Arthur Hayes: Avoiding CEX Traps, How Projects Can Counterattack the Crypto Market with DEX

Original Title: PvP

Author: Arthur Hayes, Co-founder of BitMEX

Compiled by: Ismay, BlockBeats

Editor's Note: In this article, Arthur Hayes delves into the current state of token listings in the crypto market, particularly the impact of high listing fees on CEX for project teams and investors. The article showcases the advantages of listing on DEX through the case of Auki Labs and emphasizes the importance of focusing on product development and user growth. For those project teams blindly pursuing listings on CEX, Hayes reminds them to pay attention to long-term value rather than short-term price fluctuations and market speculation.

The following is the original content:

PvP, or "player versus player," is a term often used by shitcoin traders to describe the current market cycle. It conveys a predatory sentiment where victory comes at the expense of others' losses. This notion is quite common in traditional finance (TradFi). The core purpose of the crypto capital market is to allow those willing to take risks with their precious capital to enjoy the benefits of early participation in projects, hoping these projects will grow alongside the development of Web3. However, we have strayed from the bright path laid out by Satoshi Nakamoto, further propelled by the highly successful Ethereum ICO led by Vitalik Buterin.

In the current crypto bull market, Bitcoin, Ethereum, and Solana are shining brightly. However, I define "new issuance" as tokens released this year, and these new issuance projects have performed poorly for retail investors. Meanwhile, VC firms remain unaffected. Hence, the term PvP has been attributed to the current market cycle. The result is a series of projects with high FDV but extremely low circulation. After issuance, the prices of these tokens are flushed down the toilet like ordinary waste.

While this reflects market sentiment, what does the data reveal? The clever analysts at Maelstrom conducted some deep digging to answer several puzzling questions:

Is it worth paying the listing fees to a trading platform for better price appreciation of your token?

Are projects starting at overly high valuations?

After I delve into the data to answer these questions, I would like to offer some unsolicited advice to those projects waiting for the market to warm up before launching. To strengthen my argument, I want to specifically mention a project in the Maelstrom portfolio—Auki Labs. They went against the trend by choosing not to list on CEX first, instead opting to list on DEX with a relatively low FDV token. They hope retail investors can make money alongside them as they succeed in building a real-time spatial computing market. They also despise the exorbitant listing fees charged by major trading platforms and firmly believe there are better ways to return more value to end users rather than to the big shots living in my neighborhood in Singapore.

Sample Set

We analyzed 103 projects listed on major shitcoin trading platforms in 2024. This is not an exhaustive list of all projects listed in 2024, but it is a representative sample.

"Pump the price!"

This is a phrase we often hear from founders during advisory calls: "Can you help us get on CEX? That way, our token price will skyrocket." Well… I never fully believe that. I think the secret to a successful Web3 project is to create a useful product or service and continuously grow the number of paying users. Of course, if you have a garbage project whose value only increases because Irene Zhao retweeted your content, then yes, you need a CEX to dump it on those retail users. Most Web3 projects are like this, but I hope the projects that Maelstrom invests in are not… Akshat, take note!

Post-listing returns refer to the number of days after listing, and LTD indicates performance since the launch.

Regardless of the trading platform, the token prices did not skyrocket. If you paid the listing fees to the trading platform hoping to see a chart of token prices soaring, then I’m sorry.

Who are the winners? The VCs are the winners because the token prices have risen by 31% based on the FDV from previous private financing rounds. I call this the "VC extraction price." I will elaborate on the distorted incentives of VCs in the latter half of this article, which drive projects to delay liquidity events as much as possible. But for now, the vast majority of people are just pure fools! That’s why those drinks at conference networking events are free… haha.

Next, I want to stir things up a bit. First, CZ is a hero in the crypto space because he is being tormented by the devils of traditional finance in a moderately secure prison in the U.S. I love CZ and respect his ability to cleverly funnel funds into his pockets across various areas of the crypto capital market. But… but… paying a hefty price for Binance listing is not worth it. To clarify, Binance as your token's primary listing platform is not that valuable. If Binance were to list your project for free due to its performance and active community, that would be worth it.

Founders often ask during our calls: "Do you have a relationship with Binance? We must list on Binance, or our token won't go up." This "no listing without Binance" sentiment is very beneficial for Binance, as it allows them to charge the highest all-inclusive listing fees among any trading platform.

Returning to the table above, while tokens listed on Binance perform better on a relative basis compared to other major trading platforms, on an absolute basis, token prices still decline. Therefore, listing on Binance does not guarantee that token prices will rise.

