Arthur Hayes: Making ICOs Great Again

Original Article Title: The Cure
Original Article Author: Arthur Hayes
Original Article Translation: Ismay, BlockBeats

Editor's Note:

In this article, Arthur Hayes offers a sharp analysis of the rise and fall of ICOs in the cryptocurrency industry, presenting insights into why ICOs could return to the forefront. He points out that over-reliance on centralized exchanges and venture capital-backed overvalued projects has become a hindrance to industry development. He contrasts Meme coins with the capital formation mechanism of ICOs, advocating for crypto projects to return to their original goals of decentralization and high-risk, high-return. Through an interpretation of technological potential and viral spread, Arthur Hayes once again demonstrates his foresight on the industry's future development.

The following is the original content:

Tension and stress can sometimes infect men and women, leading to irrational behavior. Unfortunately, many companies in the Maelstrom investment portfolio have fallen victim to the "Centralized Exchange Platform-spread Disease (CEXually Transmitted Disease)." The affected founders believe they must fully obey the instructions of certain well-known centralized exchanges, or else the path to huge returns will be blocked. These centralized exchanges demand: boost this metric, hire this person, allocate me this portion of tokens, list your token on this date... and so on, well, just follow our notice for the listing. These "patients" addicted to exchange platform desires have almost completely forgotten the original intention of users and cryptocurrency. Come to my clinic, I can cure you. The prescription is ICO. Let me explain...

I have a three-point theory on why cryptocurrency has become one of the fastest-growing networks in human history:

Government Capture

Big business, big tech, big pharma, big defense, and other "big XX" have used their wealth and power to control most major governments and economies. Since the end of World War II, despite a rapid and consistent improvement in living standards and life expectancy, this improvement has slowed for the 90% of the population with very little financial assets and almost no political voice. Decentralization is the antidote to combating highly concentrated wealth and power.

The Magic of Technology

The Bitcoin blockchain and the many blockchains that followed are groundbreaking marvels of technology. Starting from humble beginnings, Bitcoin has proven itself to be one of the most resilient monetary systems to date. For anyone capable of compromising the Bitcoin network, the nearly $2 trillion worth of Bitcoin serves as a colossal bug bounty, open to double-spending.

Greed

The value appreciation of blockchain-powered cryptocurrencies and their tokens in terms of fiat and energy has enriched users. The wealth of the cryptocurrency community was on full display during the November U.S. elections. The U.S. (and most other countries) operate on a "pay-for-play" political system. Cryptocurrency "robbers" were among the largest donors to political candidates, helping pro-crypto candidates secure victories. Cryptocurrency voters were able to contribute generously to political campaigns because Bitcoin is the fastest-growing asset in human history.

Amnesia of Capital Formation

Most cryptocurrency stakeholders instinctively understand why this industry has been successful; however, occasional amnesia sets in. This is demonstrated in the evolution of cryptocurrency capital formation. At times, those seeking crypto capital catered to the community's greed and saw massive success. Yet, at other times, capital-starved founders forgot why users flocked to cryptocurrency in the first place. Yes, they may believe in a government "for the people, by the people," or they may have created dazzling technology, but if users cannot enrich themselves, the adoption of any cryptocurrency-related product or service will be too slow.

Since the end of the 2017 ICO craze, capital formation has become less pure, deviating from the path of community greed. Instead, we've seen high fully diluted valuations (FDV), low circulating supply, or VC-backed tokens. However, VC-backed tokens have performed abysmally in this bull cycle (2023 to present). In my article "PvP," I highlight that the median performance of tokens issued in 2024 is down approximately 50% compared to mainstream assets (Bitcoin, Ethereum, or Solana). Retail investors are ultimately deterred by the high prices when these projects go live on centralized exchanges (CEX). Consequently, exchange-based market makers, airdrop recipients, and third-party liquid providers dump tokens onto illiquid markets, resulting in catastrophic performance.

Why has our entire industry forgotten the third tenet of the cryptocurrency value proposition... to make ordinary investors "filthy rich"?

