Interpreting the logic behind VC coins, what else is worth paying attention to?

Original title: "Interpreting the logic behind VC coins"
Original source: Aquarius

In the Web3 space, understanding the strategies and logic behind VC investments is critical for investors and industry participants. This article delves into the complex dynamics of VC tokens, exploring how large projects like Ethena, IO, and MSN shape the market, investment trends in different regions, and the key differences between successful projects and those doomed to die. By revealing the underlying strategies and potential pitfalls, this article provides valuable insights for navigating the complex environment of VC-driven crypto projects.

This article is based on a conversation between Sam, head of research at Aquarius Fund, and George Yu, President of Uweb.

Highlights

1. Ethena, IO, and MSN - VC projects such as Ethena, IO, and MSN quickly attracted funds through high valuations and market hype. However, the market appeal of these projects has weakened, and investors have begun to turn their attention to MEME projects.

2. Market bubbles in the current financing boom - The current surge in financing has led to a market bubble, and high-valuation projects are difficult to meet expectations. The influx of people trying to profit through venture capital has further exacerbated market chaos.

3. Sustainability of idealist and puppet projects - Idealistic projects are often difficult to sustain, while puppet projects rely heavily on capital manipulation. Teams like Zama and Fhenix focus on long-term technological innovation and are expected to have better prospects.

4. Investment preferences: North America vs Asia - North American funds generally focus on technology-driven projects, while Asian funds pay more attention to market effects. However, Asian projects generally face more challenges in obtaining long-term funds.

5. Long-term potential of high-quality products - Projects with strong products have long-term potential. Retail investors should align themselves with the project team and profit together with VC in the current market cycle.

6. Technical skills and information channels to identify the authenticity of the project - Technical capabilities and access to reliable information channels can help identify whether a project is authentic. Even projects with potential problems can be evaluated through their fundamentals to determine their acceptability.

7. "Gold Mine and Human Mine" Theory - This theory reveals that there is no real "gold mine" in the market. Projects rely on the growth of new users, and many transactions are essentially worthless cycles.

8. VC is the current "human mine" - In the current market, the real "human mine" is VC itself. Those who profit in this cycle are those who work with the project team and take advantage of VC.

9. Low-cost, controllable risk strategy - Stable returns can be obtained by participating in airdrops and staking strategies, with low risks and suitable for long-term participation.

10. Beware of high-valuation, low-liquidity projects - These projects face huge inflationary pressure. By using tools such as Etherscan, investors can check the distribution of token holding addresses. If a large number of tokens are actively circulating, the project may be robust.

11.ETH's Rigorous Technology and High Security - ETH is technically rigorous and highly secure, making it an ideal project for crypto enthusiasts. However, it is worth noting that technology and token prices are not always directly correlated.

Ethena, IO, and MSN

This year, many projects were dominated by large VCs, especially in the staking and CeDeFi fields. Projects listed on top exchanges like Binance are often driven by these VCs. The rise and fall of VC-driven projects can be analyzed through the following three cases:

Ethena:As a typical VC-driven project, Ethena performed well in VC rounds, thanks to its high valuation and strictly controlled whitelist minting mechanism. Although it initially brought returns to retail investors, its token price fell sharply over time, and many VC investments are still locked. The "1+3" clause of North American VC (i.e., a one-year cliff period followed by three years of linear release) seems to be intended to protect VCs, but in reality, many investors are still trapped.

IO: IO attracted a lot of market attention after announcing a $30 million financing. However, the project was disappointing; its technology was immature, the team was still being formed, and there were security vulnerabilities that led to hacker attacks. Despite this, IO was successfully listed on Binance, but many retail investors did not get the expected returns and even suffered losses.

MSN:The founders of MSN attracted a lot of investment through extensive publicity and KOL endorsements. However, after listing on OKX, the project quickly lost momentum and the token value almost returned to zero. The project team had already arranged an exit strategy to profit from retail investors and other VCs before quietly exiting.

Market Bubble in the Current Funding Boom

The success of the previous round of VC investment led to the current funding boom, and many so-called cryptocurrency venture capital funds flooded into the market and successfully raised a lot of funds. The original VC institutions quickly expanded their scale due to this influx of funds. However, this capital inflow was not accompanied by significant technological innovation, resulting in a market bubble.

Due to the time constraints of LPs, VCs are forced to invest capital in a limited time, resulting in two situations: either investing in low-valuation but mediocre projects, or competing to invest in a few so-called top projects, resulting in valuations far exceeding actual value. This high valuation has led to a greatly inflated market expectation of these projects.

For example, Ethena is not necessarily a bad project, nor are WorldCoin and RNDR necessarily underperforming. However, their valuations have been pushed too high and are difficult to match with actual market performance. At the same time, VCs not only need investment capital, but also want to profit from these high-valuation projects, leading to projects like IO and MSN. IO is a typical VC-driven project, while MSN is an example of a project team turning the tables and taking advantage of VCs.

