Crypto projects should return to their original intention of decentralization and high risk and high return.
By Arthur Hayes
Compiled by: Ismay, BlockBeats
Editor's Note: In this article, Arthur Hayes analyzes the ups and downs of ICO in the cryptocurrency industry from a sharp perspective, and provides insights into why ICO can return to its peak. He profoundly points out that over-reliance on centralized trading platforms and high-valuation projects supported by venture capital has become a shackle on the development of the industry, and compares the capital formation mechanism of Meme coins with that of ICO, advocating that crypto projects should return to the original intention of decentralization and high risk and high return. By interpreting the potential of technology and virality, Arthur Hayes once again demonstrated his vision for the future development of the industry.
The following is the original content:
Tension and stress sometimes infect men and women, leading to irrational behavior. Sadly, many companies in Maelstrom's portfolio have been infected with the "CEXually Transmitted Disease." Victimized founders believe that they must obey the instructions of certain well-known centralized exchanges, otherwise the road to huge returns will be blocked. These centralized exchanges require: pull up this indicator, hire this person, give me this part of the token allocation, launch your token on this date... Wait, forget it, just wait for us to notify you before launching. These "patients" who are addicted to the desire of the trading platform have almost completely forgotten the original intention of users and cryptocurrencies. Come to my clinic, I can cure you. The prescription is ICO. Let me explain...
I have a three-point theory as to why cryptocurrency is one of the fastest growing networks in human history:
The government was captured
Big business, Big Tech, Big Pharma, Big Defense, and other “Big XX” use their wealth and power to control most major governments and economies. While living standards and life expectancy have risen rapidly and consistently since the end of World War II, this has slowed for the 90% of the population who have little financial assets and almost no political voice. Decentralization is the antidote to the extreme concentration of wealth and power.
Amazing technology
The Bitcoin blockchain and the many blockchains that have spawned it are amazing, groundbreaking technologies. From humble beginnings, Bitcoin has proven itself to be one of the most enduring monetary systems. For anyone who can break into the Bitcoin network, nearly $2 trillion in Bitcoin can be double-spent, like a giant bug bounty.
greedy
The growth of fiat and energy value of blockchain-powered cryptocurrencies and their tokens has made users rich. The wealth of the crypto community was on display in the US elections in November. The US (and most other countries) is a “money for power” political system. Crypto “gangsters” are one of the top donors to political candidates, helping pro-crypto candidates win. Crypto voters are able to contribute generously to political campaigns because Bitcoin is the fastest growing asset in human history.
The amnesia of capital formation
Most people working in crypto instinctively understand why the industry is successful; however, there are occasional lapses in memory. This phenomenon is reflected in the variations in crypto capital formation. Sometimes, those seeking crypto capital cater to the greed of the community and achieve great success. At other times, cash-strapped founders forget why users are flocking to crypto. Yes, they may believe in a government of the people, by the people, and for the people, and they may create amazing technology, but if users can’t get rich from it, any crypto-related product or service will be too slow to promote.
Since the end of the ICO craze in 2017, capital formation has become less pure and has gradually deviated from the path of inspiring community greed. In its place are tokens with high fully diluted valuations (FDV), low circulating supply, or venture capital (VC) backing. However, VC-backed tokens have performed extremely poorly in this bull market (2023 to date). In my article "PvP", I pointed out that the median performance of tokens issued in 2024 was about 50% lower than that of mainstream assets (Bitcoin, Ethereum or Solana). When ordinary investors finally bought these projects online through centralized exchanges (CEX), they were daunted by the high prices. As a result, the exchanges' internal market making teams, airdrop recipients, and third-party market makers dumped tokens into the illiquid market, resulting in disastrous performance.
Why has our industry forgotten the third pillar of cryptocurrency’s value proposition…making average investors rich?
