Arthur Hayes blog post: Meme coins are very popular, but VC coins are ignored. How can project owners raise funds?

By Arthur Hayes

Compiled by: Shen Chao, Wu Shuo

Original link:

https://cryptohayes.substack.com/p/the-cure?utm_source=%2Finbox&utm_medium=reader2

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People sometimes act irrationally because of desire or blindness. Unfortunately, many Maelstrom portfolio companies seem to be infected with a "CEXually Transmitted Disease". Some affected founders mistakenly believe that they can only get the so-called "extreme returns" by following the instructions of certain well-known centralized exchanges (CEX). These instructions include: pushing up a certain indicator, hiring a certain person, allocating a certain number of tokens, listing tokens on a specified date, or even temporarily changing the listing plan. These companies driven by desire have forgotten the needs of users and the original purpose of the existence of cryptocurrency. If you are also troubled by this disease, please come to my clinic, I have the antidote. Let me explain it to you in detail.

I believe there are three main reasons why cryptocurrency is one of the fastest growing networks in human history:

Government Control - Big business, big tech, big pharma, and big military control most major governments and economies through their vast wealth and power. While global living standards and life expectancy have increased significantly since the end of World War II, this growth has stagnated or even reversed for the 90% of the population who have very few financial assets and almost no political voice. The decentralized nature of cryptocurrency is the antidote to this concentration of wealth and power.

Revolutionary Technology - The Bitcoin blockchain and the various blockchain technologies that have spawned it are revolutionary innovations. From its humble beginnings, Bitcoin has proven to be one of the most stable and secure monetary systems in the world. The Bitcoin network itself has offered nearly $2 trillion in bug bounties (earned Bitcoins through double-spending attacks), but no one has yet been able to break the security of this system.

Wealth Effect - The growth in the value of cryptocurrencies and their derivative tokens has made many users rich overnight. The economic power of cryptocurrency supporters was on full display in the US elections in November this year. Like many countries, the US political system relies on the "money game". Practitioners in the cryptocurrency industry have become one of the groups that contribute the most to political candidates, which directly contributed to the victory of candidates who support cryptocurrency. Bitcoin, as the fastest growing asset in human history, enables the cryptocurrency community to play a significant role in political activities.

While most of the cryptocurrency community understands why the movement is successful, amnesia occasionally sets in. This amnesia manifests itself in the way capital is raised. Sometimes projects achieve great success by catering to the community’s thirst for wealth, while other times, cash-strapped founders forget why users choose crypto. Yes, they may believe in the philosophy of “by the people, for the people”, and yes, they may create amazing technology. But if users can’t profit from it, the adoption of any cryptocurrency product or service will be slow.

Since the 2017 frenzy, capital raising has deviated from its original purpose. Capital formation that used to rely on stimulating community participation and wealth has been replaced by high fully diluted valuations (FDV), low circulating supply, and venture capital (VC) backed tokens. However, these VC backed tokens have performed dismally in this bull run (2023 to date). In my article, I mentioned that the median token issued in 2024 underperformed mainstream coins (such as Bitcoin, Ethereum or Solana) by about 50%. Although retail investors were finally able to purchase these projects through centralized exchanges (CEX), they were unwilling to pay their high prices. As a result, the exchanges' internal market making teams, airdrop token recipients, and third-party market makers dumped these tokens into the illiquid market, resulting in dismal price performance. As an industry, why have we forgotten the third pillar of the cryptocurrency value proposition - helping retail investors create wealth?

Today’s cryptocurrency issuance market has become similar to the initial public offering (IPO) system of traditional finance (TradFi). Retail investors often become the “buyers” of VC tokens. However, in the field of cryptocurrency, there is always an alternative - Memecoin. Memecoin is a token with no practical use, and its only function is to spread meme content through the Internet. If the meme is attractive enough, users will buy it, hoping that someone will follow up and buy it later.

Memecoins have a more egalitarian approach to capitalization. The team typically releases the entire token supply at launch, and the initial FDV is usually just a few million dollars. They typically start trading on decentralized exchanges (DEXs), and speculators bet on which meme will attract attention in the industry and drive up demand for the token.

The most attractive thing about Memecoin for ordinary speculators is that if they participate early, they may jump one or two points on the wealth ladder. Nevertheless, every participant knows that Memecoin has no intrinsic value and does not generate any cash flow, so they fully accept the risk of losing all their funds just to chase the dream of wealth. More importantly, there is no institution preventing them from buying these tokens, and there is no hidden capital pool waiting to sell the unlocked token supply at a high price.

In order to better understand the different types of tokens and where their value comes from, I want to build a simple classification framework. First, let’s start with Memecoin:

Memecoin’s intrinsic value = the influence of Meme dissemination

This is pretty intuitive. If you’re active in any community (online or offline), you’ll understand the power of memes.

