that attract retail and institutional investors.
• Retail investors' potential returns have been significantly reduced due to higher valuations before public sales and many projects distributing tokens through airdrops. This shift in market structure makes it difficult for retail investors to achieve substantial returns through early investments.
• FDV limits the market's upside potential, tying the nominal value of tokens received by retail investors to higher FDVs, further constraining market growth.
• Lattice Fund focuses on investment strategies for early-stage projects and emphasizes the advantages of small teams and funds. They also discuss how to survive and thrive in the current market environment.
• There is a significant liquidity mismatch between the primary and secondary markets, and they discuss the impact of ETFs on the market and the effectiveness of airdrops as a marketing strategy.

为什么这个周期已经结束了？

In this segment, several guests discuss the structural issues of the current crypto market cycle and explain why this cycle feels different from previous ones.

Jason first introduces today's guests, Regan and Mike, co-founders of Lattice Fund.

Jason points out that the current market cycle feels a bit strange and wants to discuss some structural issues, such as low liquidity, high fully diluted valuation (FDV), and token distribution.

Regan believes that the biggest difference in this cycle compared to previous ones is that it is driven more by macroeconomic factors rather than new crypto-native innovations. For example, the launch of Bitcoin ETFs and macro capital inflows into the market lack significant new innovations. While there are hot topics like meme coins, they are not the main market drivers.

Mike adds that the current market lacks new applications that can attract retail and institutional investors. In past cycles, such as DeFi Summer and the NFT craze, retail investors could enjoy and profit from participating in various new applications. Now, new infrastructure-level innovations (like Eigenlayer) are difficult for ordinary investors to understand and accept.

Jason summarizes that the market structure issues of the current cycle leave investors feeling confused and dissatisfied, especially those accustomed to earning returns through new applications and innovations.

为什么散户赚不到钱？

Regan believes that while some people have made a lot of money through memes, he is primarily discussing the traditional venture capital token market. He points out that in the past, retail investors could achieve very high returns by participating in token sales, such as turning $20,000 into $500,000 during Solana's ICO. However, such opportunities have become scarce now.

Regan explains that a significant change in the current market is that projects have higher valuations before public sales, and many projects do not sell tokens to the public at all, instead distributing them through airdrops. This approach significantly reduces the potential returns for retail investors. For example, participating in the Eigenlayer airdrop might only allow investors to double their initial investment, rather than achieving hundreds of times returns like before.

Mike adds that this structural change in the current market makes it difficult for retail investors to achieve substantial returns through early investments as they could in the past. In previous cycles, retail investors could enjoy and profit from participating in various new applications and innovative projects, but such opportunities have diminished now.

Jason also mentions that the traditional capital market model involves multiple rounds of financing before an IPO, which has similarities with the current changes in the crypto market, where retail investors differ significantly from those in the stock market.

市场上涨上限

Regan believes that the current projects have higher valuations (FDV) before public sales. This means that the nominal value of tokens received by retail investors is tied to higher FDVs, limiting the market's upside potential. For instance, if a project goes public at a $10 billion FDV, the room for the market to continue rising is greatly compressed.

Jason mentions that as the industry grows and success stories increase, more capital flows into the market, leading to higher valuations before public listings.

Mike also adds that the current system resembles traditional capital markets, with many venture capital funds involved, reducing opportunities for retail participation.

Mike points out that many projects choose to collaborate with single investors rather than conducting public token sales, partly to avoid regulatory risks. While this somewhat protects the project side, it also limits opportunities for retail participation.

The guests also discuss how to address this issue. Mike suggests that projects in their growth phase could allow more retail participation through public token sales instead of solely relying on large venture capital funds.

Regan believes that projects should conduct public sales at lower valuations in the early stages and reduce the amount of pre-sale funding raised, which would give the community more room for appreciation.

Lattice Fund 的策略

Mike points out that when projects list at high valuations (like $5 billion or more), a key question is who the future buyers will be. Traditionally, retail investors are the main buyers of these new tokens, but currently, there is a lack of large institutional buyers to absorb these high-valued tokens. Therefore, even if high returns seem possible in the short term, the long-term value of these tokens may be difficult to sustain.

Regan explains that Lattice's investment strategy focuses on early-stage projects. In the current market, many large funds have high minimum investment amounts, making it challenging for early entrepreneurs to secure funding. Lattice chooses to operate in this relatively uncrowded market, focusing on helping startups grow in their early stages rather than participating in large projects that have already gone through multiple rounds of financing.

Regan states that Lattice prefers to maintain small teams and funds and adhere to its investment strategy. This approach not only yields substantial returns but also allows the team to focus on their areas of expertise.