The Antidote to Meme Coins

The new issuance market of cryptocurrencies has morphed into the very model it was supposed to replace—a system resembling the Initial Public Offering (IPO) benefit chain seen in traditional finance (TradFi). In this system, retail investors end up as the bagholders supporting tokens that VCs have backed. However, in the crypto space, there's always an alternative. Meme coins are a type of token with no real-world utility other than virally spreading meme content over the internet. If the meme is popular enough, you buy into it, hoping others will follow suit. The capital formation of meme coins is egalitarian. The team releases the entire supply upfront during issuance, with the starting fully diluted valuation (FDV) typically only in the single-digit millions. By launching on decentralized exchanges (DEXs), speculators make highly risky bets on which meme will tap into the industry's collective consciousness, thus creating buying demand for the token.

From a retail speculator's standpoint, the allure of meme coins lies in the potential to leapfrog several rungs on the wealth ladder if you get in early. However, every participant understands that the meme coin they buy has no intrinsic value, generates no cash flows, and thus, its inherent value is zero. Hence, they fully embrace the risk of losing all their funds in pursuit of financial dreams. Most importantly, there are no gatekeepers telling them whether they can purchase a specific meme coin, and there are no shadowy capital pools waiting to dump newly unlocked supply when the price rises high enough.

I want to create a simple taxonomy to understand different types of tokens and why they hold value. Let's start with Meme Coins.

Meme Coin Intrinsic Value = Virality of the meme content

This concept is very intuitive. As long as you are an active individual in any online or offline community, you understand the significance of memes.

If that's what a Meme Coin is, then what is a VC Token?

The Essence of VC Tokens and Traditional Finance Culture

Followers of traditional finance (TradFi) don't actually have real skills. I know this firsthand as I reflect on my experience working in investment banking, where the required skills were pathetically minimal, to sum it up: almost nonexistent. Many people aspire to get into traditional finance because you can make a lot of money without substantial knowledge. Just give me someone with a slight grasp of high school algebra and a good work ethic, and I can train them to do any front-office financial services job. This contrasts with professions like doctors, lawyers, plumbers, electricians, mechanical engineers, which require time and skills but often earn less on average than a junior investment banker, salesman, or trader. The intellectual wastage in the financial services industry is disheartening, but I and others are simply responding to societal incentives.

Because traditional finance is a low-skill, high-income industry, entry into this exclusive club often depends on other social factors. Your family background and the university or boarding school you attended are more important than your actual intelligence. In traditional finance, stereotypes based on race and social class are more influential than in other professions. Once you are admitted to this unique circle, you will perpetuate these norms to give more value to traits you have acquired or not acquired. For example, if you work hard and take on massive 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, you would be admitting that the time and effort you put into obtaining those qualifications were not worth it. In psychology, this is known as the Effort Justification Bias.

Let's use this framework to understand how venture capital (VC) newcomers raise funds and allocate resources.

To raise enough capital to invest in numerous companies in the hopes of finding a winner (e.g., Facebook, Google, Tencent, ByteDance, etc.), top venture capital firms require a significant amount of capital. This funding mainly comes from endowment funds, pension funds, insurance companies, sovereign wealth funds, and family offices. And these pools of capital are managed by Traditional Finance (TradFi) individuals. These managers must fulfill a fiduciary duty to their clients and can only invest in "appropriate" venture capital funds. This means they mostly have to invest in venture capital funds managed by "qualified" and "experienced" professionals.

These subjective requirements have led to a phenomenon: these venture partners usually graduate from that small fraction of elite universities worldwide (such as Harvard, Oxford, Peking University, etc.), and their careers typically start at large investment banks (such as JPMorgan Chase, Goldman Sachs), asset management firms (like BlackRock, Fidelity), or major tech companies (like Microsoft, Google, Facebook, Tencent, etc.). If you don't have such a background, gatekeepers of traditional finance employment will believe you lack the necessary experience and qualifications to manage other people's money. As a result, this circle has become a highly homogenized group—they look alike, speak alike, dress alike, even live in the same global elite communities.