So, what are VC tokens?

People in the traditional finance (TradFi) industry often have no real professional skills. I know this very well because I found in my work in investment banking that the skills required for this job are actually very limited. Many people choose to enter TradFi because it offers a generous salary without having to master too much substantive knowledge. As long as a young person has basic high school algebra knowledge and a good work attitude, I can train them to be competent for any front-office financial services job. But professions such as doctors, lawyers, and engineers require time and technical accumulation, even though the average income of these professions is much lower than that of practitioners in the financial industry.

The high salary attraction of TradFi makes the entry threshold of this industry more dependent on social background than personal ability. For example, your family background, the reputation of your university or boarding school are often more important than your intelligence level. Such a system makes the TradFi industry a closed elite club, further consolidating existing social class and racial prejudices.

Let’s apply this framework to analyze how VCs raise capital and allocate resources.

In order to find winners like Facebook, Google, Tencent or ByteDance, top venture capital (VC) firms need to raise huge amounts of money. These funds mainly come from endowments, pensions, insurance companies, sovereign wealth funds and family offices, and these pools of funds are usually managed by traditional finance (TradFi) people. As fund managers, they must fulfill their fiduciary responsibilities to their clients and can only invest in venture capital funds that are considered "appropriate". This "appropriate" standard usually means that these funds need to be managed by "qualified" and "experienced" professionals. And these definitions of "qualified" are often closely related to the educational background and career experience of managers: they usually graduate from a few top universities in the world (such as Harvard, Oxford, Peking University, etc.), and have entered large investment banks (such as JPMorgan Chase, Goldman Sachs), asset management companies (such as BlackRock, Fidelity) or technology giants (such as Microsoft, Google, Facebook, Tencent, etc.) in the early stages of their careers. Without such a background, the career threshold guards of TradFi will think that you lack the ability to manage other people's funds.

This screening mechanism results in a highly homogeneous group: they look similar, talk similarly, dress similarly, and even live in the same global elite circle.

The biggest dilemma for fund allocators is career risk. If they choose a fund with a non-traditional background and the fund fails, they may lose their job; but if they choose a fund that meets traditional standards, even if the fund fails, they can attribute it to "bad luck" and keep their job. Therefore, in order to reduce career risk, they tend to choose funds that meet traditional standards rather than taking risks to try new possibilities.

This logic extends to the selection of entrepreneurial projects. Venture capital firms tend to support projects whose founders' backgrounds fit the stereotype of "successful founders." Business founders need to have work experience in large consulting firms or investment banks and graduate from top universities around the world; technical founders need to accumulate experience in successful technology companies and hold advanced degrees from renowned universities. Geographical location also becomes a consideration: Silicon Valley venture capital firms tend to invest in companies located in the Bay Area of California, while Chinese venture capital firms focus more on projects in Beijing or Shenzhen.

Ultimately, this model has created a highly homogeneous investment environment: everyone’s background, way of thinking, values, and even geographical location are highly similar. Because of this, this environment not only limits innovation, but also makes venture capital decisions more conservative.

When the bubble of the 2017 craze burst, crypto project founders had to make compromises in order to obtain venture capital (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 preferences of VCs.

Token value in the eyes of VCs = founder’s education, career, family background and location

For venture capitalists, the team is far more important than the product. If the founder fits a certain stereotype of a "successful founder", then the funds will be easily in place. Because these founders are considered to be born with the "right" qualifications, even if they can only find the fit between product and market after burning hundreds of millions of dollars, there will always be a few teams that succeed and give birth to the next Ethereum. And for those teams that fail, the decision of venture capitalists will not be questioned, because the founders they support are generally considered to be the type of people who are most likely to succeed.

Apparently, expertise in crypto is not a key consideration when VCs choose to fund their projects. This selection criteria has led to a disconnect between VC-backed projects and the ultimate retail investors. VCs’ goal is to protect their positions, while the goal of retail investors is to achieve financial freedom by betting on tokens that can skyrocket 10,000 times. In the early days, such returns were possible. For example, if you bought ETH at about $0.33 during the Ethereum presale, your investment would have grown 9,000 times at current prices. However, today’s crypto capital operating model makes such returns almost impossible.

VCs profit by flipping worthless and illiquid SAFTs between funds, with each flipping bringing an increase in valuation. When a troubled crypto project finally gets listed on a centralized exchange (CEX), its fully diluted valuation (FDV) often exceeds $1 billion. To achieve a 10,000x return, the FDV of the project must grow to an extremely large number - even more than the total value of all fiat assets, and that's just for one project.

If the VC coin model is rejected by ordinary users, then what is the intrinsic meaning?

The intrinsic value of 1CO = explosive power of content dissemination + technological potential

Meme - If a project can match the current trend in the crypto space in terms of appearance design and target positioning, it 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 realize the monetization of products or services through these users. A widely discussed project can often quickly attract users into its marketing funnel.

