The transition of token issuance from venture capital-led to community-driven: Is community fundraising a good idea or a trap?

Original Title: The Illusion of Change: Balancing Community and Financial Incentives

Original Author: Francesco

Original Translation: 深潮 TechFlow

Community-led token issuance is making a resurgence, challenging the traditional model dominated by institutional investors.

To analyze this shift, we will explore recent trends, including the cases of Hyperliquid and Echo, while assessing community sentiment and the market performance of different token distribution methods.

Community-led Token Issuance: A New Trend Emerges

In recent months, community-driven fundraising activities have seen a significant rebound.

Several key factors seem to be behind this trend.

1. Positive Market Sentiment Towards Community Fundraising

In the past, the token issuance model dominated by venture capital (VC) often resulted in poor performance post-issuance.

Low liquidity, uneven token distribution, and strict token unlock schedules often led to continuous price declines. Over time, market sentiment has gradually shifted towards community-led issuance models.

This shift has been largely influenced by Hyperliquid. The case of Hyperliquid demonstrates that a mature product, when combined with a well-nurtured community, can not only reduce reliance on VC funding but also effectively avoid the common issue of token value decline post-issuance.

Furthermore, as more new tokens enter the market, projects need to find ways to stand out in the competition, and community participation is becoming a key differentiating factor. Thus, the "fair distribution model" has returned to the spotlight.

This trend also brings new opportunities for retail investors, allowing them to participate in investment projects that were previously limited to institutional investors. In some cases, community-led models even enable retail investors to acquire tokens at better prices than traditional investors.

2. The Dilemma of Venture Capital Support

Today, users are increasingly skeptical of projects that allocate a large portion of tokens to VCs and other institutional investors. This puts project teams in a dilemma: how to ensure necessary funding while maintaining fairness in token distribution.

Although many founders value democratic participation from the community, they often face more practical issues: how to raise sufficient funds to complete product development.

While community-driven distribution models offer a fairer allocation mechanism, they also bring uncertainties regarding financial stability and strategic investor support.

Nevertheless, this model still has unique advantages:

• Helps projects build a loyal user base

• Facilitates iterative development and testing of products

• Allows projects to focus more on long-term value creation rather than short-term investor interests.

If the token distribution structure overly relies on institutional investors, it often leads to a mismatch between short-term price fluctuations and the project's long-term strategic goals. This issue is often manifested through strict token unlock mechanisms, further affecting the healthy development of token economics.

Moreover, excessive control by institutional investors can undermine retail investors' voice in project governance and long-term development. This lack of engagement may lead to decreased community activity, ultimately resulting in a loss of investor interest and attention.

Common Pain Points

• Privilege Issues: Early investors and advisors often receive more favorable token terms and priority access than ordinary community members, creating clear unfairness.

• Insufficient Governance Impact: Although many projects claim to be community-led, retail token holders often have limited influence in actual decision-making.

• Strategic vs. Market Sentiment Conflict: Project teams typically focus on long-term development, but token prices are often dominated by short-term trading sentiment.

Community Preferences: What Matters Most to Users?

Discussions on social media and the rise of platforms like Echo indicate that cryptocurrency users are increasingly dissatisfied with the preferential treatment enjoyed by VCs and institutional investors.

The call for a fairer investment environment from the community is growing louder.

Key Expectations from the Community

• Equal Investment Opportunities: The community hopes to enjoy investment conditions similar to those of VCs, including fair token pricing and simpler participation processes.

• Clear Token Economic Models: Clear token distribution rules are key to building investor trust.

• Inclusive Participation Mechanisms: Investment opportunities should not be limited to "whales" (high-net-worth individuals) but should be fairly open to all investors.

• Diverse Participation Pathways: Users should have multiple ways to join projects, whether through providing liquidity, participating in platform development, or directly purchasing tokens.

Structural Considerations

• Clear Token Unlock Mechanisms: A clear unlocking plan can effectively mitigate market volatility and prevent insiders from suddenly dumping tokens.

• Balanced Governance Structure: While large token holders have more influence, mechanisms like delegated voting or time-based governance models can enhance the participation rights of smaller investors.

• Transparent Reward Distribution Mechanisms: Projects should establish transparent reward frameworks, such as staking rewards, token buybacks, or profit-sharing, to create value for token holders.

