In the Web3 space, understanding the strategies and logic behind VC investments is critical for investors and industry participants. This article delves into the complex dynamics of VC tokens, exploring how large projects like Ethena, IO, and MSN shape the market, investment trends in different regions, and the key differences between successful projects and those doomed to fail. By revealing the underlying strategies and potential pitfalls, this article provides valuable insights for navigating the complex landscape of VC-driven crypto projects.
This article is based on a conversation between Sam, head of research at Aquarius Fund, and George Yu, President of Uweb.
Highlights
Ethena, IO, and MSN - VC projects such as Ethena, IO, and MSN quickly attracted funds through high valuations and market hype. However, the market appeal of these projects has weakened, and investors have begun to turn their attention to MEME projects.
Market froth amid current funding boom - The current funding surge has led to a market froth where high-valuation projects are struggling to meet expectations. The massive influx of people trying to profit from venture capital has further exacerbated market dislocation.
Sustainability of idealist and puppet projects - Idealist projects are often difficult to sustain, while puppet projects rely heavily on capital manipulation. Teams like Zama and Fhenix focus on long-term technological innovation and are expected to have better prospects.
Investment Preference: North America vs Asia - North American funds usually focus on technology-driven projects, while Asian funds place more emphasis on market performance. However, Asian projects usually face more challenges in obtaining long-term funding.
Long-term potential of high-quality products - Projects with strong products have long-term potential. Retail investors should align with the project team and profit along with VCs in the current market cycle.
Technical skills and access to reliable information to identify project authenticity - Technical skills and access to reliable information can help identify whether a project is authentic. Even potentially problematic projects can be evaluated based on their fundamentals to determine their acceptability.
The "Gold Mine and People Mine" Theory - This theory reveals that there is no real "gold mine" in the market. Projects rely on the growth of new users, and many transactions are essentially worthless cycles.
VC is the current "people mine" - In the current market, the real "people mine" is VC itself. Those who profit in this cycle are those who cooperate with the project team and take advantage of VC.
Low-cost, controllable risk strategy - By participating in airdrops and staking strategies, you can get stable returns with low risks, which is suitable for long-term participation.
Be wary of high-valuation, low-liquidity projects - these projects face huge inflationary pressures. By using tools such as Etherscan, investors can check the distribution of token holding addresses. If there are a large number of tokens in active circulation, the project is likely to be robust.
ETH's rigorous technology and high security - ETH is technically rigorous and highly secure, making it an ideal project for crypto enthusiasts. However, it is worth noting that technology and token prices are not always directly correlated.
Ethena, IO and MSN
This year, many projects have been dominated by large VCs, especially in the staking and CeDeFi fields. Projects listed on top exchanges like Binance are often driven by these VCs. The rise and fall of VC-driven projects can be analyzed through the following three cases:
Ethena : As a typical VC-driven project, Ethena has performed well in VC rounds, thanks to its high valuation and strictly controlled whitelist minting mechanism. Although it initially brought returns to retail investors, its token price has fallen sharply over time, and many VC investments are still locked. The "1+3" clause of North American VC (i.e., a one-year cliff period followed by three years of linear release) seems to be intended to protect VCs, but in fact, many investors are still trapped.
IO : After announcing a $30 million funding round, IO attracted a lot of market attention. However, the project was disappointing; its technology was immature, the team was still being formed, and there were security vulnerabilities that led to hacker attacks. Despite this, IO was successfully listed on Binance, but many retail investors did not receive the expected returns and even suffered losses.
MSN : The founders of MSN attracted a lot of investment through extensive publicity and KOL endorsements. However, after the OKX listing, the project quickly lost momentum and the token value almost returned to zero. The project team had already arranged an exit strategy to profit from retail investors and other VCs before quietly exiting.
Market bubbles in the current funding boom
The success of the last round of VC investment led to the current financing boom, with many so-called cryptocurrency venture capital funds flooding the market and successfully raising large amounts of funds. The original VC institutions quickly expanded in size due to this influx of funds. However, this capital inflow was not accompanied by significant technological innovation, leading to a market bubble.
Due to the time constraints of LPs, VCs are forced to invest capital within a limited time, resulting in two situations: either investing in low-valuation but mediocre projects, or competing to invest in a few so-called top projects, resulting in valuations far exceeding actual values. This high valuation leads to greatly inflated market expectations for these projects.
For example, Ethena is not necessarily a bad project, and WorldCoin and RNDR are not necessarily underperforming. However, their valuations are pushed too high and difficult to match with actual market performance. At the same time, VCs not only need investment capital, but also want to profit from these high-valuation projects, leading to projects like IO and MSN. IO is a typical VC-driven project, while MSN is an example of a project team turning the tables and taking advantage of VC.