Technical potential - usually occurs in the early stages of a project, such as Ethereum, which raises funds before development. This model relies on the community's trust in the team, that is, as long as the community provides funds, the team can develop valuable technology. The evaluation of potential technology can start from the following aspects:

Does the team have experience developing significant products in Web2 or Web3?

Is the proposed technical solution feasible?

Can the technology solve a problem of global significance that would attract millions or even billions of users?

Technical founders can achieve the above goals, but they are not necessarily the ones favored by venture capital (VC). The crypto community does not place much emphasis on family background, work experience, or education from prestigious schools. Although these conditions are icing on the cake, they are meaningless if the team does not actually develop excellent code. 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.

While most ICOs, or 99.99%, are close to zero after a cycle, there are still a few teams that are able to develop technology that gains value by attracting users because their memetic effect is strong enough. Those who invest in these early may get a 1,000x or even 10,000x return. This is exactly what they are looking for. Speculation and volatility are a feature, not a defect. If retail investors want stable and conservative investments, they can choose to trade on global traditional financial (TradFi) stock exchanges. In most countries, IPOs (initial public offerings) require companies to be profitable and management needs to make various statements to ensure financial transparency. However, the problem with IPOs for most retail investors is that they cannot bring life-changing returns because early venture investors have already squeezed out most of the gains in the process.

In its purest form, it allows any team with an internet connection to present a project to the crypto community and receive funding. The team launches a website with details about who they are, what they plan to build, why they qualify, and why the market needs their product or service. Investors can then send cryptocurrency to an on-chain address, and after a certain period of time, the investor receives the tokens. All details such as timing, amount raised, token price, technology type, team composition, and geographic location of investors are completely determined by the team without the involvement of any intermediaries such as venture capital funds or centralized exchanges. This is exactly why centralized intermediaries hate ICOs - because they are completely bypassed. However, the community is very supportive because they provide opportunities for people from different backgrounds and give those willing to take high risks the opportunity to obtain high returns.

Thanks to tool frameworks like Pump.fun, it now only takes minutes to list a token, and we have more liquid decentralized exchanges (DEX). This is different from previous cycles, when it could take months or even years from subscription to token delivery. Today, investors can trade newly issued tokens immediately on platforms such as Uniswap and Raydium.

Thanks to Maelstrom’s investment in Oyl Wallet, we’ve gotten a sneak peek at some of the potentially disruptive smart contract technology being developed using the Bitcoin blockchain. Alkanes is a new meta-protocol that aims to bring smart contracts to Bitcoin via the UTXO model. I can’t claim to fully understand how it works. But I hope those who are more competent can check out their GitHub repo and decide for themselves if they’d like to build on it. I hope Alkanes will drive an explosion in issuance on Bitcoin.

Today, retail crypto enthusiasts are showing great interest in Memecoins, looking to trade these highly speculative assets on decentralized exchanges (DEXs). This demand allows unproven projects to be traded immediately after the tokens are delivered, allowing the market to freely price their value.

Although I have always been critical of Solana, I have to admit that Pump.fun has made a positive impact on the industry. This protocol allows ordinary users to issue their own Meme coins and start trading in minutes without a technical background. Continuing this trend of "making financial and crypto trading more democratized", Maelstrom invested in a new platform that may become the first choice for spot trading of Meme coins, cryptocurrencies, and even new issuances.

Back in 2017, a hot project would often cause the Ethereum network to become overloaded or even paralyzed. Gas fees soared, making the network expensive to use and unaffordable for many people. By 2025, block space will become extremely cheap to use, whether on Ethereum, Solana, Aptos, or other Layer-1 blockchains. The current transaction throughput has increased by orders of magnitude compared to 2017. If a team can attract a large number of speculative backers, their ability to raise funds will no longer be hindered by the slow speed and high fees of blockchains.

Retail crypto investors also need to take action and "reject bad investments" with practical actions.

“Say no to bad investments” means:

Reject venture-backed projects with excessively high fully diluted valuations (FDV) but extremely low actual float.

Reject tokens that are first listed on centralized exchanges (CEX) at high valuations.

Reject those who criticize so-called "irrational" trading behavior.

Looking back at 2017, there were many projects of extremely poor quality. The most destructive of these was EOS. Block.one raised $4.1 billion in cryptocurrency to develop EOS. However, EOS almost disappeared after it went live. In fact, this statement is not entirely correct; surprisingly, even a failed project like EOS still maintains a market cap of $1.2 billion. This shows that even a project like EOS, which once marked the peak of the bubble, is still worth much more than zero. As someone who loves financial markets, I must admit that the structure and execution of EOS is a classic case. The project founders should seriously study how Block.one raised the most funds in history through token sales.