Interpreting the Logic Behind VC Tokens
The "human mine" in the VC market is actually the VCs themselves. Since the last market cycle, VCs have maintained cash flow by covering losses through other channels, but in this cycle, those who truly profit are the participants who leverage VC involvement alongside project teams.In the Web3 space, understanding the strategies and logic behind VC investments is crucial for investors and industry participants. This article delves into the complex dynamics of VC tokens, exploring how large projects like Ethena, IO, and MSN shape the market, investment trends in different regions, and the key distinctions between successful projects and those destined to fail. By revealing underlying strategies and potential pitfalls, this article provides valuable insights for navigating the complex environment of VC-driven crypto projects.
This article is based on a conversation between Sam, the research director of Aquarius Fund, and George Yu, the president of Uweb. >
Highlights
- Ethena, IO, and MSN - VC projects like Ethena, IO, and MSN quickly attracted funding through high valuations and market hype. However, the market appeal of these projects has waned, and investors are beginning to shift their focus to MEME projects.
Market bubble in the current financing boom - The current surge in financing has led to a market bubble, with overvalued projects struggling to meet expectations. The influx of individuals attempting to profit through venture capital has further exacerbated market chaos.
Sustainability of idealistic vs. puppet projects - Idealistic projects often struggle to sustain themselves, while puppet projects heavily rely on capital manipulation. Teams like Zama and Fhenix, which focus on long-term technological innovation, are expected to have better prospects.
Investment preferences: North America vs. Asia - North American funds typically focus on technology-driven projects, while Asian funds place more emphasis on market effects. However, Asian projects often face more challenges in securing long-term funding.
Long-term potential of high-quality products - Projects with strong products have long-term potential. Retail investors should align with project teams to profit alongside VCs during the current market cycle.
Technical skills and information channels for identifying project authenticity - Technical capabilities and access to reliable information channels can help identify whether a project is genuine. Even projects with potential issues can be assessed through their fundamentals to determine their acceptability.
"Gold mine vs. human mine" theory - This theory reveals that there are no real "gold mines" in the market. Projects rely on the growth of new users, and many transactions are essentially worthless cycles.
VCs as the current "human mine" - In the current market, the true "human mine" is the VCs themselves. Those profiting in this cycle are those who collaborate with project teams and leverage VC participation.
Low-cost, controllable risk strategies - Participating in airdrops and staking strategies can yield stable returns with lower risks, suitable for long-term involvement.
Beware of overvalued, low-liquidity projects - These projects face significant inflationary pressures. By using tools like Etherscan, investors can check the distribution of token holding addresses. If a large number of tokens are actively circulating, the project may be robust.
Rigorous technology and high security of ETH - ETH is technically rigorous and highly secure, making it an ideal project for crypto enthusiasts. However, it is worth noting that technology and token prices are not always directly correlated.
Ethena, IO, and MSN
This year, many projects have been dominated by large VCs, especially in the staking and CeDeFi sectors. Projects listed on top exchanges like Binance are often driven by these VCs. The rise and fall of VC-driven projects can be analyzed through the following three cases:
Ethena: As a typical VC-driven project, Ethena performed well in VC funding rounds, benefiting from its high valuation and strictly controlled whitelist minting mechanism. Although it initially provided returns to retail investors, its token price has significantly dropped over time, with many VC investments still locked. The "1+3" clause of North American VCs (one year cliff, followed by three years of linear release) seems designed to protect VCs, but in reality, many investors remain trapped.
IO: After announcing $30 million in funding, IO attracted significant market attention. However, the project was disappointing; its technology was immature, the team was still being assembled, and there were security vulnerabilities that led to hacks. Despite this, IO successfully listed on Binance, but many retail investors did not receive the expected returns and even incurred losses.
MSN: The founder of MSN attracted significant investment through extensive publicity and KOL endorsements. However, after listing on OKX, the project quickly lost momentum, and the token value nearly dropped to zero. The project team had already arranged an exit strategy, profiting quietly from retail investors and other VCs before withdrawing.
Market bubble in the current financing boom
The success of the previous round of VC investments has led to the current financing boom, with many so-called cryptocurrency venture capital funds flooding the market and successfully raising substantial funds. Original VC firms rapidly expanded due to this influx of capital. However, this capital inflow has not been accompanied by significant technological innovation, resulting in a market bubble.
Due to LP time constraints, VCs are forced to invest capital within a limited timeframe, leading to two scenarios: either investing in undervalued but mediocre projects or competing to invest in a few so-called top projects, resulting in valuations far exceeding actual value. This overvaluation has led to greatly inflated market expectations for these projects.