The antidote to meme coins
The new issuance market for cryptocurrencies has become the traditional model it was supposed to replace - a system similar to the initial public offering (IPO) profit chain in traditional finance (TradFi). In this system, ordinary investors end up as the receivers of venture capital (VC) backed tokens. However, in the crypto space, there are always alternatives. Meme coins are a class of tokens that have no practical use other than to spread memetic content through the Internet. If the meme is popular enough, you will buy it, hoping that someone will take over later. Capital formation for meme coins is egalitarian. Teams release the entire supply directly at the time of issuance, and the fully diluted valuation (FDV) starting is usually only millions of dollars. Through decentralized exchange (DEX) listings, speculators will make extremely high-risk bets on which meme will enter the collective consciousness of the industry and thus generate buying demand for the token.
From the perspective of the average speculator, the most attractive thing about Meme coins is that if you enter early, you may jump several levels on the wealth ladder. But every participant knows that the Meme coins they buy have no real value and will not generate any cash flow, so their intrinsic value is zero. Therefore, they fully accept the risk of losing all their funds in pursuit of their financial dreams. Most importantly, there are no thresholds or gatekeepers telling them whether they can buy a certain Meme coin, and there are no shady capital pools waiting to dump the newly unlocked supply when the price rises high enough.
I wanted to create a simple taxonomy to understand the different types of tokens and why they have value. Let’s start with Meme Coin.
Intrinsic value of Meme Coin = virality of meme content
The concept is pretty intuitive. If you are an active member of any community, online or offline, you will understand the meaning of memes.
If this is the Meme Coin, then what is the VC Token?
The Nature of VC Tokens and the Culture of Traditional Finance
TradFi followers don’t actually have any real skills. I know this because I think back to my time working in investment banking and the skills required were minimal, which can be summed up as: almost nothing. The reason many people want to go into traditional finance is that you can make a lot of money without having to master substantive knowledge. Give me a young person with a little knowledge of high school algebra and a good work attitude, and I can train him to be competent in any front office financial services job. This does not apply to the following professions: doctors, lawyers, plumbers, electricians, mechanical engineers, etc. It takes time and skills to enter these professions, but the average income is often less than that of a junior investment banker, salesperson or trader. The wasted intellectual resources in the financial services industry are frustrating, but I and others are just responding to social incentives.
Because traditional finance is a low-skilled but high-paying industry, the barrier to entry into this rarefied club often relies on other social factors. Your family background and the college or boarding school you attended are more important than your actual intelligence. In traditional finance, racial and social class stereotypes are more influential than in other professions. Once you are included in this exclusive circle, you will perpetuate these norms to give more value to your own acquired or unearned traits. For example, if you worked hard and took on a lot of debt to get into a top university, you will tend to hire people from the same university because you believe it is the best choice. If you don't do this, you will admit that the time and energy you put into obtaining these qualifications is not worth it. In psychology, this is called "Effort Justification Bias."
Let’s use this framework to understand how new venture capital (VC) investors raise capital and allocate resources.
In order to raise enough capital to invest in enough companies in the hope of finding a winner (such as Facebook, Google, Tencent, ByteDance, etc.), top venture capital firms need a lot of capital. This money mainly comes from endowments, pension funds, insurance companies, sovereign wealth funds and family offices. And these capital pools are managed by traditional finance (TradFi) people. These managers need to fulfill their fiduciary responsibilities to their clients and can only invest in "appropriate" venture capital funds. This means that most of them must invest in venture capital funds managed by "qualified" and "experienced" professionals.
These subjective requirements lead to a phenomenon: these venture capital partners usually graduate from a small number of elite universities around the world (such as Harvard, Oxford, Peking University, etc.), and their careers usually begin with large investment banks (such as JPMorgan Chase, Goldman Sachs), asset management companies (such as BlackRock, Fidelity) or large technology companies (such as Microsoft, Google, Facebook, Tencent, etc.). If you don't have such a background, the traditional financial employment threshold guardians will think that you lack the necessary experience and qualifications and are not capable of managing other people's funds. As a result, this circle has formed a highly homogeneous group - they look alike, talk alike, dress alike, and even live in the same global elite community.
