By Azeem Khan , CoinDesk
Compiled by: Felix, PANews
One of the undeniable facts in Web3 over the past year has been the massive proliferation of meme tokens. This has led to a clear distinction between meme tokens and VC tokens (tokens issued by companies backed by venture capital institutions).
While I disagree with the view that Memecoin will kill VC tokens in the long run, it is clear that the market for many VC tokens is currently stagnant. How did we get to this point? What needs to happen to revive the VC token market?
More importantly, especially as meme tokens begin to weaken, what can a savvy founder willing to go against the grain do to reinvigorate the VC token market? To answer this question, we need to trace the roots that led to this step.
The roots are at the intersection of venture-backed Web3 companies and centralized exchanges. For founders and venture capitalists, a successful token launch is essential. Centralized exchanges can be tiered based on their trading volume and liquidity. The goal of tiering is to get your token listed on the exchange with the highest volume and liquidity to increase trading activity and improve market positioning. But what does it take to do this? It’s a complex process.
In short, as you can imagine, the top centralized exchanges are very picky. Each exchange has different criteria, but one key factor they look for is a high valuation. A high valuation indicates that the founders have successfully raised a lot of money, making their token offering look more promising. An important metric in valuation is the fully diluted valuation (FDV), which is calculated by multiplying the token price by the total supply. If a company achieves a high FDV, it will be seen as a high-profile project and worthy of being listed on an exchange with better trading volume and liquidity. While exchanges also consider other factors when choosing to list coins, a high valuation is a crucial factor.
While this strategy was successful in the past, venture capitalists, especially those with deep pockets, found a way to exploit the model by helping more companies raise money at high valuations. This worked for a while, and a few made significant profits, but it also disrupted the market. Now, it seems like every company is raising tens or hundreds of millions of dollars, often at valuations of $1 billion or more.
But this strategy has a major drawback: artificially inflating the value of tokens before listing. This practice limits retail investors who only have a few hundred dollars to trade. Without sufficient upside, retail investors do not think it is worth participating, especially for short-term traders looking for quick profits. It is this gap in the market that Meme tokens stepped in and "replaced" VC tokens.
In contrast, meme tokens thrived due to the potential to offer high returns, attracting traders who were lost by VC tokens. Meme tokens promise huge returns in a short period of time, which VC tokens cannot match. However, the problem with meme tokens is that they lack intrinsic value outside of the meme. Therefore, meme tokens tend to have shorter life cycles and eventually become worthless.
To reinvigorate VC tokens, the current funding model needs to be rethought. This means moving away from inflated valuations and adopting a model that appeals to retail investors. This will require courageous founders willing to challenge the conventional wisdom of the past few years and develop a new model where the founders can successfully make retail investors money and inspire others to follow suit. But what does the new model look like?
Currently, Web3 founders are incentivized to raise as much money as possible to achieve an artificially high FDV. However, founders can create hype while only raising the money they need. This approach keeps valuations low, making tokens more accessible to retail investors and providing greater upside potential.
Granted, this strategy will require more nuance, such as explaining to retail investors why your token is priced below competitors and the need to collaborate with the broader Web3 ecosystem. However, once retail investors realize that you have left value for them, your VC token could soar like this year’s Meme tokens. Given the scarcity of original thinking in Web3, others are likely to follow suit.
You may be wondering how founders can get their tokens listed on larger exchanges without artificially inflating the FDV. Centralized exchanges are frustrated with current funding strategies and are pushing back against unnecessary high FDV tokens. Exchanges are shifting their focus on listing tokens because their business model relies on users buying and selling tokens. If users don’t see the potential upside of a token, they won’t trade it, and exchanges won’t make a profit. As a result, exchanges are now waiting to provide investors with projects that are reasonably valued and truly valuable.
In summary, the stagnation of VC tokens amid the rise of meme tokens highlights the need for a shift in funding strategies. Abandoning inflated valuations and adopting methods that attract retail investors to trade can revitalize the VC token market. This change will not be easy, but it is critical to the long-term health of the ecosystem. Innovative founders who rise to this challenge will lead the narrative, create a trend that balances the interests of investors and exchanges, and ensure a vibrant future for VC tokens.
Related reading: Reality or bias, are the low circulation and high FDV of “VC tokens” the original sin?