Finally, Mike mentions that current entrepreneurs are still primarily concerned about legal and compliance issues when launching tokens. Many entrepreneurs hope to find a method different from airdrops and high-valuation low-liquidity tokens, but there is currently no clear solution. Therefore, despite entrepreneurs' willingness to change the status quo, airdrops remain the primary token distribution strategy in the absence of regulatory clarity.

在这个周期中生存

Mike points out that there is a significant liquidity mismatch between the primary and secondary markets in the current market. Many projects have already achieved valuations in the billions before going public, leading to immense selling pressure when tokens list. Even if the projects themselves execute well, like Arbitrum, there is still a large influx of tokens into the market, causing prices to drop.

Mike mentions that investors need to choose tokens more wisely, and the overall growth of the industry is also necessary to attract more participants and capital inflows. He believes that the current issue is primarily a structural imbalance in capital flow, requiring more new participants and funds to enter the market to balance it.

The guests discuss the impact of ETFs on the market. While the launch of ETFs is seen as a sign of institutional capital entering, in reality, most ETF buyers are still spontaneous retail investors. This means that although ETFs increase accessibility to leading assets (like Bitcoin and Ethereum), they may not necessarily lead to significant capital inflows into long-tail assets (like lower market cap tokens).

Regan points out that investment strategies in the current market may change. In the past, investors would buy mainstream assets like Ethereum and then invest in other altcoins. However, now, with the emergence of L2 and various token options, capital may become more dispersed. This dispersion could affect the performance of mainstream assets but may also bring more opportunities for mid- to long-tail assets.

The guests believe that future capital flows may differ from the past. ETFs and other new products may change the liquidity patterns in the market, making it easier for funds to enter leading assets while also potentially flowing into other assets indirectly through wealth effects.

低流动，高 FDV

Mike points out that in a high FDV, low liquidity environment, almost no one except venture capitalists (VCs) can profit. After investing in projects early on, VCs typically move on to the next project or sell their held tokens in the market. Even if the project team continues to develop and deliver products, the long-term survival of the project will face challenges without a loyal base of supporters.

Regan adds that after a token lists, the natural buyers are usually retail investors. However, airdrops can siphon off a significant amount of buying demand in the market. Those who wish to acquire a project's tokens often already obtained them through participation in airdrops, making them less likely to purchase more tokens at high FDVs. This situation leads to poor market structure, further exacerbating liquidity issues.

He believes that the phenomenon of low liquidity and high FDV is actually a "red herring," a misleading appearance. He points out that the current liquidity ratio has not significantly changed from the previous cycle. Many successful L1 projects (like Solana, AVAX, Near) had liquidity ratios of no more than 1% at listing. The real issue lies in the mismatch of capital inflows and outflows, rather than the liquidity ratio or FDV itself.

Jason mentions that an important lesson they learned during their time at CoinList is that "tokens are products." In Web2 companies, finding product-market fit is key to success. Similarly, in Web3, finding a loyal user base that loves your token is crucial. Successful projects are often those that can allow early contributors to earn money, as these early contributors become loyal supporters and help spread the project's story.

Solana is a typical success story. Although in 2019 and 2020, Solana was not favored by the market and did not attract significant investment, they built a loyal supporter base by allowing early contributors to profit. These supporters not only helped promote the project but also attracted more developers and users, driving the project's long-term success.

空投

Jason raises the question of whether airdrops should be abandoned, as this might anger the community in another way, leaving those who have been chasing airdrops without any.

Mike believes that airdrops are effective as a marketing strategy and user acquisition tool, guiding people to use the product. However, the current use of airdrops as the primary strategy for token distribution may not be ideal.

He suggests that airdrops should be part of a broader toolkit rather than the sole strategy. For example, a points system could be used, allowing users to earn points to qualify for future token sales.

Regan believes that token sales are the most logical way to give early users and the community unlimited upside potential. He points out that the regulatory environment in the U.S. is indeed challenging, but there are many ways to conduct token sales in more friendly jurisdictions. For instance, Europe’s MiCA regulations provide new avenues for compliant token sales. He thinks that simply following the trend of airdrops in the market without attempting innovation is a significant mistake.

Regan emphasizes that turning points in the entire industry over the past five to six years often occurred when new token distribution mechanisms emerged. For example, initial coin offerings (ICOs), DeFi yield farming, and the emergence of DePin projects (like Helium) have all sparked significant market interest. He believes that airdrops as a marketing strategy have been widely used for years, and now new strategies are needed to capture the market's attention.