For managers who need to allocate capital to venture capital funds, the dilemma is this: if they take a risk and invest in a fund managed by someone with a non-traditional background, and that fund fails, they may lose their job. But if they choose the safe route and put their money in a fund managed by someone with the “right and proper” background, even if the fund fails, they can blame it on bad luck and keep their job in the asset management industry. If you fail alone, you will lose your job; but if you fail with everyone, your job is usually not affected. Since the primary goal of traditional finance people is to keep their high-paying, low-skilled jobs, they will minimize career risks by choosing managers with seemingly “proper” backgrounds to ensure their own safety.
If the selection criteria of venture capital funds are based on whether the managing partners fit a certain accepted stereotype, then these managers will only invest in companies or projects whose founders fit the "founder" stereotype. For business-oriented founders, their resumes must include work experience at large consulting firms or investment banks, and they are expected to have attended certain elite global universities. Technical founders need to have work experience at highly successful large technology companies and hold advanced degrees from universities that are recognized for producing excellent engineers. Finally, because humans are social by nature, we tend to invest in people who are close to us. Therefore, Silicon Valley venture capitalists only invest in companies located in the Bay Area of California, while Chinese venture capitalists want companies in their portfolios to be headquartered in Beijing or Shenzhen.
The result is an echo chamber of homogeneity. Everyone looks, speaks, thinks, believes, and lives alike. As a result, everyone either succeeds together or fails together. This environment is exactly what traditional financial VCs want, as their goal is to minimize career risk.
When crypto founders scrambled to raise venture capital after the ICO boom bubble burst, they were actually making a deal with the devil. In order to get funding from venture capital firms mainly in San Francisco, New York, London and Beijing, crypto founders had to make changes.
Intrinsic value of venture capital tokens = founder’s school background, employment history, family background, geographic location
VC allocators look at the team first, and the product second. If the founders fit the stereotype, the money will continue to flow in. Because these founders are born with the "right" background, a small number of these teams will find product-market fit after spending hundreds of millions of dollars and become the next Ethereum. Since most teams will eventually fail, the decision logic of VC allocators is not questioned because the founders they support are all recognized as the type that can succeed.
It’s clear that cryptocurrency expertise is only an afterthought when selecting investment teams. This is where the disconnect between VCs and the ultimate retail investor begins. The primary goal of VC newbies is to keep their jobs, while the average retail investor hopes to fight back from poverty by buying a coin that has skyrocketed 10,000 times. 10,000x returns were once possible. If you bought ETH at around $0.33 during the Ethereum presale, you would have achieved a 9,000x return at current prices. However, the current crypto capital formation mechanism makes such returns almost impossible.
VCs make money by flipping shitty, illiquid SAFTs between funds, bidding up the valuation each time. When these problematic crypto projects finally land on centralized exchanges (CEX) for their first listing, their fully diluted valuation (FDV) is often over $1 billion. To achieve a 10,000x return, the FDV needs to grow to an extremely exaggerated number - a number that even exceeds the total value of all fiat-denominated assets... and this is just one project. This is why retail investors are more willing to bet on a meme coin with a market value of $1 million than a project with a FDV of $1 billion backed by the "most respected" VC community. Retail investors' behavior is actually in line with the logic of maximizing expected returns.
If retail investors have begun to reject the venture token model, what makes ICOs inherently more attractive?
ICO intrinsic value = virality of content + potential technology
Meme:
A project team that can launch a product that is in line with the current cryptocurrency trend and has a visual, feel, and clear goals has "meme value". When this "meme" is attractive and spreads, the project will gain attention. The goal of the project is to attract users at the lowest possible cost and then sell them products or services. A project that is deeply rooted in people's hearts can quickly get users to the top of its growth funnel.
Potential technologies:
ICO (Initial Coin Offering) usually happens early in the life cycle of a project. Ethereum is about raising funds first and developing products later. In this model, the community's trust in the project team is implicit, believing that as long as they are given financial support, they can create valuable products. Therefore, potential technologies can be evaluated in the following ways:
- Has the team developed meaningful products in the Web2 or Web3 space?
