Founder of IOSG Ventures: The industry calls for real users and new capital; Ethereum cannot just talk about sentiment and ideals

Author: Jocy Lin, Founder of IOSG Ventures

This year's Token2049 exhibition has reached a considerable scale, with attendance doubling compared to last year, surpassing 20,000 people. Even Grab drivers remarked that the number of people attending crypto events this week seems to exceed the tourists coming for the F1 race. At multiple events, overseas attendees and speakers accounted for more than half, and there is no doubt that this exhibition may become the most successful and profitable one in Token2049's history.

The industry calls for real users and new funds, innovation support is precarious

In this industry, everyone is busy; some are creating false data and revenue to deceive exchanges and investors, while others engage in endless academic discussions in technical communities but forget that good infrastructure is meant to gain applications and users. Exchanges, benefiting from excellent revenue models, have become the biggest winners, providing the best working environment and income levels in the short term, but making it harder for startups to attract top talent. This is somewhat like the prosperity of the 2049 conference, where amidst the flourishing scene, few are discussing how to acquire real users and revenue, as well as stable and sustainable business models.

The overall trend in startup projects is to aim for Binance, where a small number of highly configured elite circles can easily secure funding, while most ordinary startup teams find it very difficult to raise funds. Fundamentally, at this stage, exchanges and investors cannot distinguish because neither has captured real users or generated value. Top-tier projects see active users drop to single digits upon launch on Binance; community content platforms transitioning from Web2 like Instagram to Web3 experience a massive sell-off by founders/advisors/investors as soon as they launch on Binance. This 2BN business model is severely harming community retail investors and draining liquidity from the entire industry.

The performance of altcoins may be worse than expected, forcing industry participants to reassess innovation and real application cases. The interests of VCs, exchanges, project parties, and retail investors are inconsistent, and all parties involved have become victims of the market, with a complete lack of trust and cooperation among the four sides. Without reform, they can only walk into a dead end, unable to let new money and talent/users in; even if Bitcoin succeeds, the entire Web3 industry will still fail.

In the past two years, 90% of Gamefi projects have broken after listing (compared to the valuation of the last round of VC investment), and it seems that all AAA games/full-chain games/Degen game community platforms have been abandoned by retail investors. The industry has not seen significant breakout games like Axie Infinity and Stepn, and some highly anticipated shooting games have also failed to emerge. However, Pirate Nation, invested by A16Z at the beginning of the year, and Small Brain, which recently completed financing, still have a solid community foundation. The gaming sector has become exceptionally difficult, and all participants are losing confidence. Crypto games are forcing participants to leave or innovate more significantly to create fun games. Of course, we are still looking for teams that have faith in games and consensus in the crypto market.

Here, I advocate for adjustments to token utility and unlocking terms. Traditional IPOs only require a lock-up period of 6 months to a year, but for early-stage seed round investments in crypto companies, the overall lock-up period can extend to 3-4 years. Most projects' tokens have no utility, and exchanges have market makers willing to provide liquidity and adjust prices in the first six months after launch, but after that, neither the project parties nor the exchanges care about the price, and no one is responsible for retail investors buying in from VCs and the secondary market. After countless injuries and losses, more people will suffer a significant loss of support and confidence in innovation.

If everyone is self-deceivingly expecting a major rebound in a bull market without considering what application scenarios will bring real users in, they will find themselves in a situation of sitting idle and consuming their resources. Those who enjoyed the early benefits of the industry do not understand the hardships of others. The largest 16-letter fund in the U.S. operates independently, and a ten-year cycle with a billion-dollar fund allows them to thrive without needing to collaborate with any institutions or market forces, while most successful founders do not care about young entrepreneurs who are just like they were 5 or 10 years ago. But the industry is at a difficult stage, and we need these successful forces to guide everyone and bring faith, allowing more people to persist and see the dawn of the next bull market.

