Author: Arthur Hayes
Compiled by: TechFlow, Wu Blockchain
Main Text
People sometimes act irrationally due to desire or blindness. Unfortunately, many Maelstrom portfolio companies seem to have contracted a "CEXually Transmitted Disease". Some affected founders mistakenly believe that they can only achieve the so-called "ultimate returns" by following the instructions of certain well-known centralized exchanges (CEXs). These instructions include: pumping certain metrics, hiring certain individuals, allocating a certain number of tokens, launching tokens on a specific date, or even temporarily changing the launch plan. These desire-driven companies have forgotten the needs of users and the original purpose of cryptocurrencies. If you are also plagued by this disease, please come to my clinic, and I have the cure. Let me explain it to you in detail.
I believe that cryptocurrencies have become one of the fastest-growing networks in human history for the following three reasons:
Government Control - Large corporations, big tech, big pharma, and the military-industrial complex, through their vast wealth and power, control most major governments and economies. Although global living standards and life expectancy have improved significantly since the end of World War II, this growth has stagnated or even declined for the 90% of the population with little financial assets and almost no political voice. The decentralized nature of cryptocurrencies is the antidote to this concentration of wealth and power.
Revolutionary Technology - The Bitcoin blockchain and the various blockchain technologies that have since emerged can be considered a revolutionary innovation. Starting from an unassuming beginning, Bitcoin has proven to be one of the most stable and secure monetary systems globally. The Bitcoin network itself offers a bounty of nearly $20 billion (through double spend attacks) for anyone who can breach its security, but no one has been able to do so.
Wealth Effect - The value growth of cryptocurrencies and their derivative tokens has made many users overnight millionaires. In the November 2022 US elections, the economic power of cryptocurrency supporters was fully demonstrated. Like many countries, the US political system also relies on the "money game". Cryptocurrency industry participants have become one of the largest contributors to political candidates who support cryptocurrencies, directly contributing to their victories. As the fastest-growing asset in human history, Bitcoin has enabled the cryptocurrency community to wield significant influence in political activities.
Although most in the cryptocurrency community understand why this movement has succeeded, occasional "amnesia" does occur. This amnesia manifests in changes to capital-raising methods. Sometimes, projects achieve tremendous success by catering to the community's desire for wealth; at other times, cash-strapped founders forget why users chose cryptocurrencies. Yes, they may believe in the "by the people, for the people" ideology; yes, they may create astounding technology. But if users cannot profit from it, the adoption of any cryptocurrency product or service will be slow.
Since the 2017 hype cycle, capital-raising methods have gradually deviated from their original intent. In the past, capital formation depended on igniting community participation and the desire for wealth, but now it has been replaced by high fully diluted valuations (FDVs), low circulating supplies, and venture capital (VC)-backed tokens. However, these VC-backed tokens have performed poorly in the current bull market (2023 to date). In my article, I mentioned that the median performance of tokens issued in 2024 is about 50% lower than that of mainstream coins like Bitcoin, Ethereum, or Solana. While retail investors can finally access these projects through centralized exchanges (CEXs), they are unwilling to pay the high prices. As a result, the exchanges' internal market-making teams, airdrop token recipients, and third-party market makers have dumped these tokens into illiquid markets, leading to dismal price performance. As an industry, why have we forgotten the third pillar of the cryptocurrency value proposition - helping retail create wealth?
The current cryptocurrency issuance market has become similar to the traditional finance (TradFi) initial public offering (IPO) system, where retail investors often end up as the "bag holders" of VC tokens. However, in the cryptocurrency space, there is an alternative - Memecoins. Memecoins are tokens without any real utility, their sole function being to spread Meme content on the internet. If the Meme is compelling enough, users will buy it, hoping that others will follow suit.
The capital formation of Memecoins is more egalitarian. Teams typically release the entire token supply at issuance, with an initial FDV usually only in the millions of dollars. They often start trading on decentralized exchanges (DEXs), and speculators bet on which Meme will gain attention in the industry and drive token demand.
For the average speculator, the most attractive aspect of Memecoins is the potential to leap a few rungs on the wealth ladder if they participate early. Nevertheless, each participant is fully aware that Memecoins have no intrinsic value, generate no cash flows, and thus accept the risk of losing all their capital in pursuit of the wealth dream. More importantly, there are no institutions preventing them from buying these tokens, nor any hidden capital pools waiting to dump unlocked token supplies at high prices.
To better understand the different types of tokens and their sources of value, I hope to establish a simple classification framework. Let's start with Memecoins:
Memecoin Intrinsic Value = Impact of Meme Propagation
This is quite intuitive. As long as you are active in any community (online or offline), you can understand the power of Meme propagation.
So, what about VC tokens then?