For example, Ethena is not necessarily a bad project, and WorldCoin and RNDR may not necessarily perform poorly. However, their valuations have been pushed too high, making it difficult to align with actual market performance. Meanwhile, VCs not only need to invest capital but also hope to profit from these overvalued projects, leading to projects like IO and MSN. IO is a typical VC-driven project, while MSN is an example of a project team reversing the situation and leveraging VCs.
The chaos in the current market can be attributed to an oversupply of funds in the primary market but a scarcity of quality projects. Many people have flooded into the market, attempting to profit through venture capital, further exacerbating the chaos—this is a classic example of a market bubble. >
Sustainability of idealistic vs. puppet projects
In North America, it is common to find project teams led by idealists who hope to change the world through their efforts. These entrepreneurs are often young, first-time founders, particularly those influenced by Silicon Valley culture or familiar with American culture. They typically believe that what they are doing is not just for profit but to create something truly valuable. While these projects may receive early funding, they often struggle to sustain themselves and eventually fade away.
Another category of entrepreneurs consists of "puppet" founders who are pushed to the forefront, but the project is not based on team strength. Instead, it relies on carefully crafted marketing and a strong support system behind the scenes. The foundation may have already set the project's profit path, including who will drive the project's TVL (Total Value Locked), who will stand up to support it, and which ecosystem will promote its development. In these cases, the importance of the team itself is diminished, and success relies more on capital and market manipulation.
Some teams plan from the outset how to profit from the project and exit the market. If they can successfully "cut the leeks" on exchanges, they will quickly profit from retail investors. If they fail, they can still secure substantial profits through financing.
Additionally, some projects collaborate entirely with VCs to launch "junk coin" projects focused on short-term profits, primarily to raise funds quickly. This blunt operational model is particularly common in the Asian market.
However, there are also excellent projects composed of top scientific and technical teams. For example, teams like Zama and Fhenix, which focus on fully homomorphic encryption (FHE), have raised substantial funds, with Zama alone raising $75 million. These team members are true scientists, similar to those in the Ethereum Foundation, who advance academic research and the blockchain industry through published papers.
Other projects are also worth noting: these teams clearly understand their goals and seriously advance their projects. While these projects may not attract much attention in the current market cycle due to uncertainty in performance and future success, it is certain that they will continue to exist in the industry over the next 3 to 5 years. >
Investment preferences: North America vs. Asia
North American and Asian funds exhibit significant differences in investment mentality. North American funds are generally more patient, willing to support projects that may not succeed in the short term or even in the next market cycle, especially those "scientist" projects that enhance blockchain technology. In contrast, Asian funds place more emphasis on actual results, concerned with how to gain more liquidity on-chain and how to make projects widely recognized and popular in the market, emphasizing data performance and market acceptance.
This difference does not necessarily imply superiority or inferiority but reflects different investment logics and cultural backgrounds. While Asian projects often demonstrate higher technical levels and perform well, they typically face more challenges in securing long-term funding compared to idealistically driven North American projects. >
Long-term potential of high-quality products
Projects can be divided into two categories: those with excellent products and those that allow retail investors to participate and profit. For projects with outstanding products, funds that focus on helping investors avoid many potential risks should be considered. Although such funds may also incur losses in bear markets, their research, published papers, and the technical logic behind their investments demonstrate a serious and rigorous attitude. Most of the projects they invest in have long-term survival potential. Even when facing difficulties, they will persist because they are research-driven native crypto funds.
While high-quality projects do not always provide participation opportunities for retail investors, those with significant momentum often allow retail participation. However, in the current market environment, retail investors need to adjust their investment mindset. The previous logic was to profit from later funding through early investments, but in this cycle, it is more important to align with project teams to profit from VCs. By adjusting this mindset, even participation in less-than-ideal projects can yield decent returns. >
Technical skills and information channels for identifying project authenticity
For those with technical skills, identifying the authenticity of a project is relatively easy. For example, inconsistencies found while reading IO's technical documentation raised alarms. Projects with impure intentions are unlikely to invest heavily in product development, making it easier for those with technical backgrounds to spot issues. Some projects may be well-hidden, but even so, it is usually possible to find some clues.
Having information channels within the community is also helpful, as rumors often provide valuable leads. By combining rumors with technical understanding, many so-called "setup" projects can be identified. Even if there are intentions to set up, if the project has no bad reputation and its technology and fundamentals are acceptable, it can still be considered acceptable. This is a reasonable judgment logic. >
"Gold mine vs. human mine" theory
This theory was formed after reflecting on the market and industry, suggesting that most projects are essentially providing services or tools, similar to making "shovels." But what are these "shovels" digging for? It turns out that there are no real "gold mines" in the market. The so-called gold mine is actually a "human mine"—constantly attracting and being consumed by new users from subsequent projects. Many projects do not have a genuine demand logic but instead exhibit a mutually dependent gambling relationship. For example, Uniswap serves Aave, and Aave serves Uniswap. This relationship raises questions about the nature of platforms like Uniswap, which ultimately provide a trading platform, but in reality, most transactions are worthless "air" trades.