- Is the technology the team plans to develop technically feasible?
- Could this potential technology solve a problem of global significance and eventually attract millions or even billions of users?
The technical founders who can meet the above conditions are not necessarily the same kind of people that the “elites” that VCs will invest in. The cryptocurrency community does not attach much importance to family background, previous career experience, or specific educational qualifications. Although these conditions are icing on the cake, they are meaningless if these backgrounds do not allow the founding team to deliver excellent code in the past. The community is more willing to support Andre Cronje than a former Google employee who graduated from Stanford and holds a membership in the Battery Club.
Although most ICOs (99.99%) will almost return to zero after a cycle, there are still a few teams that can develop technologies that attract users based on their "meme effect". Early investors in these ICOs have the opportunity to achieve a return of 1,000 times or even 10,000 times. This is exactly the game they want to play. The speculative and volatile nature of ICOs is a feature, not a defect. If retail investors want safe and boring investments, they can choose the stock trading platform of traditional finance around the world. In most jurisdictions, IPOs (initial public offerings) require companies to be profitable, and management must make various statements to assure the public that they will not commit fraud. But for ordinary retail investors, the problem with IPOs is that they cannot bring life-changing returns because venture capital institutions have already divided up the benefits in the early stages.
If it’s clear that ICOs can fund technologies with viral memes and potential global impact, how do we make them “great again”?
ICO Roadmap
In its purest form, an ICO allows any team with an internet connection to present their project to the crypto community and receive funding. The team launches a website detailing who is on the team, what product or service they plan to build, why they are qualified, and why the market needs their product or service. Investors — well, “speculators” — can then send cryptocurrency to an on-chain address and receive distributed tokens after a certain period of time. All aspects of the ICO, such as the timing, amount of funds raised, token price, type of technology developed, team composition, and investor locations, are entirely determined by the ICO team and not controlled by any gatekeepers (such as VC funds or centralized exchanges). This is exactly why centralized intermediaries hate ICOs — because they simply don’t have to exist. However, the community loves ICOs because it provides a diverse range of projects launched by people from all backgrounds, giving those willing to take high risks the opportunity to reap the highest returns.
ICOs are coming back because the industry has come full circle. We enjoyed our freedom, but got our wings burned by it; then we felt the oppression of the authoritarian control of VCs and centralized exchanges (CEXs), and we got sick of the overvalued junk projects they pushed. Now, in a budding bull market driven by massive money printing in the US, China, Japan, and the EU, speculators in the cryptocurrency market are addicted to speculating on useless meme coins, and the community is once again ready to go all in on high-risk ICO transactions. Now is the time for "quasi-rich" crypto speculators to cast their capital wide in the hope of catching the next Ethereum.
The question then becomes: What will be different this time?
Time Schedule:
Today, with frameworks like Pump.fun, it only takes a few minutes to list a token, and with decentralized exchanges (DEX) with higher liquidity, teams can raise funds through ICOs and deliver tokens within a few days. This is very different from the previous ICO cycle, when it could take months or even years from subscription to token delivery. Now, investors can trade newly issued tokens immediately on platforms such as Uniswap or Raydium.
Thanks to Maelstrom's investment in Oyl Wallet, we've been given an early preview of some potentially game-changing smart contract technology built on top of the Bitcoin blockchain. Alkanes is a brand new meta-protocol that aims to bring smart contracts to Bitcoin via the UTXO model. I can't fully understand how it works, but I hope that people smarter and more skilled than me can take a look at their GitHub repo and decide for themselves if it's worth building on top of. I fully expect Alkanes to drive an explosion in ICO issuance in the Bitcoin ecosystem.
Liquidity:
As retail crypto speculators are obsessed with meme coins, they have a strong desire to trade highly speculative assets on decentralized exchanges (DEXs). This means that unproven project ICO tokens can be traded immediately after the tokens are delivered to investors, allowing for true price discovery.