For allocators who need to distribute funds to venture capital funds, the dilemma is this: if they take the risk of investing in a fund managed by non-traditional background individuals and the fund fails, they might lose their job. But if they choose the safe route and allocate funds to funds managed by "appropriate and proper" individuals, even if the fund fails, they can attribute it to bad luck, thereby keeping their position in the asset management industry. If you fail alone, you lose your job; but if you fail together with everyone else, your job is usually safe. Since the primary goal of traditional finance individuals is to retain their high-paying, low-tech job, they will minimize career risk by choosing seemingly "suitable" background managers to ensure their own safety.

If the selection criteria for venture capital funds is to assess whether the managing partner fits a certain accepted stereotype, then these managers will only invest in companies or projects where the founders also fit the "founder" stereotype. For business-oriented founders, their background must include experience at a major consulting firm or investment bank, and it is expected that they have attended specific global elite universities. On the other hand, technical founders are required to have experience working at highly successful large tech companies and hold advanced degrees from universities known to produce top engineers. Finally, due to the social nature of humans, we tend to prefer investing in people we are more closely related to. Therefore, Silicon Valley VCs only invest in companies located in the Bay Area, while Chinese VCs seek to invest in companies headquartered in Beijing or Shenzhen.

The result is the creation of an echo chamber-like homogeneous environment where everyone looks, talks, thinks, believes, and lives in a similar manner. As a result, everyone either succeeds together or fails together. This environment happens to be the ideal state for traditional finance VCs, as their goal is to minimize career risk.

After the ICO craze bubble burst, when cryptocurrency project founders were scrambling to raise VC funding, they were essentially bargaining with the "devil." To secure funding from VCs mainly based in San Francisco, New York, London, and Beijing, cryptocurrency project founders had to make adjustments.

Venture Token Intrinsic Value = Founder's educational background, employment history, family background, geographic location

Venture allocators prioritize the team first and then the product. If the founder fits the stereotype, funding flows continuously. Because these founders naturally possess the "correct" background, a small fraction of teams will find product-market fit after spending billions, giving rise to the next Ethereum. Since most teams will ultimately fail, venture allocators' decision logic remains unquestioned, as the founders they support are all universally accepted as likely to succeed types.

Obviously, when selecting investment teams, cryptocurrency expertise is only a distant consideration. This is the beginning of the disconnect between venture capital and retail investors. The primary goal for VC newcomers is to keep their job, while retail investors hope to turn their fortunes around by buying coins that skyrocket in value. Thousandfold returns were once possible. If you bought ETH at around $0.33 during the Ethereum presale, you would have made a 9000x return at current prices. However, the current mechanism of crypto capital formation has made such returns almost impossible.

Venture investors make money by trading illiquid, shitty SAFTs (Simple Agreement for Future Tokens) between funds, each trade inflating the valuation. By the time these troubled crypto projects finally land on centralized exchanges (CEX) for their initial listing, their fully diluted valuation (FDV) often exceeds $1 billion. To achieve thousandfold returns, the FDV would need to grow to an extremely exaggerated number—even one that surpasses the total value of all fiat-priced assets... and this is just for one project. This is why retail investors are more willing to gamble on a $1 million market cap meme coin rather than a project supported by the "most respected" VC cohort with an FDV of $1 billion. The behavior of retail investors actually aligns with the logic of maximizing expected returns.

If retail investors have already begun to reject the venture capital token model, then what makes ICOs inherently more attractive?

ICO Intrinsic Value = Virality of the Narrative + Potential Technology

Meme:

A project team that can launch a product in line with the current crypto trend, combining visuals, aesthetics, and a clear goal, has what is known as "meme value." When this "meme" is attractive and spreads, the project gains attention. The goal of the project is to attract users at the lowest possible cost and then sell them a product or service. A project that resonates with people can quickly bring users to the top of its growth funnel.

Potential Technology:

Early in the project lifecycle, an Initial Coin Offering (ICO) typically takes place. Ethereum raised funds before developing its product. In this model, the community's trust in the project team is implicit, believing that by providing financial support, they can create a valuable product. Therefore, potential technology can be assessed in the following ways:

1. Has the team previously developed meaningful products in the Web2 or Web3 space?

2. Is the technology the team plans to develop technically feasible?

3. Can this potential technology address a globally significant problem, ultimately attracting hundreds of millions or even billions of users?

