Written by: Mark Beylin, Boost VC Translated by: Yangz, Techub News
In his article Be Good, Paul Graham, founder of Y Combinator, outlined how startups can find product-market fit, that is, making something people want. If we believe that tokens are products , then the question we face is: how do we create tokens that people want?
The first piece of advice Paul gives is to not worry too much about the business model in the beginning, although he admits that creating value without worrying about value capture is something that only charities do. In the cryptocurrency space, we see the opposite: by issuing utility tokens that people must buy before they can use them (sometimes years in advance), value is necessarily captured before it is created. This is probably why many successful crypto token ecosystems look more like scams than charities in their early days, especially for those who are familiar with the traditional startup building model.
In order to find a crypto startup that matches the token market, is it possible that, as Paul originally suggested, one should not worry about creating direct value for token holders at all, but instead focus on capturing value by selling tokens first?
One of the most challenging aspects of early-stage startups that haven’t found product-market fit is constantly communicating with customers to understand their interest in new products or features. Founders need to develop relationships with various stakeholders in the ecosystem and build tight feedback loops to design solutions that are exactly in line with market needs. The tighter these feedback loops are, the faster the team can iterate on the best solution and test it in the market. However, just communicating with customers doesn’t scale, after all, there are only so many people willing to meet or talk on the phone with you…how do other customers get connected?
When observing existing projects with issued tokens, it is not difficult to find a feedback loop between the price of the token and the market's expectations of the future value that the token ecosystem will create. Whether it is Uniswap raising the price of the token in response to its fee conversion proposal, Vitalik selling MKR in response to Maker's plan to launch its own chain, or DEGEN raising the price in response to the plan to launch L3, we can see that the price of the token is quite sensitive to the news of the future plans of a particular project.
Tokens act as prediction markets, predicting the collective interest of the crowd in a project moving in a particular direction, and the expected likelihood of achieving that goal. The efficiency of this feedback loop is determined by the liquidity of the token, with more liquid tokens (such as BTC and ETH) reacting immediately to news events, while smaller projects attract fewer speculators (trading based on news events). However, even less liquid tokens can attract new buyers if they are interested in the narrative the project is building, that is, if they believe that the solution outlined by the project will be valuable to a certain group of people in the future. The huge increase in AI token valuations over the past 6 months is a testament to this: while only a very small number of tokens currently provide value to token holders, the market has repriced the expected value that these ecosystems can create in the future based on the huge value that traditional AI startups have already created so far.
What’s interesting about this process is that by launching a token and attracting enough liquid attention (to make it worthwhile for people to spend their time/money trading on your news), teams have the potential to form an extremely tight feedback loop about their future product releases. While talking to users, crypto product builders can also temperature-test product decisions through iterative cycles until they find the ones that the market values (i.e. the ones that will make your token go up significantly). Once that happens, you know you’re moving in a direction that the market deems meaningful, and you can then use the token’s price mechanism as a tool to discover mass market demand without having to build anything upfront.
The mechanism of getting people to buy tokens based on their belief in a future need that the project will satisfy is at the heart of venture capital. It exploits the same prerequisites for value creation that Paul Graham describes, which is why technically, founders are already acting this way.
Typically, startups raise venture capital because they have a specific set of goals or plans that require new funding, which provides a feedback loop for founders (if VCs aren’t interested in your new plan, they won’t invest), except that this feedback loop is exclusive, opaque, and only occurs every 18 months or so.
The emergence of tokens allows anyone to freely participate in the funding of new projects at any time, increasing the supply of funds available in the market to participate in purchasing early projects, thereby increasing the proportion of projects that receive funding. If a new proposal expands the market opportunity for tokens by providing new use cases that tokens can enable, the market will assign a higher value to the project, and the scale of token diversity will also increase. With tokens, the market becomes a direct financing mechanism for innovation, which is at the core of why tokens are a powerful tool for expanding human potential.