A project must offer or sell tokens to the trading platform at a cheap price, and these tokens are often in limited supply, in exchange for the listing opportunity. Some trading platforms are allowed to invest in projects at extremely low FDV, regardless of the FDV from the last round of private financing. These tokens could have been distributed to users for completing tasks that promote project growth. A simple example is trading apps rewarding traders with tokens for reaching certain trading volume targets, known as liquidity mining.

Selling tokens to the listing trading platform can only be done once, but the positive flywheel effect created by increasing user engagement will continue to yield returns. Therefore, if you give up precious tokens just for the sake of listing and only exceed a few percentage points on a relative basis, you as a project founder are essentially wasting valuable resources.

The Price is Wrong

As I often tell Akshat and his team, the reason you have jobs at Maelstrom is that I believe you can build a portfolio of top Web3 projects that can outperform my core holdings of Bitcoin and Ethereum. If that weren't the case, I would continue to buy Bitcoin and Ethereum with my spare cash instead of paying salaries and bonuses. As you can see here, if you buy tokens at the time of listing or shortly thereafter, your performance is far worse than that of the hardest currency of all time—Bitcoin—and the two top Layer-1 decentralized computing platforms—Ethereum and Solana. Given these results, retail investors should absolutely not buy newly listed tokens. If you want exposure to cryptocurrency risk, holding Bitcoin, Ethereum, and Solana directly is sufficient.

This tells us that projects must lower their valuations by 40% to 50% at the time of listing to become attractive on a relative basis. Who suffers when tokens list at a lower price? VCs and CEXs.

While you might think that VCs aim to generate positive returns, the most successful managers understand that they are actually playing a game of asset accumulation. If you can charge management fees on a massive nominal amount, typically 2%, then you can make money regardless of whether the investment appreciates. If you invest in illiquid assets like early token projects as a VC, which are essentially just promises of future tokens, how do you make their value rise? You persuade founders to continue private financing rounds under an ever-increasing FDV.

When the FDV of private financing rounds increases, VCs can revalue their illiquid portfolios at market prices, showing massive unrealized returns. These impressive past performances enable VCs to raise the next fund and charge management fees based on a higher fund value. Moreover, VCs cannot get paid without deploying capital. But this is not easy, especially since most VCs established in Western jurisdictions are not allowed to purchase liquid tokens. They can only invest in some equity of a management company and provide investors with warrants for the tokens of the projects they develop through an additional agreement. This is also why the "Simple Agreement for Future Tokens" (SAFT) exists. If you want to get VC funding while they have a lot of idle capital, you must join this game.

For many VCs, a liquidity event is very harmful. When this happens, gravity begins to take effect, and the value of tokens quickly returns to reality. For most projects, the reality is that they fail to create products or services that enough users are willing to pay real money for, thus justifying their extremely high FDV. At this point, VCs have to lower their book values, which negatively impacts their reported return rates and the scale of management fees. Therefore, VCs push founders to delay token releases as much as possible and continue to conduct upward private financing rounds. The end result is that when the project finally lists, the token price plummets like a stone, just as we have just witnessed.

Before I thoroughly criticize VCs, let’s talk about the "anchoring effect." Sometimes, human thinking is really foolish. If a shitcoin opens with a 10 billion dollar FDV, but it is actually worth only 100 million dollars, you might sell the token, resulting in massive selling pressure that causes the token price to plummet by 90%, down to 1 billion dollars, and trading volume disappears. VCs can still value this illiquid shitcoin at a 1 billion dollar FDV on their books, which is often far higher than the price they actually paid. Even if the price crashes, opening the market at an unrealistic FDV still benefits VCs.

There are two reasons why CEXs want to see high FDV. First, trading fees are charged as a percentage of the token's notional value. The higher the FDV, the more revenue and fees the trading platform earns, regardless of whether the project goes up or down. The second reason is that high FDV and low circulation benefit trading platforms because there are a lot of unallocated tokens to distribute to them. According to our sample data, the median circulation ratio of projects is 18.60%.

Listing Costs

I want to briefly discuss the costs of listing on CEXs. The biggest problem with current token issuances is the initial price being too high. Therefore, whichever CEX secures the primary listing rights almost cannot achieve a successful issuance. If that’s not bad enough, overpriced projects also have to pay a large amount of tokens and stablecoins to obtain the privilege of "listing a pile of garbage."

Before commenting on these fees, I want to emphasize that I don’t think it’s wrong for CEXs to charge listing fees. CEXs have invested a lot of money to build a user base, which needs to be recouped. If you are an investor or token holder in a CEX, you should be satisfied with their business acumen. However, as an advisor and token holder, if my project gives tokens to a CEX instead of users, it will harm the project's future potential and negatively impact the trading price of the token. Therefore, I either advise founders to stop paying listing fees and focus on attracting more users or suggest that CEXs significantly lower their prices.