Technology founders who can meet the above criteria are not necessarily the same type of people that venture capital firms would invest in. The cryptocurrency community does not place as much emphasis on family background, past career experiences, or specific educational qualifications. While these factors are nice to have, they are meaningless if they have not led the founding team to deliver excellent code in the past. The community is more willing to support someone like Andre Cronje rather than a former Google employee who graduated from Stanford and is a member of the Battery Club.

Although most ICOs (99.99%) will almost drop to zero after a cycle, a few teams are still able to develop technology that attracts users based on their "meme effect." Early investors in these ICOs have the opportunity to achieve returns of 1,000 times or even 10,000 times. This is precisely the game they want to play. The speculative and volatile nature of ICOs is a feature, not a bug. If retail investors want a safe and boring investment, they can choose stock trading platforms in the global traditional financial system. In most jurisdictions, an Initial Public Offering (IPO) requires companies to be profitable, and management must make various statements assuring the public that they will not deceive them. However, the issue with IPOs for the average retail investor is that they cannot provide life-changing returns, as venture capitalists have already taken the lion's share of the benefits in the early stages.

If ICOs can clearly provide funding to technology with viral memetic potential and potential global impact, how do we make them "great again"?

ICO Roadmap

At its purest form, an ICO allows any team with an internet connection to showcase their project to the crypto community and receive funding support. The team will launch a website detailing team members, the product or service they plan to build, why they are qualified, and why the market needs their product or service. Subsequently, investors — well, "speculators" — can send cryptocurrency to a blockchain address and receive distributed tokens after a certain period. Every aspect of the ICO, such as the timeline, fundraising amount, token price, development tech type, team composition, and investor location, is entirely decided by the ICO team themselves, not by any gatekeepers (e.g., VC funds or centralized exchanges). This is precisely why centralized intermediaries loathe ICOs — because they are utterly unnecessary. However, the community loves ICOs because they offer a diverse array of projects initiated by people from various backgrounds, providing an opportunity for those willing to take on high risk to potentially receive high rewards.

ICOs are making a comeback as the entire industry has gone through a full cycle. We once enjoyed freedom but got burned in the process; then we felt oppressed by the tyranny of VCs and centralized exchanges (CEXes) pushing overvalued garbage projects down our throats. Now, in a budding bull market propelled by large-scale money-printing from the US, China, Japan, the EU, and others, cryptocurrency market speculators are engrossed in useless meme coin speculation trading, and the community is once again ready to dive headfirst into high-risk ICO trading. It is now the "almost affluent" crypto speculators casting their nets wide, hoping to capture the next Ethereum opportunity.

The next question is: What will be different this time?

Timeline:

Today, through frameworks like Pump.fun, token launches can be completed in a matter of minutes, coupled with higher liquidity decentralized exchanges (DEXes), enabling teams to raise funds through ICOs and deliver tokens in a matter of days. This is in stark contrast to the previous ICO cycle, where the journey from fundraising to token delivery could take months or even years. Now, investors can immediately trade newly issued tokens on platforms like Uniswap or Raydium.

Thanks to Maelstrom's investment in the Oyl wallet, we have had the privilege of a sneak peek into some potentially game-changing smart contract technology built on the Bitcoin blockchain. Alkanes is a brand-new meta-protocol aimed at bringing smart contracts to Bitcoin through the UTXO model. I don't fully understand how it works, but I hope those smarter and more skilled than me can review their GitHub codebase and decide for themselves if it's worth building on. I am very excited for Alkanes to drive explosive growth in ICO issuance within the Bitcoin ecosystem.

Liquidity:

Due to retail crypto speculators' obsession with meme coins, they eagerly seek to trade hyper-speculative assets on decentralized exchanges (DEXs). This means that unverified project ICO tokens can be traded immediately after token delivery to investors, enabling true price discovery.