Practitioners in the traditional finance (TradFi) industry often lack genuine professional skills. I know this firsthand, as I found that the skills required for investment banking work are quite limited. Many choose to enter TradFi because it offers generous compensation without the need for substantial substantive knowledge. As long as a young person has basic high school algebra skills and a good work ethic, I can train them to excel in any front-office financial services role. In contrast, professions like medicine, law, and engineering require time and technical accumulation, even though their average incomes are far lower than those in the finance industry.
The high salaries in TradFi make the entry barriers more dependent on social background than individual ability. For example, your family background, the reputation of your university or boarding school, are often more important than your intellectual capacity. This system has turned TradFi into a closed elite club, further entrenching existing social strata and racial biases.
Let's apply this framework to analyze how VCs raise capital and allocate resources.
To find winners like Facebook, Google, Tencent, or ByteDance, top venture capital (VC) firms need to raise massive amounts of capital. This capital primarily comes from endowments, pension funds, insurance companies, sovereign wealth funds, and family offices, which are typically managed by traditional finance (TradFi) professionals. As asset managers, they must fulfill their fiduciary duty to clients and can only invest in VC funds deemed "appropriate". This "appropriateness" standard often means that these funds must be managed by "qualified" and "experienced" professionals. The definition of "qualified" is closely tied to the manager's educational background and professional experience: they typically graduated from a handful of top global universities (e.g., Harvard, Oxford, Peking University) and entered large investment banks (e.g., JPMorgan, Goldman Sachs), asset management firms (e.g., BlackRock, Fidelity), or tech giants (e.g., Microsoft, Google, Facebook, Tencent) early in their careers. Without such a background, the TradFi gatekeepers of professional competence will consider you unfit to manage other people's money.
This screening mechanism has resulted in a highly homogeneous group: they look similar, speak similarly, dress similarly, and even live in the same global elite circles.
For capital allocators, the biggest dilemma is professional risk. If they choose a fund with a non-traditional background and the fund fails, they may lose their jobs; but if they choose a fund that fits the traditional standards, even if the fund fails, they can attribute it to "bad luck" and keep their positions. Therefore, to reduce professional risk, they tend to choose funds that fit the traditional standards rather than take the risk of trying new possibilities.
This logic extends to the selection of startup projects. Venture capital firms are more inclined to support projects where the founders' backgrounds fit the stereotypical "successful founder" image. Business founders need to have work experience at large consulting firms or investment banks, and have graduated from top global universities; technical founders need to have accumulated experience at successful tech companies and hold advanced degrees from renowned universities. Geographic location also becomes a factor: venture capital firms in Silicon Valley are more inclined to invest in companies located in the San Francisco Bay Area, while venture capital firms in China are more focused on projects in Beijing or Shenzhen.
Ultimately, this pattern has formed a highly homogeneous investment environment: everyone's background, mindset, values, and even geographic location are highly similar. This not only limits innovation, but also makes venture capital decision-making more conservative.
After the 2017 bubble burst, crypto project founders had to make compromises to obtain VC capital. In order to raise funds from VCs mainly located in San Francisco, New York, London and Beijing, they had to cater to the VCs' preferences.
In the eyes of VCs, the value of a token = the founder's educational background, professional experience, family background and geographic location
For VCs, the team's importance far outweighs the product. If the founders fit a certain "successful founder" stereotype, the funding will be easily secured. Because these founders are perceived to have the "right" qualifications innately, even if they can only find product-market fit after burning hundreds of millions of dollars, a few teams will still succeed and give birth to the next Ethereum. And for the failed teams, the VCs' decisions will not be questioned, because the founders they supported are the ones who are generally considered most likely to succeed.
Clearly, in the VCs' selection of funding targets, professional expertise in the crypto field is not a key consideration. This selection standard has led to a disconnect between the projects supported by VCs and the ultimate retail investors. The VCs' goal is to protect their own positions, while the retail investors' goal is to achieve financial freedom by betting on tokens that can surge 10,000x. In the early days, such returns were possible. For example, if you bought ETH at around $0.33 during the Ethereum pre-sale, your investment has grown 9,000x at the current price. However, the current crypto capital operation model has made such returns almost impossible.
VCs profit by flipping SAFT (Simple Agreement for Future Tokens) contracts, which are essentially worthless and highly illiquid, between funds, with each flip accompanied by a valuation increase. When a problematic crypto project finally lists on a centralized exchange (CEX), its fully diluted valuation (FDV) often exceeds $1 billion. To achieve a 10,000x return, the project's FDV would need to grow to an extremely large number - even exceeding the total value of all fiat assets, and this is just for one project.
If the VC coin model is rejected by ordinary users, what is essentially meaningful?
The intrinsic value of an ICO = the explosive power of content dissemination + technical potential
Meme - A project that can align with the current trends in the crypto field in terms of visual design and target positioning has Meme value. If its Meme content is attractive enough and can spread quickly, it can bring widespread attention to the project. The core goal of the project is to attract users at the lowest cost and monetize through these users. A widely discussed project can often quickly attract users into its marketing funnel.