The current market chaos can be attributed to the excess of funds in the primary market and the scarcity of high-quality projects. Many people rushed into the market to try to profit from risky investments, further exacerbating the chaos - this is a classic example of a market bubble.
Idealists and puppets: sustainability of projects
In North America, it is common to see project teams led by idealists who hope to change the world through their efforts. These entrepreneurs are usually young and first-time founders, especially those who are deeply influenced by Silicon Valley culture or familiar with American culture. They usually think that what they do is not just for profit, but to create something truly valuable. Although these projects may receive early funding, they are often difficult to maintain and eventually die out.
Another type of entrepreneur is the "puppet" founder, who is pushed to the foreground, but the project is not based on team strength. Instead, it relies on carefully planned marketing and a strong support system behind the scenes. The foundation may have set the project's profit path, including who will drive the project's TVL (total locked value), who will stand up for support, and which ecosystem will drive the project. In these cases, the importance of the team itself is reduced, and success depends more on capital and market manipulation.
Some teams plan how to profit from the project and exit the market from the beginning. If they can successfully "cut leeks" on the exchange, they will quickly profit from retail investors. If they fail, they can still make considerable profits through financing.
In addition, some projects fully cooperate with VCs to launch short-term profit-oriented "shit coin" projects, with the main purpose of raising funds quickly. This simple and crude operating model is particularly common in the Asian market.
However, there are also excellent projects made up of top scientific and technical teams. For example, the Zama and Fhenix teams focusing on fully homomorphic encryption (FHE) have raised a lot of money, with Zama alone raising $75 million. These team members are real scientists, similar to those of the Ethereum Foundation, who promote academic research and the development of the blockchain industry through publishing papers.
Other projects are also worth watching: these teams clearly understand their goals and are seriously advancing their projects. While these projects may not attract much attention in the current market cycle due to uncertainty about performance and future success, it is certain that they will continue to exist in the industry in the next 3 to 5 years.
Investment Preference: North America vs Asia
There are significant differences in investment mentality between North American and Asian funds. North American funds are generally more patient and willing to support projects that may not succeed in the short term or even in the next market cycle, especially those "scientists" projects that enhance blockchain technology. In contrast, Asian funds pay more attention to practical results, care about how to obtain more liquidity on the chain, and how to make the project widely recognized and popular in the market, emphasizing data performance and market acceptance.
This difference does not necessarily mean superiority or inferiority, but rather reflects different investment logics and cultural backgrounds. Although Asian projects generally demonstrate high technical standards and perform well, they often face more challenges in obtaining long-term funding than ideal-driven North American projects.
Long-term potential for high-quality products
Projects can be divided into two categories: those with excellent products and those that allow retail investors to participate and make a profit. For projects with excellent products, funds that focus on projects and directions that help investors avoid many potential risks can be considered. Although such funds may also suffer losses in a bear market, their research, published papers, and the technical logic of their investment projects all demonstrate their seriousness and rigor. Most of the projects they invest in have the potential to survive in the long term. Even in the face of difficulties, they will persist because they are research-driven native crypto funds that invest. For example, it is worth paying attention to these projects.
While high-quality projects do not always provide opportunities for retail investors to participate, those with significant momentum usually allow retail investors to participate. However, in the current market environment, retail investors need to change their investment mentality. The previous logic was to profit from later funds through early investment, but in this cycle, it is more necessary to align with the project team and profit from VC. By adjusting this mentality, even if you participate in less than ideal projects, you can get a good return.
Technical skills and information channels to identify project authenticity
For those with technical skills, it is relatively easy to identify the authenticity of a project. For example, reading IO's technical documentation revealed some inconsistencies, which raised red flags. Projects with impure intentions are unlikely to invest heavily in product development, making it easier for those with a technical background to spot problems. Some projects may be well hidden, but even so, some clues can usually be found.
Having information channels within the community also helps, as rumors often provide valuable clues. By combining rumors with technical understanding, many so-called "setup" projects can be identified. Even if there is a setup intention, if the project does not have a bad reputation and its technology and fundamentals are acceptable, it can be considered acceptable. This is a reasonable judgment logic.