Mike mentions that when they see points activities mentioned in market entry strategies, they consider it just basic operations (table stakes) and that differentiated methods need to be found. They discuss node sales as a new fundraising method, where users can pre-purchase the rights to operate nodes to help decentralize the network.

独特的 GTM 和融资

Jason mentions Gala, suggesting that it seemed like a massive scam in the last cycle.

Regan finds it difficult to make a clear judgment but mentions that the idea of reselling validator services in the network and helping decentralization is interesting. This approach might have some regulatory breakthroughs, allowing people to contribute to the network.

Mike discusses the idea of using points activities as a sales access point. He believes this not only allows people to participate in sales but also incentivizes them to take corresponding actions during the points activity to gain access to sales. He hopes someone will try this approach.

Jason contrasts traditional venture capital funds (like seed funds, Series A, Series B, etc.) with the cryptocurrency market. He points out that there is a lack of funds in the crypto market similar to later-stage funds (like Series D, Series E).

Regan believes that the best growth stage strategy over the past four to five years may have been to buy large amounts of tokens. He thinks that while these funds should exist, if we view token generation events (TGEs) as companies going public in Series A or B, then growth stage investors should directly purchase tokens or engage in OTC rounds. He does not believe there is a significant gap in the market where protocol teams need $75 million in Series D funding.

Mike mentions that in a traditional IPO environment, investment banks form a syndicate and pitch to high-net-worth clients. However, in the crypto market, growth stage funds may ultimately distribute tokens through airdrops. This raises the question of who the next buyers will be.

Jason references a tweet from Arthur from Defiance, suggesting that large venture capital funds' fundraising may have a value-extraction effect on the market unless they use a significant portion of the raised funds for liquid tokens.

Regan believes this perspective also applies to venture capital firms in traditional markets. The issue lies in the lack of liquid tokens in the pre-IPO or distribution phase, leading to a structural mismatch between capital inflows and outflows. He thinks that smart allocators should invest more funds into liquid markets.

He also believes that due to high market volatility, it is very challenging for hedge funds to operate liquid assets in this environment. However, as the industry matures, more LPs (limited partners) will incorporate crypto assets like Bitcoin into their portfolios, which will help address the structural mismatch issue.

DePin

Jason observes that founders in the DePin space are often not crypto-native, making this area very interesting. He mentions some projects, like Geodnet, and notes that these founders focus more on tokens as flywheel incentive mechanisms rather than community building and token price appreciation.

Mike believes that the DePin space has changed in the past six months, with more crypto-native individuals entering the field, trying to make quick profits. He gives an example where team members of the Demo project have backgrounds in the automotive industry, Consensys, and Chainalysis, and this diverse team composition enables them to succeed in the industry.

He emphasizes that teams with industry expertise are more likely to succeed because they can find experts in the crypto field to complement their teams.

Regan states that they are very excited about the DePin space and hope this excitement can be conveyed to the audience. They have been working on network launches for seven years and believe that the current issues are well-known, but more importantly, it is about finding solutions rather than complaining about market conditions.

Regan mentions that their investment thesis has always revolved around products that can scale the market or the infrastructure supporting these products. They believe that DePin is one of the first categories to truly reach scale. They also mention applications like Layer 3 and Galaxy, which are starting to have more of their own tech stacks, thereby capturing more value.

Regan points to projects like Blur that capture more value through vertical integration and owning more infrastructure. They believe this trend will lead to applications being repriced in this cycle and capturing more market value.

L1s \& L2 全景

Jason mentions some blockchain projects with built-in distribution channels, such as Telegram's TON and Coinbase's Base. They discuss how these projects leverage existing user bases to drive blockchain adoption.

Mike believes that distribution channels will become increasingly important as an advantage. He mentions that they have invested in some projects, like Layer 3 and Galaxy, which serve as the first touchpoints for many entering the cryptocurrency world. He thinks that projects with large user bases may not be as technically advanced as others, but due to their distribution channel advantages, they can still succeed.

Regan believes that as technological tools advance, creating one's own blockchain is becoming easier. Now, more innovation is shifting from pure technology to how to build unique user communities. He also notes that more venture capital is flowing into applications rather than infrastructure.

Regan explains that their core strategy is to invest in early-stage projects, with about 20% of the fund allocated to purchasing liquid tokens in the secondary market. They primarily focus on products that may have tokens, as they believe this represents the greatest opportunity for crypto-native value capture.

Mike states that although the first half of this year has been somewhat frustrating due to a lack of new innovations, he has been very surprised by the quality of new founders entering the space in the past three months. He believes the market is improving, more interesting projects are emerging, and the quality of entrepreneurs is also rising.