While VCs love to talk at length about their love for tokens, what is often overlooked is that tokens are in direct competition with venture capital and are substitute products. As a former founder and now a VC, I believe there is a sweet spot for VC funding that is useful and necessary for all founders. The right amount of funding depends on the team and the market, but I don’t think it’s zero for any project. VCs have also played an important role in continuing to fund early-stage projects during periods when the public token market has dried up, and they have often been rewarded outsize for taking that risk.
One downside of tokens is that capital flows with the flow of attention in a particular ecosystem. Market participants are not all alike, and the attention of a particular investor is tied to their own ideas. People constantly adjust their portfolios based on their latest views, so the strength of a token cycle depends on whether it can continue to attract the attention of market participants. One way founding teams solve this problem is through "narrative surfing," which is to constantly link their projects to the latest hot value propositions in cryptocurrencies that attract liquidity, hoping to maximize the value of the token by constantly expanding what the token can achieve. Another way for teams to stay fresh is to use memes: excellent memes will resonate in the community, creating a snowball effect, and the "meme wars" between communities are currently quite fierce. Communities with excellent meme creation cycles can ensure that there is always a lot of content about the project being created/shared on social channels, making their tokens the focus of attention. This is why memes are necessary to keep tokens sufficiently liquid, and one of the reasons why memecoins can continue to attract and maintain liquidity. Get the right people into the ecosystem early, and they will have a native motivation to talk about the project and help it grow. If too many tokens are airdropped to people who are not willing to continue to share the project, it will be difficult for the project to maintain attention in the long run.
Imagine a world where markets are perfectly efficient and the price of a project’s token acts as a perfect oracle, predicting whether a course of action is optimal. Perhaps the market is populated by AI agents that trade tokens based on updates from various projects and can predict whether a project will succeed. Moreover, project teams only take actions that external market participants deem worth taking. If one were to ask, “Who has the final say here?” the correct answer would be the market as a whole (via the price of the token), with the rest of the ecosystem around the token simply acting as stewards or custodians to help achieve the market’s goals. But would this system of organizational governance actually achieve more than other models? I think the answer is no. First, the best founders in a given industry tend to hate being told what to do. They know their market intimately and have their own opinions about the best course of action. Second, the best founders tend to be comfortable with these deviations from the mainstream consensus, and in fact, they are often proud of them. Importantly, these deviations are precisely why they create such successful companies: every market misunderstanding is an arbitrage opportunity, a reward for the first person to voice dissent. The most successful companies of our time have experienced long periods of time when the market actively devalued their work, and it is their ability to resist such forces that has enabled them to maintain value over the long term. Great founders are visionaries who don’t optimize around local minima like everyone else, but instead explore new areas in the hope of discovering new opportunities that others didn’t think existed. They do this by asking questions that no one else has thought of, and switching quickly between concepts based on intuition when there is very little data. This helps them achieve product-market fit faster than their competitors, win markets, and create valuable ecosystems out of thin air. If a team collects valuable new data about an untapped market, the last thing they want to do is share it publicly. But even the best founders will have a hard time attracting the attention of the public markets if they keep their cards close to their chests. However, they will benefit from attracting money through private rounds (participants in private rounds are screened and trustworthy), and will also benefit from finding crazy investors who see the vision and think intuitively like them.
Going back to our original question, we believe that tokens are a powerful tool that teams can use to discover market needs and narratives that fit their needs. Like product founders before them, token founders can quickly iterate on the value proposition of their token based on the tremendous feedback that their token provides. To keep this feedback loop alive, teams should strive to continuously attract investors' attention on social platforms. They should maintain a deep awareness of the various narratives around them and understand why the market values each narrative. They should use content and memes to continuously appear in people's attention so that people don't lose interest and rebalance their portfolios. Most importantly, teams should focus on attracting high-value contributors who believe in the project's vision and are willing to support it with funds and energy. If a team can do this well, then they can build an army of HODLers who will not sell tokens and will promote the token to new audiences.