The current market chaos can be attributed to the excess of funds in the primary market but the scarcity of high-quality projects. Many people have flooded into the market, trying to profit from venture capital, further exacerbating the chaos - this is a classic example of a market bubble.

Sustainability of Idealists and Puppet Projects

In North America, it is common to see project teams led by idealists who want to change the world through their efforts. These entrepreneurs are usually young and first-time founders, especially those who are deeply influenced by Silicon Valley culture or familiar with American culture. They usually believe that what they do is not just for profit, but to create something truly valuable. Although these projects may obtain early funding, they often find it difficult to maintain and eventually die out.

Another type of entrepreneur is the "puppet" founder who is pushed to the front, but the project is not based on team strength. Instead, it relies on carefully planned marketing and a strong support system behind the scenes. The foundation may have set the project's profit path, including who will drive the project's TVL (total locked value), who will stand up for support, and which ecosystem will drive the project. In these cases, the importance of the team itself is reduced, and success depends more on capital and market manipulation.

Some teams plan from the beginning how to profit from the project and exit the market. If they can successfully "cut leeks" on the exchange, they will quickly profit from retail investors. If they fail, they can still make considerable profits through financing.

In addition, some projects fully cooperate with VCs to launch "shitcoin" projects oriented towards short-term profits, with the main purpose of raising funds quickly. This simple and crude operating model is especially common in the Asian market.

However, there are also excellent projects composed of top scientific and technological teams. For example, the Zama and Fhenix teams focusing on fully homomorphic encryption (FHE) have raised a lot of funds, with Zama alone raising $75 million. These team members are real scientists, similar to those of the Ethereum Foundation, who promote academic research and the development of the blockchain industry by publishing papers.

Other projects are also worth paying attention to: these teams clearly understand their goals and seriously advance their projects. While these projects may not attract much attention in the current market cycle due to the uncertainty of performance and future success, it is certain that they will continue to exist in the industry in the next 3 to 5 years.

Investment Preference: North America vs Asia

North American and Asian funds have significant differences in investment mentality. North American funds are generally more patient and willing to support projects that may not succeed in the short term or even in the next market cycle, especially those "scientist" projects that enhance blockchain technology. In contrast, Asian funds pay more attention to practical results, care about how to get more liquidity on the chain, and how to make the project widely recognized and popular in the market, emphasizing data performance and market acceptance.

This difference does not necessarily mean superiority or inferiority, but reflects different investment logics and cultural backgrounds. Although Asian projects generally show a high level of technology and perform well, they usually face more challenges in obtaining long-term funds compared to ideal-driven North American projects.

Long-term potential of high-quality products

Projects can be divided into two categories: those with excellent products and those that allow retail investors to participate and make profits. For projects with excellent products, funds that focus on projects and directions that help investors avoid many potential risks can be considered. Although such funds may also suffer losses in a bear market, their research, published papers, and the technical logic of their investment projects all demonstrate their seriousness and rigor. Most of the projects they invest in have the potential to survive in the long term. Even in the face of difficulties, they will persist because they are research-driven native crypto funds that invest. For example, it is worth paying attention to these projects.

While high-quality projects do not always offer retail investors the opportunity to participate, those with significant momentum usually allow retail investors to participate. However, in the current market environment, retail investors need to change their investment mentality. The previous logic was to profit from later funds through early investment, but in this cycle, it is more necessary to align with the project team and profit from VC. By adjusting this mentality, even participating in less than ideal projects can get a good return.

Technical skills and information channels to identify the authenticity of the project

For those with technical skills, it is relatively easy to identify the authenticity of a project. For example, some inconsistencies were found when reading the technical documentation of IO, which aroused alarm. Projects with impure intentions are unlikely to invest heavily in product development, which makes it easier for those with a technical background to find problems. Some projects may be well hidden, but even so, some clues can usually be found.

It is also helpful to have information channels within the community, because rumors often provide valuable clues. By combining rumors with technical understanding, many so-called "set-up" projects can be identified. Even if there is an intention to set up a scheme, if the project does not have a bad reputation and its technology and fundamentals are acceptable, it can be considered acceptable. This is a reasonable judgment logic.

"Gold Mine and Human Mine" Theory

This theory was formed after reflecting on the market and the industry, and believes that most projects are essentially providing services or tools, similar to making "shovels". But what are these "shovels" digging? It turns out that there is no real "gold mine" in the market. The so-called gold mine is actually a "human mine"-new users who are constantly attracted and consumed by subsequent projects. Many projects do not have real demand logic, but present a mutually dependent gambling relationship. For example, Uniswap provides services for Aave, and Aave provides services for Uniswap. This relationship raises questions about the nature of platforms like Uniswap. In the end, they provide a trading platform, but in fact most transactions are worthless "air" transactions.