Although I am not a fan of Solana, I have to admit that Pump.fun has made a positive impact on the industry as the protocol allows non-technical users to issue their own memecoins and start trading in minutes. Continuing this trend of democratizing finance and crypto trading, Maelstrom invested in a project that aims to become the premier spot trading platform for memecoins, all cryptocurrencies, and newly issued ICOs.
Spot.dog is building a memecoin trading platform to attract Web2 users. Their "secret sauce" is not in technology, but in distribution channels. Most of the current memecoin trading platforms are designed for crypto traders. For example, Pump.fun requires users to have certain knowledge of Solana wallets, token conversions, slippage, etc. Ordinary users who follow Barstool Sports, subscribe to r/wsb, trade stocks on Robinhood, and bet on their favorite teams through DraftKings will choose to trade on Spot.dog.
Spot.dog has signed some really great partnerships since its inception. For example, the “crypto buy button” on social trading platform Stocktwits (which has 1.2 million monthly active users) is powered by Spot.dog. Also, the sole partner for Iggy Azalea’s $MOTHER Telegram trading bot is none other than — yes, Spot.dog.
I bet you speculators are wondering when their token will be launched? Don’t worry, when the time is right, if you are interested in “all-in” Spot.dog’s governance token, I will let you know the time!
UI/UX:
The crypto community is already very familiar with non-custodial browser wallets like Metamask and Phantom. Crypto investors are used to loading their crypto browser wallets, connecting them to dApps, and then buying assets. This usage habit will make it easier to raise funds for ICOs.
Blockchain speed:
In 2017, popular ICOs often brought the Ethereum network to its knees. Gas fees soared, making it impossible for ordinary users to use the network at a reasonable cost. By 2025, block space costs will be very low for Ethereum, Solana, Aptos and other Layer-1 blockchains. The current order processing capacity has increased by several orders of magnitude compared to 2017. If a team can attract a large number of "degen" supporters who are keen on speculation, their fundraising ability will no longer be limited by slow and expensive blockchains.
Since Aptos has extremely low cost per transaction, it has the potential to become the preferred blockchain platform for ICOs.
Average transaction cost (USD):
- Aptos: $0.0016
- Solana: $0.05
- Ethereum: $5.22
The necessity of saying no
I proposed a solution to the "Centralized Exchange (CEX)-related diseases" - ICO. However, now the project parties need to make the right choice. But in case they don't understand this, ordinary crypto investors need to firmly "say no".
Say no to:
- Venture-backed projects with high FDV (fully diluted valuation) and low circulation
- Tokens that were first listed on centralized trading platforms with high valuations
- People who promote so-called "irrational" trading behavior
There were indeed many obvious "junk projects" in the ICOs in 2017. The most destructive ICO was EOS. Block.one raised $4.1 billion in cryptocurrency to build EOS, but EOS almost disappeared after it went online. In fact, this is not entirely accurate. The market value of EOS is still as high as $1.2 billion. This shows that even "junk projects" like EOS, which were issued at the peak of the bubble, are still far from zero. As someone who loves financial markets, I must admit that the structural design and execution of the EOS ICO can be called an "art". The project founders should study in depth how Block.one raised the most funds in history through ICOs or token sales.
I mention this to illustrate the logic of risk-adjusted investing: even projects that should be worth zero may retain some value after the ICO if the investment shares are allocated correctly. Investing in ICOs early is the only way to get a 10,000x return, but there is no heaven without hell. In order to pursue a 10,000x return, you have to accept that the value of most investments after the ICO may be close to zero. However, this is much better than the current venture token model. Today, a 10,000x return is almost impossible in venture tokens, but it is not uncommon for CEX to lose 75% after one month of launch. Ordinary investors have subconsciously noticed the poor risk-reward ratio of venture tokens, so they turned to memecoin. Let's create fanatical support for new projects through ICOs again, give investors the possibility of making huge wealth, and bring ICOs back to the top!
