Behind the Memecoin craze: the rise of retail investors and the bottleneck of innovation

Editor's Note: Retail investors hope to regain power, the complex token economics design has been abandoned, exchanges continue to list low-quality tokens to boost user registration rates, leading to a decline in listing quality, and a reduction in innovation, which explains why memecoins are currently dominating the market. The market is currently very enthusiastic about memecoins, and to change this trend, a truly innovative crypto narrative is needed to replace it. Although AI has potential, its combination with crypto still appears vague. In the future, DeFi may have some breakthroughs, but it still needs time to be verified. The original text (edited and reorganized for easier reading): I am often asked a question: will memecoins continue to dominate the market? On this topic, I have compiled some thoughts and reviewed the relevant historical background. First, I believe the main factors driving the dominance of memecoins are as follows: 1. Although the market has strong demand for new tokens, the industry lacks new innovations. (Has cryptocurrency reached the limit of its development without introducing centralized elements?) 2. There is a deliberate cancellation of the actual use of tokens, allowing their valuation to be unconstrained. 3. Retail investors hope to regain control of power. 4. When memecoins are listed on exchanges, the user registration conversion rate is extremely high, encouraging exchanges to list a large number of low-quality tokens. Reviewing the innovation process, we can see the technological advancement path in the crypto field: 2016: Basic smart contract functionality, such as DAO and Etherdelta. 2017: Crypto is ubiquitous. For example, various tokens for dentists, taxis, etc. 2021: Combination of finance and Non-Fungible Tokens. For example, lending, automated market makers (AMMs), DeFi, and collectibles. 2023: Infrastructure building, such as Layer 1 networks, cheaper/faster transactions. 2024: Memes These may seem unrelated on the surface, but they actually have a very clear process of narrowing down. Initially, this technology was like the "Wild West," and everyone felt its possibilities were limitless. However, with each cycle, the application of technology becomes more and more focused, until 2021, when the market felt that the things that could be done in a fully decentralized network had reached their limit. Since then, the number of innovative dApps has clearly decreased, and the market has begun to focus on improving the infrastructure. Although infrastructure improvements can continue for multiple cycles, retail investors' focus is short-term, and when the market can no longer provide other innovations, memes become mainstream, but it should be noted that memes have always had huge attention. The second factor driving the dominance of memecoins is their theoretical valuation. For a long time, there has been a joke in the industry that the most valuable projects never want to launch a real product, because once they do, the market can immediately quantify their valuation. DeFi in 2024 is a good example: in an efficient market, investors can review the fundamentals of a project in less than five minutes, give it a 20x price-to-earnings ratio, and conclude that the project should not be worth more. This is the biggest reason why DeFi cannot see another bull market in the current cycle. In 2021, we saw some projects use complex token economic designs to make it difficult for most people to see their true returns or whether the project is sustainable. This created some of the most sophisticated Ponzi schemes at the time, but ultimately, as these projects collapsed, the market's interest in opaque token economics also disappeared. Therefore, the solution for memecoins is simple: just throw away the usefulness, and the project becomes unquantifiable. Interestingly, the projects in this cycle that have tried to add usefulness to memecoins have actually damaged their own valuations by doing so. The most direct reason for the dominance of memecoins in this cycle is that retail investors want to take power back from venture capital firms and large institutions and transfer it to ordinary investors. The reality, however, is that this is only a small change in profit distribution, and unfortunately, retail investors still have not received the main benefits. Instead, the profits have shifted from venture capital firms to the "sharks" within the industry (some lean teams), who are very adept at monopolizing token supply, packaging it as "organic" market behavior, and repeating this process. This phenomenon is ubiquitous in the market and no longer requires specific projects to be named. The key factor that makes this strategy so effective is that the market mistakenly treats market capitalization as a signal of legitimacy, which incentivizes those who artificially inflate valuations through token supply monopolization. Of course, the market is also constantly fighting back, with solutions like Pump Fun being created to limit this opaque supply monopolization. However, this has led to the emergence of even more complex "sniping" and accumulation techniques, and the war continues. But ultimately, the vast majority of the profits from memecoins still end up in the hands of these organized groups, while attracting ordinary retail investors to continue participating in this game through the occasional "organic jackpot." Finally, let's talk about the token listing mechanism of exchanges. This is something that is rarely discussed, but exchanges have actually greatly driven the current memecoin frenzy, and it is closely related to their incentive mechanisms. Specifically, the listing teams of exchanges hope to select tokens that can maximize user registration. In other words, the listing of a token can bring how many new users to register and make their first deposit on that exchange, and the widely distributed tokens in the new ecosystem perform particularly well in this regard. For example, according to an interview with the CEO of Bybit, the click-to-earn games on TON have brought in hundreds of millions of new users each time they are listed (a staggering number). Popular memecoins are often widely distributed in small amounts, as they are very easy for ordinary retail investors to understand, which also leads to higher user registration and deposit conversion rates. However, the underlying incentive mechanism is actually misaligned. For the listing teams, this looks good - a surge in user numbers that meets their performance goals (OKRs). But the reality is that many of these new registered users are of poor quality, and this phenomenon often prompts exchanges to list some low-quality tokens in order to achieve these numerical targets. In the long run, this is likely to lead to a decline in listing quality, which in turn will affect innovation across the entire industry. After understanding this background, do I think the market attention on memecoins will continue? At least in the medium term, I think it will. To make memes lose market attention, we need to see a truly innovative crypto-native narrative (i.e., decentralized hybrid technology) and good Ponzinomics. However, the unfortunate reality is that this is much more difficult than before. The closest thing to this currently is AI, but in most cases, people ask why this needs to use crypto technology?