Arthur Hayes blog post: Meme coins are popular, while VC coins are ignored. How should project teams raise funds?

Arthur Hayes
2024-12-17 12:49:01
Collection
Has the death knell for VC coins been sounded?

Author: Arthur Hayes

Compiled by: Shen Chao, Wu Shuo

Main Text

People sometimes act irrationally due to desire or blindness. Unfortunately, many Maelstrom portfolio companies seem to have contracted a "CEX Transmitted Disease." Some affected founders mistakenly believe that by following the directives of certain well-known centralized exchanges (CEX), they can achieve so-called "ultimate returns." These directives include: boosting certain metrics, hiring specific individuals, allocating a certain number of tokens, launching tokens on specified dates, and even temporarily altering launch plans. These companies, driven by desire, have forgotten the needs of users and the original purpose of cryptocurrency. If you are also afflicted by this disease, come to my clinic; I have the antidote. Let me explain in detail.

I believe that the reasons cryptocurrency has become one of the fastest-growing networks in human history are primarily threefold:

Government Control - Giants such as large corporations, big tech, big pharma, and the military control most major governments and economies through their vast wealth and power. While global living standards and life expectancy have significantly improved since World War II, for the 90% of the population who hold very few financial assets and have almost no political voice, this growth has stagnated or even regressed. The decentralized nature of cryptocurrency is the antidote to this concentration of wealth and power.

Revolutionary Technology - The Bitcoin blockchain and the various blockchain technologies that followed represent a revolutionary innovation. Starting from an initially unremarkable point, Bitcoin has proven to be one of the most stable and secure monetary systems globally. The Bitcoin network itself offers nearly $2 trillion in bug bounties (for obtaining Bitcoin through double-spending attacks), yet no one has been able to breach the security of this system to date.

Wealth Effect - The value growth of cryptocurrencies and their derivative tokens has made many users overnight millionaires. In the upcoming U.S. elections this November, the economic power of cryptocurrency supporters will be fully demonstrated. Like many countries, the U.S. political system relies on the "money game." Practitioners in the cryptocurrency industry have become one of the largest groups contributing to political candidates, directly facilitating the victories of candidates who support cryptocurrency. Bitcoin, as the fastest-growing asset in human history, has enabled the cryptocurrency community to exert significant influence in political activities.

Although most people in the cryptocurrency community understand why this movement has succeeded, there are occasional bouts of "amnesia." This amnesia manifests in changes to the way capital is raised. Sometimes, project teams achieve great success by catering to the community's desire for wealth; at other times, cash-strapped founders forget why users chose cryptocurrency in the first place. Yes, they may believe in the idea of "by the people, for the people"; yes, they may create astonishing technology. But if users cannot profit from it, the promotion of any cryptocurrency product or service will slow down.

Since the hype of 2017 has faded, the way capital is raised has gradually deviated from its original intent. In the past, capital formation relied on stimulating community engagement and wealth desire, whereas now it has been replaced by high fully diluted valuations (FDV), low circulating supplies, and VC-backed tokens. However, these VC-backed tokens have performed poorly in this bull market (from 2023 to now). In my article, I mentioned that the median performance of tokens issued in 2024 is about 50% lower than that of mainstream coins (such as Bitcoin, Ethereum, or Solana). Retail investors, although finally able to purchase these projects through centralized exchanges (CEX), are unwilling to pay their high prices. As a result, the internal market-making teams of exchanges, airdrop token recipients, and third-party market makers have dumped these tokens into illiquid markets, leading to poor price performance. As an industry, why have we forgotten the third pillar of cryptocurrency's value proposition—helping retail investors create wealth?

Today's cryptocurrency issuance market has become similar to the traditional finance (TradFi) initial public offering (IPO) system. Retail investors often become the "bag holders" of VC tokens. However, in the cryptocurrency space, there is always an alternative—Memecoins. Memecoins are tokens with no real utility, whose sole function is to spread Meme content through the internet. If the Meme is compelling enough, users will buy it, hoping that others will follow suit.

The capital formation method of Memecoins is more egalitarian. Teams typically release the entire token supply at launch, with initial FDVs often only in the millions. They usually start trading on decentralized exchanges (DEX), with speculators betting on which Meme will capture attention in the industry and drive up token demand.

For ordinary speculators, the most attractive aspect of Memecoins is that if they can participate early, they might leap up one or two tiers on the wealth ladder. Nevertheless, every participant is aware that Memecoins inherently have no intrinsic value and generate no cash flow, thus fully accepting the risk of potentially losing all their funds in pursuit of wealth dreams. More importantly, there are no institutions preventing them from purchasing these tokens, nor are there hidden capital pools waiting to sell unlocked token supplies at high prices.

To better understand the different types of tokens and their sources of value, I hope to establish a simple classification framework. First, let’s start with Memecoins:

Intrinsic Value of Memecoins = Influence of Meme Dissemination

This is very intuitive. As long as you are active in any community (online or offline), you can understand the power of Meme dissemination.