• Community-Centric Development: Regular interaction with the community, transparent governance processes, and funding support for community-driven projects are key to maintaining long-term engagement.

Trends of Change: Impact on the Market

As more projects adopt community-centric strategies, several key trends are gradually emerging:

Innovative Token Issuance Mechanisms

• Community Truly Holds Power: Projects are moving from symbolic governance to substantive empowerment, allowing token holders to directly participate in protocol changes, fund allocation, and strategic decisions. This includes adopting weighted voting systems and granting the community direct management of the treasury.

• Diverse Participation Reward Mechanisms: Many projects are beginning to experiment with innovative reward methods, such as dynamic staking rewards, contribution-based token distribution, and reputation systems that reward long-term active participation rather than merely distributing rewards based on token holdings.

• Long-term Development Token Economic Models: Projects are placing greater emphasis on designing sustainable token systems with built-in mechanisms to maintain token value, such as flexible supply adjustments, buyback systems triggered by usage, and incentives tied to protocol growth.

• Reduced Dependence on VC Funding: Projects are exploring more diversified financing methods, such as community fundraising, protocol-owned liquidity (liquidity funds directly held and managed by the protocol), and revenue-sharing growth models, thereby reducing reliance on large upfront investments from VCs.

Major Challenges Faced by Projects

• Balancing Funding and Control: Teams need to ensure that while raising sufficient funds to support project development, the community retains enough ownership and decision-making power. This may require adopting a hybrid financing model to balance funding needs with community control.

• Promoting Long-term Community Growth: Sustainable community development requires moving beyond short-term incentives to attract and retain community members through education, shared goals, and genuine value creation. This can be achieved through ambassador programs, developer grants, and community-driven marketing efforts.

• Transparency Becoming the New Norm: Projects must regularly update progress, conduct open governance discussions, and maintain clear communication. These transparency measures have become basic expectations of the community rather than optional.

• Building Sustainable Revenue Models: Projects need to develop mechanisms that can create stable revenue for the protocol and token holders, such as service fees, platform fees, or other value-creating activities, to support the long-term development of the project.

Case Study: Hyperliquid's No-VC Model

The successful performance of Hyperliquid's token post-distribution provides a reference for rejecting traditional VC financing:

• No Allocation to VCs: Tokens were fully distributed to platform users rather than VC firms.

• Stable Market Performance: The token's price remained stable post-distribution, without significant fluctuations.

• Organic Community Development: The project's growth relied entirely on the participation of real users rather than artificial incentives.

• Contribution-Based Distribution Mechanism: Token distribution was based on users' activities and actual contributions on the platform, rather than purely on purchase behavior.

However, Hyperliquid's user base has some unique characteristics, distinguishing it from other projects attempting similar community-driven approaches, and thus may not serve as a universal reference case:

• Primarily Professional Traders: The platform's core users are not ordinary retail investors but professional traders who frequently engage in large transactions.

• Ability to Hold Long-Term: These users have ample funds and do not need to quickly sell tokens for returns, reducing selling pressure in the market and promoting long-term holding behavior.

• Natural Alignment of Interests with the Platform: Since these users have already gained significant profits through trading on the platform, their interests are closely tied to the platform's development, with tokens serving merely as an additional reward.

• Lower Selling Pressure: When users are already profiting from trading, they are not in a hurry to sell tokens for short-term gains.

• No Reliance on Token Financing: Unlike many projects that rely on token sales to raise development funds, Hyperliquid does not need to fill funding gaps through token sales.

• Pure Usage Reward Mechanism: Tokens are only distributed to users who genuinely use the platform, rather than those who purchase tokens in hopes of future profits.

• Different Holding Mindset: Users who earn tokens through platform usage have completely different psychological tendencies in their holding and selling decisions compared to investors who directly purchase tokens.

While Hyperliquid's approach has achieved significant success, other projects need to recognize that their communities may differ greatly from Hyperliquid's community. Strategies suitable for a platform with many wealthy and experienced traders may not apply to projects targeting ordinary retail users.

This also raises a thought-provoking question: Is community fundraising truly more sustainable, or does it merely shift selling pressure from VCs to retail investors who are more eager for quick returns? VCs typically employ well-considered exit strategies, while retail investors in community fundraising, due to limited funds, lack the capacity for long-term investment, which may lead to greater market instability and emotional fluctuations.