In discussions with someone responsible for listings at a leading exchange, I learned that their current internal principle and consensus is to seek long-term entrepreneurs. Some founders who previously manipulated data chose to cash out and relax after successful listings, leaving the community with a pile of debts, while long-term-minded entrepreneurs, regardless of the stage, are committed to growth and finding more reliable and effective sustainable business scenarios.

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User growth in the new cycle is far below the level of user entry in the previous cycle.

Where should Ethereum go? (Return to real application scenarios, avoid false prosperity)

After "The Merge" transitioned to PoS, due to the significant reduction in ETH issuance and the existence of a burning mechanism, Ethereum has effectively entered a deflationary cycle lasting 20 months. However, due to the sluggish L1 transactions in recent months, L1's gas prices have remained in single digits for a long time, causing ETH to revert to an inflationary trend, with total supply potentially returning to the levels seen during "The Merge" soon.

IOSG continues to be optimistic about Ethereum in its investment strategy; we have yet to find a more successful technical ecosystem than Ethereum. The overall TVL of Ethereum's ecosystem has grown from about $34 billion a year ago to $88 billion, a growth rate of 159.5%; this significant increase further indicates the potential for Ethereum to drive new innovative projects in the future.

However, the large number of airdrops and liquidity mining has contributed to Ethereum's false prosperity. The real user base brought by airdrops and incentives is relatively limited, and people have begun to feel disgusted with the airdrop customer acquisition strategy. Third-party research indicates that user churn rates can be as high as 80% after airdrops end, which is detrimental to both founders and projects. Taking Friendtech as an example, it was previously a relatively influential and eye-catching project in the market, but after the subsequent token launch and without maintaining the price, all users abandoned the application. The restaking sector has also encountered similar bottlenecks, with TVL withdrawing or shifting to new protocols after airdrops end.

The latest data on monthly active users of Metamask shows a drop from 30 million at the peak of the bull market to 1 million, marking a significant decline. User activity on EVM-compatible L1/L2 chains has also decreased by over 50%. This dispersion of liquidity has led to a widespread fragmentation of applications, developers (asset issuers), and users. Developers and users are rapidly moving towards chains that offer subsidies and memes, while liquidity between different chains and L2s is overly fragmented, and high-performance chains have not brought about high-performance applications.

Ethereum is undergoing unprecedented scrutiny. Since the launch of ETFs, it has seen net selling/fund outflows exceeding $1.2 billion, leading to a significant trust crisis among Ethereum's core researchers/EF, developer community organizations, Consensys-related commercial companies, and external investors. Vitalik needs to better guide different participants in terms of direction and goals, as Ethereum has become a massive decentralized entity in both the crypto market and even the traditional market. Historically, such a commercial entity has never existed, and the challenges for the entire Ethereum community and Vitalik will only become more severe, even reaching a point where one must break to establish anew.

Interestingly, the most discussed topic at this year's 2049 was the Ton ecosystem. However, Western funds are generally not optimistic about Ton and Web2 platforms; they do not see potential but have not answered the investment/non-investment question. It is evident that in this challenging cycle, Ton has brought new vitality to the crypto market. Among the 900 million monthly active Telegram users, about 3 million are actual gamers, and the customer acquisition cost for each Ton user is $0.7. It is highly likely that Ton's model of bringing new users from Web2 to Web3 will also be applied to the growth of new L1/L2s, and it can be expected that these platforms will allocate a budget to subsidize this user growth. At the same time, an opportunity can be seen: after the U.S. completes its strategic deployment of crypto financial ETFs, it will begin to consider allowing tech company applications to connect and penetrate Web3, where a seamless one-stop experience for users will become the new standard.

About five years ago, when we visited the Ethereum official website, we could still see a list of several other L1 competitors at the bottom, allowing everyone to understand Ethereum's shortcomings or issues in a completely open and transparent manner. Now, Ethereum is stronger than ever, but how to make this network more open and diverse is a pressing issue we need to solve.

Solana's recent BreakPoint received high praise from the community! It reflects Solana's strong community cohesion, with a more pragmatic pursuit of user growth and breakout. I believe Ethereum should align with Solana in understanding the core developer community and educating users' mindsets.