So, what about VC tokens?

Practitioners in the traditional finance (TradFi) industry often lack real professional skills. I know this well because I found that the skills required for my job in investment banking are actually quite limited. Many people choose to enter TradFi because it offers lucrative salaries without needing to master much substantive knowledge. As long as a young person has basic high school algebra knowledge and a good work attitude, I can train them to handle any front-office financial service job. However, professions like doctors, lawyers, and engineers require time and technical accumulation, even though the average income of these professions is far lower than that of those in finance.

The high salary allure of TradFi makes the entry barrier to this industry more reliant on social background than on individual ability. For example, your family background, the reputation of your university or boarding school, often matters more than your intelligence level. This system has made the TradFi industry a closed elite club, further entrenching existing social classes and racial biases.

Let’s apply this framework to analyze how VCs raise funds and allocate resources.

To find winners like Facebook, Google, Tencent, or ByteDance, top venture capital (VC) firms need to raise huge amounts of money. This funding primarily comes from endowments, pensions, insurance companies, sovereign wealth funds, and family offices, which are typically managed by traditional finance (TradFi) professionals. As fund managers, they must fulfill their fiduciary duties to clients and can only invest in what is deemed "appropriate" venture capital funds. This "appropriate" standard usually means that these funds need to be managed by "qualified" and "experienced" professionals. The definition of "qualified" is often closely related to the manager's educational background and work experience: they typically graduate from a few top universities globally (like Harvard, Oxford, Peking University, etc.) and have early career experience in large investment banks (like JPMorgan, Goldman Sachs), asset management firms (like BlackRock, Fidelity), or tech giants (like Microsoft, Google, Facebook, Tencent, etc.). Without such a background, the gatekeepers of TradFi will consider you incapable of managing other people's money.

This screening mechanism leads to a highly homogeneous group: they look similar, speak similarly, dress similarly, and even live in the same global elite circles.

For fund allocators, the biggest dilemma is career risk. If they choose a fund with a non-traditional background and it fails, they might lose their job; but if they choose a fund that meets traditional standards, even if it fails, they can attribute it to "bad luck" and keep their position. Therefore, to mitigate career risk, they tend to choose funds that meet traditional standards rather than risk trying new possibilities.

This logic extends to the selection of entrepreneurial projects. Venture capital firms are more inclined to support projects whose founders fit the stereotype of "successful founders." Business-oriented founders need to have experience in large consulting firms or investment banks and graduate from top universities globally; technical founders need to have experience in successful tech companies and hold advanced degrees from prestigious universities. Geographic location also becomes a consideration: Silicon Valley VCs are more likely to invest in companies located in the Bay Area of California, while Chinese VCs focus more on projects in Beijing or Shenzhen.

Ultimately, this model creates a highly homogeneous investment environment: everyone’s background, way of thinking, values, and even geographic location are highly similar. Because of this, the environment both limits innovation and makes venture capital decision-making more conservative.

When the bubble of the 2017 hype burst, founders of crypto projects had to compromise to obtain VC capital. To raise funds from VCs primarily located in San Francisco, New York, London, and Beijing, they had to cater to the preferences of VCs.

The value of tokens in the eyes of VCs = the founder's educational background, work experience, family background, and geographic location.

For VCs, the importance of the team far outweighs the product. If the founder fits a certain "successful founder" stereotype, funding will come easily. Because these founders are perceived to inherently possess the "right" qualifications, even if they only find product-market fit after burning through hundreds of millions of dollars, there will always be a few teams that succeed and give birth to the next Ethereum. And for those failed teams, VCs' decisions will not be questioned, as the founders they supported are already widely considered the most likely to succeed.

Clearly, when VCs choose whom to fund, expertise in the crypto space is not a key consideration. This selection criterion leads to a disconnect between the projects supported by VCs and the ultimate retail investors. VCs aim to keep their jobs, while retail investors aim for financial freedom by betting on tokens that could skyrocket 10,000 times. In the early days, such returns were possible. For example, if you bought ETH at about $0.33 during the Ethereum presale, your investment has grown 9,000 times at current prices. However, the current capital operation model in crypto has made such returns nearly impossible.

VCs profit by trading worthless and illiquid SAFTs (Simple Agreements for Future Tokens) between funds, with each transfer accompanied by an increase in valuation. When a troubled crypto project finally lists on a centralized exchange (CEX), its fully diluted valuation (FDV) often exceeds $1 billion. To achieve a 10,000 times return, this project's FDV must grow to an extremely large number—possibly exceeding the total value of all fiat assets, and that’s just for one project.

If the VC token model is rejected by ordinary users, then what is essentially meaningful?

Intrinsic Value of 1CO = Explosive Power of Content Dissemination + Technical Potential

Meme - A project that can align its appearance and target positioning with the current trends in the crypto space possesses Meme value. If its Meme content is compelling enough and can spread rapidly, it can attract widespread attention for the project. The core goal of the project is to attract users at the lowest cost and monetize through these users. A project that is widely discussed can quickly draw users into its marketing funnel.