Additionally, it is worth noting that although Hyperliquid distributed over 31% of its tokens, it has consistently focused on creating a high-quality product that users genuinely want to use.

This provides an important insight for other projects: the community alone cannot ensure a project's success; the project must be built on a solid foundation, such as providing an excellent product experience.

Key Differences Between Approaches

Despite the cryptocurrency community's enthusiastic embrace of the shift from VC-led fundraising models to community-driven models, an undeniable fact is that the human tendency for short-term profit-seeking has not changed.

The key differences between these distribution methods are reflected in the following aspects:

(Original table from Francesco, translated by 深潮 TechFlow)

Democratizing Investment Opportunities

The rise of platforms like Echo and Legion further promotes the opening of investment opportunities traditionally limited to venture capital and institutional investors to a broader base of ordinary investors.

Moreover, these platforms provide a simplified interface for protocols to conduct funding rounds, allowing protocols to more easily optimize their strategies when distributing tokens.

Current trends are changing, and these new developments have begun to influence how new projects redesign their token distribution methods. Notably, an increasing number of projects are choosing to conduct token sales on these platforms, with the recent MegaETH being one of them.

This change has led to a more balanced stakeholder relationship and capital structure, while the allocation of community funds continues to increase.

Approaches of Echo and Legion:

• Focus on community-driven development models

• Transparent token economics

• Balanced stakeholder relationships

• Innovative token distribution mechanisms

There is no "one-size-fits-all formula" in token distribution and investment strategies.

However, projects can consider the following new factors based on current industry development trends.

Recommendations for Future Projects

For future projects looking to innovate token distribution models, consider the following points:

1. Distribution Strategy

• Implement fair and transparent community sale mechanisms

• Ensure that the interests of token holders are closely tied to the project's success

• Develop innovative project financing methods

• Ensure broad distribution of governance rights to enhance community participation

1. Community Participation

• Establish open and transparent communication channels

• Reach community consensus around distribution mechanisms

• Maintain long-term community engagement

• Provide practical use cases for token holders to increase the added value of tokens

• Empower the community to influence the long-term direction of the project

Who Are the Winners and Losers in Different Token Models?

(Original table from Francesco, translated by 深潮 TechFlow)

Interesting Aspect: The Reality of Hybrid Models

When VCs combine with the community:

• VCs' Gains: Smaller shares but better public image

• Project's Gains: More supporters but more complex management

• Community's Gains: Higher stability but less token allocation

The advantages and disadvantages of a token model, whether more inclined towards investors or the community, do not have absolute standards. It always depends on the perspectives of different stakeholders, especially market demand.

Conclusion and Reflection

The rise of community fundraising marks a significant shift from the traditional VC-dominated model to a community-driven model. More and more projects are realizing the importance of aligning with community interests rather than merely catering to large institutional investors. In this evolving environment, the key to success may lie in designing distribution mechanisms that prioritize community ownership while ensuring the project's long-term sustainability.

Although there is no "one-size-fits-all formula," projects aiming for successful launches must seriously consider some emerging factors.

Currently, we are in a transitional phase between the two models, with many projects attempting to replicate the Hyperliquid model, but with mixed results. On one hand, they strive to show a willingness to allocate a higher proportion of tokens to the community; on the other hand, they are constrained by their relationships with existing investors, limiting their autonomy in token distribution.

However, community participation alone is not enough to ensure a project's long-term success or the consistency of incentive mechanisms.

Retail investors often focus more on short-term gains when dealing with their acquired tokens, and may even be more inclined to cash out quickly than traditional investors. Additionally, retail investors lack mature exit strategies, which may have a greater impact on market price fluctuations.

Nevertheless, as long as these factors are adequately considered from the early stages of the project, achieving balance is not impossible. Just as blockchain technology evolves over time, the token distribution models of projects also need to keep pace with the times. While the current pace of progress may not be as rapid as expected, we can still see a resurgence of community-led models, bringing new hope.

The coming months will be a critical period to observe and assess this trend: Will the community truly gain fair investment opportunities, or will these changes merely remain at the marketing level, with little substantial improvement over traditional models?

This time, can we truly achieve a breakthrough?