Theory of "Gold Mine and Human Mine"
The theory was formed after reflecting on the market and the industry, arguing that most projects are essentially providing services or tools, similar to making "shovels". But what are these "shovels" digging? It turns out that there is no real "gold mine" in the market. The so-called gold mine is actually a "human mine"-new users who are constantly attracted and consumed by subsequent projects. Many projects do not have real demand logic, but present a mutually dependent gambling relationship. For example, Uniswap provides services for Aave, and Aave provides services for Uniswap. This relationship raises questions about the nature of platforms like Uniswap, which ultimately provide a trading platform, but in fact most transactions are worthless "air" transactions.
Chinese investors are better at reconciling with this reality, and they do not necessarily pursue lofty goals when entering the market. Through the perspective of the "gold mine and human mine" theory, we can identify where the "human mine" comes from. Although it sounds cruel, it is indeed a methodology for analyzing industry problems.
VC is the current “human mine”
The current market is clearly divided into several parts. Looking back at the heyday of the Inscription project, the "people mining" at that time mainly came from retail investors. Just posting an inscription on the chain and hinting at its name can trigger a strong FOMO (fear of missing out) emotion and attract a large number of retail investors to participate. This wave of retail investors, whether from Web2 or Web3, is driven by emotions.
The situation is different today. VC-driven projects mainly rely on existing funds, and there is no significant inflow of new funds into the market. Even if new funds such as ETFs enter the market, it is unlikely to flow into the Altcoin market, forming an isolated phenomenon. Therefore, the "human mine" in the VC market is actually the VC itself. Since the last market cycle, VC has maintained cash flow by covering losses through other channels, but in this cycle, the real profit is those participants who use VC together with the project team.
A low-cost, risk-controlled strategy
Large exchanges usually restrict project teams from selling tokens, so project teams often distribute tokens legally through airdrops. For example, Manta's airdrop rules are designed to allow project teams to get more tokens. This makes "airdrops" a legal business, allowing participants to share profits with project teams and VCs.
The cost of participating in an airdrop is relatively low, especially compared to trading derivatives. For example, in an interaction-based airdrop strategy, the basic cost of an account includes three necessities: Twitter, Discord, and Telegram. The cost of setting up these three items is approximately between 20 and 50 RMB. When performing on-chain operations, it is recommended to minimize the time on the mainnet and interact mainly on Layer 2 to keep GAS fees within a negligible range. Other costs, such as isolating IPs and using anti-Sybil tools, are also relatively low, keeping the overall cost of the airdrop within an acceptable range.
Staking-based airdrop strategies may seem like they require more capital, but by spreading your capital across different staking opportunities, you can reduce risk and still earn a decent return. For example, staking with EtherFi can provide a kind of safety net. By tracking on-chain activity, you can find potential loopholes in project rules and earn extra rewards. There are many ways to participate in airdrops, and perseverance can bring good returns no matter how much capital you have. Compared to trading, airdrops are lower risk and have more stable returns.
Be wary of high valuations and low liquidity projects
Be wary of projects with high valuations but low liquidity, as they often face huge inflationary pressures. The continued issuance of new tokens may have an impact on the market. For example, although the price of Arbitrum's ARB initially performed well, holders could not earn interest, and they also faced an annual inflation rate of about 60%. This means that the value of the token is being continuously diluted, which is unfair to ordinary holders.
Although SUI is also a highly VC-dependent project, it has high liquidity and continuously releases new tokens. However, it provides a large number of rewards on the chain, especially through various DeFi applications. This enables SUI holders to offset the impact of inflation through on-chain activities, thereby reducing the direct impact of inflation.
To identify projects that require caution on-chain, you can use tools such as Etherscan to check the distribution of token holding addresses. For example, if most tokens are concentrated in exchanges or platform addresses like Uniswap, this indicates that these tokens are actively circulating. If these tokens, despite their high valuations, only account for a small portion of the current circulation, this is a warning sign. Checking the distribution ratio between exchange addresses and holding addresses can help you determine whether a project is relatively robust based on whether a large number of tokens are actively circulating.
ETH's rigorous technology and high security
Ethereum is often called the "scientists' chain" because of its rigorous underlying architecture, game theory design, and cryptographic foundations. These are carefully designed by real scientists. In contrast, Ethereum's main competitor Solana is more like an "engineer's chain." Solana's engineers seem to lack clear guidance on improving the platform, and many technical issues remain unresolved. For example, Solana's frequent outages and the need to rewrite code highlight the limitations of the engineers' approach.
Ethereum upgrades are always carried out with great rigor. Although some people believe that its decentralization has been reduced, the cryptographic and game-theoretic design that supports it still ensures its security. Therefore, the future of blockchain will need one or two projects that truly embody the ideals of the crypto community, and Ethereum is one of the suitable choices. It must be understood that the quality of a project's technology is not directly related to its token price.