Technical Potential - This usually occurs in the early stages of a project, such as Ethereum, which raised funds before development. This model relies on the community's trust in the team, believing that as long as the community provides funding, the team can develop valuable technology. Potential technology assessments can be approached from several angles:

Does the team have experience developing significant products in Web2 or Web3?

Is the proposed technical solution feasible?

Can this technology solve a globally significant problem, thereby attracting millions or even billions of users?

Technical founders can achieve the above goals, but they may not necessarily be the ones favored by venture capital (VC). The crypto community does not place much value on family background, work history, or prestigious university degrees. While these conditions may be a bonus, they are meaningless if the team does not produce excellent code. The community is more willing to support Andre Cronje than some "elite" who graduated from Stanford, worked at Google, and is a member of The Battery.

While most initial coin offerings, or 99.99%, will approach zero after a cycle, there are still a few teams capable of developing technology that gains value by attracting users, as their dissemination effect (Memetic) is strong enough. Early investors in these may achieve returns of 1,000 times or even 10,000 times. This is precisely the goal they pursue. Speculation and volatility are characteristics, not flaws. If retail investors want stable and conservative investments, they can choose to trade on global traditional finance (TradFi) stock exchanges. In most countries, IPOs require companies to be profitable, and management must make various statements to ensure financial transparency. However, for most retail investors, the problem with IPOs is that they cannot deliver life-changing returns because early venture capitalists have already drained most of the profits from the process.

In its purest form, it allows any team with an internet connection to showcase their project to the crypto community and obtain funding. The team will launch a website detailing who they are, what they plan to build, why they are qualified, and why the market needs their product or service. Investors can then send cryptocurrency to a blockchain address, and after a certain period, they will receive tokens. All details, such as timelines, fundraising amounts, token prices, technology types, team composition, and investors' geographic locations, are entirely determined by the team, without the involvement of any intermediaries (such as venture capital funds or centralized exchanges). This is precisely why centralized intermediaries hate 1COs—because they are completely bypassed. However, the community is very supportive because they provide opportunities for people from different backgrounds, allowing those willing to take high risks to have a chance at high returns.

Thanks to frameworks like Pump.fun, launching a token now takes just a few minutes, and we have more liquid decentralized exchanges (DEX). This is different from previous cycles, where it could take months or even years from subscription to token delivery. Today, investors can immediately trade newly issued tokens on platforms like Uniswap and Raydium.

Due to Maelstrom's investment in the Oyl wallet, we have had a sneak peek at some potentially industry-disrupting smart contract technologies being developed using the Bitcoin blockchain. Alkanes is a new meta-protocol aimed at bringing smart contracts to Bitcoin through the UTXO model. I cannot claim to fully understand how it works. But I hope that those more capable can check their GitHub repository and decide for themselves whether they want to develop based on it. I hope Alkanes can drive explosive growth in issuance on Bitcoin.

Today, retail crypto enthusiasts show great interest in Memecoins, hoping to trade these highly speculative assets on decentralized exchanges (DEXs). This demand allows unverified projects to trade immediately after token delivery, enabling the market to freely price their value.

Although I have always been critical of Solana, I must admit that Pump.fun has had a positive impact on the industry. This protocol allows ordinary users to issue their own Memecoins and start trading within minutes without a technical background. Continuing this trend of "democratizing finance and crypto trading," Maelstrom has invested in a new platform that could become the preferred choice for Memecoins, cryptocurrencies, and even newly issued spot trading.

Looking back at 2017, a popular project often led to the Ethereum network being overloaded or even paralyzed. Gas fees skyrocketed, making network usage prohibitively expensive for many. By 2025, however, the cost of using block space on Ethereum, Solana, Aptos, or other Layer-1 blockchains will become extremely low. Current transaction throughput has improved by orders of magnitude compared to 2017. If a team can attract a large number of eager speculators, their ability to raise funds will no longer be hindered by the blockchain's low speed and high costs.

Retail crypto investors also need to take action and "reject bad investments" in practice.

"Rejecting bad investments" means:

Rejecting projects that are VC-backed, have excessively high fully diluted valuations (FDV), but very low actual circulating supply.

Rejecting tokens that list on centralized exchanges (CEX) at high valuations for the first time.

Rejecting those who criticize so-called "irrational" trading behavior.

Looking back at 2017, there were many projects of extremely poor quality. Among them, the most destructive was EOS. Block.one raised $4.1 billion in cryptocurrency to develop EOS. However, after its launch, EOS almost vanished. In fact, this statement is not entirely accurate; surprisingly, even a failed project like EOS still maintains a market cap of $1.2 billion. This indicates that even projects like EOS, which once symbolized the peak of the bubble, still hold value far above zero. As someone who loves financial markets, I must admit that EOS's structure and execution are classic cases. Project founders should study seriously how Block.one raised the most funds in history through token sales.

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