Chinese investors are better at reconciling with this reality, entering the market without necessarily pursuing lofty goals. Through the lens of the "gold mine vs. human mine" theory, one can identify where the "human mine" comes from. While it sounds harsh, it is indeed a methodology for analyzing industry issues. >
VCs as the current "human mine"
The current market is clearly divided into several parts. Reflecting on the heyday of inscription projects, the "human mine" at that time primarily came from retail investors. Simply publishing an inscription on-chain and hinting at its name could trigger strong FOMO (fear of missing out) emotions, attracting a large number of retail participants. This influx of retail investors, whether from Web2 or Web3, is driven by emotions.
The situation today is different. VC-driven projects mainly rely on existing funds, with no significant new capital inflow into the market. Even new funds like ETFs entering the market are unlikely to flow into the Altcoin market, creating an isolated phenomenon. Therefore, the "human mine" in the VC market is actually the VCs themselves. Since the last market cycle, VCs have covered losses through other channels to maintain cash flow, but in this cycle, those truly profiting are those who collaborate with project teams and leverage VC participation. >
Low-cost, controllable risk strategies
Large exchanges often restrict token sales by project teams, so project teams often distribute tokens legally through airdrops. For example, Manta's airdrop rules are designed to allow project teams to acquire more tokens. This makes "airdrops" a legitimate business, enabling participants to share profits with project teams and VCs.
The cost of participating in airdrops is relatively low, especially compared to trading derivatives. For example, in an interaction-based airdrop strategy, the basic cost for one account includes three essentials: Twitter, Discord, and Telegram. The setup cost for these three is around 20 to 50 RMB. When performing on-chain operations, it is advisable to minimize time spent on the mainnet, primarily interacting on Layer 2 to keep GAS fees negligible. Other costs, such as isolating IPs and using anti-Sybil tools, are also relatively low, keeping the overall cost of airdrops within an acceptable range.
Staking-based airdrop strategies may seem to require more funds, but by diversifying funds across different staking opportunities, risks can be lowered while still achieving substantial returns. For example, staking with EtherFi can provide a safety net. By tracking on-chain activities, you can discover potential loopholes in project rules and earn additional rewards. There are many ways to participate in airdrops, and regardless of how much capital you have, persistence can yield decent returns. Compared to trading, airdrops carry lower risks and more stable returns. >
Beware of overvalued, low liquidity projects
Caution is needed for overvalued but low liquidity projects, as they often face significant inflationary pressures. The continuous issuance of new tokens can impact the market. For example, while Arbitrum's ARB initially performed well, holders could not earn interest and faced an annual inflation rate of about 60%. This means the value of the tokens is continuously being diluted, which is unfair to ordinary holders.
Although SUI is also a project highly reliant on VCs, it has high liquidity and continuously releases new tokens. However, it provides substantial rewards on-chain, especially through various DeFi applications. This allows SUI holders to offset the impact of inflation through on-chain activities, thereby reducing the direct effects of inflation.
To identify projects that require caution on-chain, tools like Etherscan can be used to check the distribution of token holding addresses. For example, if most tokens are concentrated in exchange or platform addresses like Uniswap, it indicates that these tokens are actively circulating. If these tokens, despite high valuations, only account for a small portion of the current circulating supply, it is a warning sign. Checking the distribution ratio between exchange addresses and holding addresses can help determine whether a project is relatively robust based on whether a large number of tokens are actively circulating. >
Rigorous technology and high security of ETH
Ethereum is often referred to as the "scientist's chain" because its underlying architecture, game theory design, and cryptographic foundation are all very rigorous. These are meticulously designed by true scientists. In contrast, Ethereum's main competitor, Solana, resembles the "engineer's chain." Solana's engineers seem to lack clear guidance for improving the platform, and many technical issues remain unresolved. For example, Solana's frequent outages and the need to rewrite code highlight the limitations of the engineering approach.
Ethereum's upgrades are always conducted with great rigor. Although some argue that its level of decentralization has decreased, the cryptographic and game-theoretic designs supporting it still ensure its security. Therefore, the future of blockchain will require one or two projects that truly embody the ideals of the crypto community, and Ethereum is one suitable choice. It must be understood that the quality of a project's technology is not directly related to its token price.