CEXs extract funds from projects primarily in three ways:

1. Directly charging listing fees.
2. Requiring projects to pay a deposit, which is refunded if the project delists.
3. Mandating projects to spend a specified amount on project marketing on the platform.

Typically, the listing team of each CEX evaluates the projects. The worse the project, the higher the fees. As I often tell founders, if your project doesn’t have many users, then you need a CEX to dump your "garbage" onto the market. If your project has product-market fit and a healthy growing ecosystem of real users, then you don’t need a CEX because your community will support your token price anywhere.

Listing Fees

At high-end CEXs, Binance charges up to 8% of the total token supply as a listing fee. Most other major CEXs charge between $250,000 and $500,000, usually payable in stablecoins.

Deposits

Binance has designed a clever strategy requiring projects to purchase BNB and stake it as a deposit. If the project delists, the BNB is refunded. Binance requires deposits of up to $5 million in BNB. Most other CEXs require deposits of $250,000 to $500,000 in stablecoins or the CEX's tokens.

Marketing Expenses

Binance requires projects to distribute 8% of their token supply to Binance users through platform airdrops and other activities. Mid-tier CEXs require spending up to 3% of the token supply. At the low end, CEXs require marketing expenses ranging from $250,000 to $1 million, payable in stablecoins or project tokens.

In total, listing on Binance could cost you 16% of your token supply and $5 million in BNB purchases. If Binance is not the primary trading platform, the project still needs to spend nearly $2 million in tokens or stablecoins.

For any CEX challenging these numbers, I strongly recommend you provide transparent accounts of every fee or mandatory expenditure. I obtained this data from multiple projects that assessed the costs of major CEXs, and some of the data may be outdated. I reiterate that I don’t think CEXs are doing anything wrong. They have a valuable distribution channel and are maximizing its value. My complaint is that the performance of tokens post-listing is insufficient to justify the fees paid by project founders.

My Advice

This game is simple: ensure your users or token holders gain wealth when your project succeeds. I am speaking directly to you—project founders.

If you must do this, only conduct a small private seed round to create a product for a very limited use case. Then, launch your token. Since your product is far from achieving true product-market fit, the FDV should be very low. This sends a message to your users. First, it is risky, which is why they are entering at such a low price. You might mess up, but your users will continue to support you because they entered the game at an extremely low price. They believe in you and will give you more time to find a solution. Second, it shows that you want your users to embark on the journey of wealth creation alongside the project. This will motivate them to tell more people about your product or service because users know that if more people join, they have the potential for substantial returns.

Currently, many CEXs are under pressure due to the poor performance of most newly listed projects, only accepting "high-quality" projects. Given how easy it is to "fake it until you make it" in the crypto space, it is very difficult to choose truly excellent projects. Garbage in, garbage out. Every major CEX has its preferred metrics, which they consider leading indicators of success. Generally speaking, a very young project will not meet their standards. Who cares? There’s something called DEX.

On DEX, creating a new trading market is permissionless. Imagine you are a project that raised $1 million USD e (Ethena USD) and wants to offer 10% of the token supply to the market. You can create a Uniswap liquidity pool consisting of $1 million USD e and 10% of your token supply. Click a button, and let the automated market maker set the clearing price based on market demand for your token. You don’t have to pay any fees for this. Now, your loyal users can immediately purchase your token, and if you really have an active community, the token price will rise rapidly.

Let’s take a look at what Auki Labs did differently when issuing their token. The above is a screenshot from CoinGecko. As you can see, Auki's FDV and 24-hour trading volume are relatively low. This is because it first listed on DEX and then on the CEX MEXC. So far, Auki's token price has risen by 78% compared to the previous private sale price.

For the founders of Auki, the token listing was just another ordinary day. Their real focus is on building their product. Auki's token was first listed on Uniswap V3 through the AUKI/ETH trading pair on August 28, on Base, which is Coinbase's Layer-2 solution. Subsequently, they listed on the CEX—MEXC—on September 4. They estimate that this way saved them about $200,000 in listing fees.

Auki's token vesting plan is also more equitable. Team members and investors vest according to a daily vesting schedule, with vesting periods ranging from one to four years.

Sour Grapes Mentality

Some readers may feel that I am just bitter because I do not own mainstream CEXs that made big money through new token listings. This is indeed true; my income comes from the appreciation of the token values in my portfolio.

If the projects in my portfolio price their tokens too high, pay hefty fees to get on trading platforms, but fail to outperform Bitcoin, Ethereum, and Solana, I have a responsibility to speak out about it. That is my position. If CEXs choose to list Maelstrom's projects because they have strong user growth and offer compelling products or services, I fully support that. But I hope the projects we support stop worrying about which CEX will accept them and start focusing on their daily active user data.