Technical potential - This usually occurs in the early stages of a project, such as Ethereum, which first raised funds and then developed. This model relies on the community's trust in the team, that as long as the community provides the funds, the team can develop valuable technology. The evaluation of potential technology can be approached from the following aspects:
Does the team have experience in developing important products in Web2 or Web3?
Is the proposed technical solution feasible?
Can this technology solve a globally significant problem and attract millions or even billions of users?
Technical founders can achieve the above goals, but they may not be the ones VCs prefer. The crypto community does not place much emphasis on family background, work experience or prestigious university degrees. These conditions may be icing on the cake, but if the team has not actually developed excellent code, they are meaningless. The community is more willing to support Andre Cronje than some "elite" who graduated from Stanford, worked at Google, and is a member of The Battery.
Although the vast majority of ICOs, 99.99%, will approach zero after a cycle, a few teams can still develop technology, gain value through user attraction, because their memetic effect is strong enough. Early investors in these may achieve 1,000x or even 10,000x returns. This is what they are pursuing. Speculation and volatility are a feature, not a flaw. If retail investors want stable and conservative investments, they can choose to trade on global traditional finance (TradFi) stock exchanges. In most countries, IPOs require companies to be profitable and management to make various statements to ensure financial transparency. However, the problem for most retail investors is that IPOs cannot bring life-changing returns, as early venture capitalists have already squeezed out most of the gains in the process.
In its purest form, it allows any team with an internet connection to showcase their project to the crypto community and raise funds. The team will launch a website detailing who they are, what they plan to build, why they are qualified, and why the market needs their product or service. Investors can then send cryptocurrencies to a on-chain address, and receive tokens after a certain period of time. All the details, such as the timeline, fundraising amount, token price, technology type, team composition and investor geography, are entirely decided by the team, without the involvement of any intermediary institutions (such as venture capital funds or centralized exchanges). This is precisely why centralized intermediaries hate ICOs - because they are completely bypassed. However, the community is very supportive, as it provides opportunities for people from different backgrounds, allowing those willing to take high risks to have a chance at high returns.
Thanks to frameworks like Pump.fun, it now only takes a few minutes to launch a token, and we have more liquid decentralized exchanges (DEXs). This is different from the previous cycle, when the time from subscription to token delivery could take months or even years. Now, investors can immediately trade newly issued tokens on platforms like Uniswap and Raydium.
Thanks to Maelstrom's investment in Oyl wallet, we were able to get a sneak peek at some smart contract technologies that may disrupt the industry, which are being developed on the Bitcoin blockchain. Alkanes is a new meta-protocol aimed at bringing smart contracts to Bitcoin via the UTXO model. I cannot claim to fully understand how it works. But I hope those more capable can check out their GitHub repository and decide for themselves whether they want to build on it. I hope Alkanes can drive an explosive growth in issuance on Bitcoin.
Nowadays, retail crypto enthusiasts are showing great interest in Memecoins, hoping to trade these highly speculative assets on decentralized exchanges (DEXs). This demand allows unverified projects to be traded immediately after token delivery, allowing the market to freely price their value.
Although I have been critical of Solana, I must admit that Pump.fun has had a positive impact on the industry. This protocol allows ordinary users without a technical background to issue their own Meme coins and start trading within a few minutes. Continuing this trend of "making finance and crypto trading more democratized", Maelstrom has invested in a new platform that could become the preferred choice for Meme coins, cryptocurrencies, and even new spot trading listings.
Looking back at 2017, popular projects often led to overloading and even paralysis of the Ethereum network. Gas fees skyrocketed, making network usage costs high, and many were unable to afford it. By 2025, however, the cost of using block space on Ethereum, Solana, Aptos, or other Layer-1 blockchains will become extremely low. The current transaction throughput has increased by orders of magnitude compared to 2017. If a team can attract a large number of speculative supporters, their ability to raise funds will no longer be hindered by the low speed and high fees of the blockchain.
Retail crypto investors also need to take action and "reject poor investments" in practice.
"Rejecting poor investments" means:
Rejecting projects that are supported by venture capitalists, have a high fully diluted valuation (FDV) but extremely low circulating supply.
Rejecting tokens that are initially listed on centralized exchanges (CEXs) at high valuations.
Rejecting those who criticize so-called "irrational" trading behavior.
Looking back at 2017, there were many low-quality projects. The most destructive of them was EOS. Block.one raised $4.1 billion in cryptocurrency to develop EOS. However, after the launch of EOS, it almost disappeared. In fact, this statement is not entirely correct; surprisingly, even a failed project like EOS still maintains a market capitalization of $1.2 billion. This shows that even projects that once symbolized the peak of the bubble, their value is still far from zero. As a lover of the financial market, I must admit that the structure and execution of EOS is a classic case. Project founders should seriously study how Block.one managed to raise the most funds in history through token sales.