While I'm not a fan of Solana, I have to admit that Pump.fun has indeed had a positive impact on the industry, as the protocol allows non-technical users to mint their own meme coins in minutes and start trading. Continuing this trend of democratizing finance and crypto trading, Maelstrom has invested in a project aiming to be the go-to platform for meme coins, all cryptocurrencies, and newly issued ICOs for spot trading.

Spot.dog is building a meme coin trading platform to attract Web2 users. Their "secret sauce" lies not in technology but in distribution channels. Current meme coin trading platforms are mostly designed for crypto traders. For example, Pump.fun requires users to have a certain level of knowledge about Solana wallets, token swaps, slippage, etc. Whereas ordinary users who follow Barstool Sports, subscribe to r/wsb, trade stocks on Robinhood, and bet on their favorite teams through DraftKings will opt to trade on Spot.dog.

Spot.dog has secured some impressive partnerships from the get-go. For instance, the "cryptocurrency purchase button" on the social trading platform Stocktwits (with 1.2 million monthly active users) is powered by Spot.dog. Additionally, Iggy Azalea's **$MOTHER Telegram trading bot**'s sole partner is—yes, Spot.dog.

I bet you speculators are itching to know when their token will launch, right? Don't worry, when the time is right, if you're interested in going all-in on Spot.dog's governance token, I'll let you know the timing!

UI/UX:

The crypto community is very familiar with non-custodial browser wallets like Metamask and Phantom. Crypto investors are accustomed to loading their crypto browser wallets, connecting them to dApps, and then purchasing assets. This user behavior will make ICO fundraising much easier.

Blockchain Speed:

In 2017, popular ICOs often caused the Ethereum network to grind to a halt. Gas fees skyrocketed, rendering the network unusable for ordinary users at a reasonable cost. By 2025, block space costs on Ethereum, Solana, Aptos, and other Layer-1 blockchains will be very low. Current order processing capabilities have increased by several orders of magnitude compared to 2017. If a team can attract a large number of enthusiastic "degen" speculator supporters, their fundraising capabilities will no longer be limited by slow and expensive blockchains.

Due to the extremely low cost per transaction of Aptos, it has the opportunity to become the preferred blockchain platform for ICOs.

Average Transaction Fees (USD):

• Aptos: $0.0016
• Solana: $0.05

• Ethereum: $5.22

The Necessity of Saying No

I proposed a solution to the "Centralized Exchange (CEX) Syndrome" — the ICO. However, now project teams need to make the right choice. To prevent them from missing the point, everyday crypto investors need to firmly say "no."

Say No to the following:

• Projects backed by VCs, with high FDV (Fully Diluted Valuation) and low circulating supply

• Tokens launching on centralized exchanges with inflated valuations

• Individuals advocating for so-called "irrational" trading behavior

The ICOs of 2017 did indeed have many obvious "junk projects." Among them, the most destructive ICO was EOS. Block.one raised $4.1 billion in cryptocurrency to build EOS, but after EOS went live, it almost disappeared. However, that's not entirely accurate, as EOS's market cap still stands at a surprising $1.2 billion. This indicates that even a "junk project" like EOS, issued during the peak of the bubble, still has value far from zero. As someone who loves financial markets, I must admit that the design and execution of the EOS ICO could be considered a piece of "art." Project founders should delve into how Block.one managed to raise the most funds in history through an ICO or token sale.

I mention this to illustrate the risk-adjusted investment logic: with proper allocation of investment stakes, even projects that should have gone to zero may still retain some value post-ICO. Investing early in ICOs was the only way to achieve a 10,000x return, but there is no heaven without hell. To pursue a 10,000x return, you must accept that most of the investment's value post-ICO may be close to zero. However, this is much better than the current VC token model. Nowadays, achieving a 10,000x return in VC tokens is almost impossible, but experiencing a 75% loss a month after listing on a CEX is all too common. Everyday investors have subconsciously recognized the dismal risk-return ratio of VC tokens and have turned to meme coins. Let's once again create fervent support for new projects through ICOs, empowering investors with the possibility of immense wealth. Let ICOs return to their former glory!

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