Chinese investors are better at reconciling with this reality, and entering the market does not necessarily pursue lofty goals. Through the perspective of the "gold mine and human mine" theory, it is possible to identify where the "human mine" comes from. Although it sounds cruel, it is indeed a methodology for analyzing industry problems.

VC is the current "human mine"

The current market is clearly divided into several parts. Looking back at the heyday of the inscription project, the "human mine" at that time mainly came from retail investors. Just posting an inscription on the chain and hinting at its name can trigger a strong FOMO (fear of missing out) emotion and attract a large number of retail investors to participate. This wave of retail investors, whether from Web2 or Web3, is driven by emotions.

The situation is different today. VC-driven projects mainly rely on existing funds, and there is no significant inflow of new funds into the market. Even if new funds such as ETFs enter the market, it is unlikely to flow into the Altcoin market, forming an isolated phenomenon. Therefore, the "human mine" in the VC market is actually the VC itself. Since the last market cycle, VC has maintained cash flow by covering losses through other channels, but in this cycle, the real profit is those participants who use VC together with the project team.

Low-cost, controllable risk strategy

Large exchanges usually restrict token sales by project teams, so project teams often distribute tokens legally through airdrops. For example, Manta's airdrop rules are designed to allow project teams to obtain more tokens. This makes "airdrops" a legal business that allows participants to share profits with project teams and VCs.

The cost of participating in airdrops is relatively low, especially compared to trading derivatives. For example, in an interaction-based airdrop strategy, the basic cost of an account includes three necessities: Twitter, Discord, and Telegram. The cost of setting up these three items is about RMB 20 to 50. When performing on-chain operations, it is recommended to minimize the time on the mainnet and interact mainly on Layer 2 to keep the GAS fee within a negligible range. Other costs, such as isolating IP and using anti-Sybil tools, are also relatively low, keeping the overall cost of the airdrop within an acceptable range.

The staking-based airdrop strategy may seem to require more funds, but by spreading funds across different staking opportunities, you can reduce risks and still get a decent return. For example, staking with EtherFi can provide a safety net. By tracking on-chain activities, you can discover potential loopholes in project rules and earn additional rewards. There are many ways to participate in airdrops, and no matter how much money you have, perseverance can bring good returns. Compared with trading, airdrops have lower risks and more stable returns.

Beware of high-valuation, low-liquidity projects

You need to be wary of projects with high valuations but low liquidity, as they often face huge inflationary pressure. The continued issuance of new tokens may have an impact on the market. For example, although the price of Arbitrum's ARB initially performed well, holders could not earn interest, and they also faced an annual inflation rate of about 60%. This means that the value of the token is being continuously diluted, which is unfair to ordinary holders.

Although SUI is also a project that is highly dependent on VC, it has high liquidity and continuously releases new tokens. However, it provides a large number of rewards on the chain, especially through various DeFi applications. This enables SUI holders to offset the impact of inflation through on-chain activities, thereby reducing the direct impact of inflation.

To identify projects that require caution on the chain, you can use tools such as Etherscan to check the distribution of token holding addresses. For example, if most tokens are concentrated in exchanges or platform addresses like Uniswap, this indicates that these tokens are actively circulating. If these tokens, despite their high valuations, only account for a small portion of the current circulation, this is a warning sign. Checking the distribution ratio between exchange addresses and holding addresses can help you determine whether a project is relatively robust based on whether a large number of tokens are actively circulating.

ETH's Rigorous Technology and High Security

Ethereum is often called the "scientist's chain" because its underlying architecture, game theory design, and cryptographic foundations are very rigorous. These are carefully designed by real scientists. In contrast, Ethereum's main competitor Solana is more like an "engineer's chain." Solana's engineers seem to lack clear guidance on improving the platform, and many technical issues remain unresolved. For example, Solana's frequent outages and the need to rewrite the code highlight the limitations of the engineer's approach.

Ethereum upgrades are always performed with great rigor. Although some argue that its decentralization has decreased, the cryptographic and game-theoretic design that underpins it still ensures its security. Therefore, the future of blockchain will require one or two projects that truly embody the ideals of the crypto community, and Ethereum is one of the suitable choices. It must be understood that the quality of a project's technology is not directly related to the price of its token.

Disclaimer:

This article is for general informational purposes only and does not constitute investment advice, a recommendation, or a solicitation or suggestion to buy or sell any security. It should not be relied upon in making any investment decision, nor should it be relied upon for accounting, legal, tax advice, or investment recommendations. We encourage you to consult your own advisors for legal, business, tax, or other relevant matters relevant to any investment decision. Some of the information contained in this article may be derived from third-party sources, including portfolio companies of funds managed by Aquarius Fund. The opinions expressed in this article are the personal opinions of the author and do not necessarily reflect the opinions of Aquarius Fund or its affiliates. These opinions may change without notice and may not be updated.