Arthur Hayes blog post: Meme coin is deeply loved, but no one cares about VC coin. How should project developers raise funds?

Author: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 behave irrationally out of desire or blindness. Unfortunately, many Maelstrom portfolio companies appear to be suffering from a "CEXually Transmitted Disease." Some affected founders mistakenly believe that they can obtain so-called "ultimate returns" only by following the instructions of certain well-known centralized exchanges (CEX). These instructions include: pushing up a certain metric, hiring someone, allocating a certain number of tokens, listing tokens on a specified date, or even temporarily changing the listing plan. These desire-driven companies have forgotten the needs of users and the original purpose of cryptocurrencies. If you are also troubled by this disease, please come to my clinic, I have the antidote. Let me break it down for you.

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

Government Control - Giants such as Big Business, Big Tech, Big Pharma, Big Military, etc., control most major governments and economies through their vast wealth and power. Although global living standards and life expectancy have improved significantly since the end of World War II, this growth has stalled or even regressed for the 90% of the population who have very 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 subsequent blockchain technologies derived from it can be called a revolutionary innovation. 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 offers nearly $2 trillion in bug bounties (Bitcoins obtained through double-spend attacks), but so far no one has been able to break the security of this system.

Wealth Effect - The growth in value of cryptocurrencies and their derivative tokens, making many users rich overnight. The financial power of cryptocurrency proponents was on full display during this November’s U.S. elections. Like many countries, the American political system relies on the "money game." Cryptocurrency industry practitioners have become one of the largest contributors to political candidates, directly contributing to the victory of pro-cryptocurrency candidates. Bitcoin’s status as the fastest-growing asset in human history allows the cryptocurrency community to exert significant influence in political campaigns.

While most in the cryptocurrency community understand why the movement is successful, there are occasional cases of amnesia. This amnesia manifests itself in changes in the way capital is raised. Sometimes projects achieve great success by catering to the community’s desire for wealth; other times, cash-strapped founders forget why users chose cryptocurrencies. Yes, they may believe in "by the people, for the people"; yes, they may create amazing technology. But the rollout of any cryptocurrency product or service will be slow if users can’t profit from it.

Since the craze subsided in 2017, capital raising methods have gradually deviated from their original intentions. Capital formation, which in the past relied on inspiring community participation and desire for wealth, has been replaced by tokens with high fully diluted valuations (FDV), low circulating supply, and venture capital (VC) backing. However, these VC-backed tokens have performed poorly in the current bull market (2023 to present). In my article, I mentioned that the median performance of tokens issued in 2024 is about 50% lower than that of mainstream coins such as Bitcoin, Ethereum or Solana. Although retail investors are finally able to purchase these projects through centralized exchanges (CEX), they are unwilling to pay the high prices. As a result, exchanges’ internal market-making teams, airdrop token recipients, and third-party market makers dumped these tokens into illiquid markets, resulting in dismal price performance. As an industry, why have we forgotten the third pillar of cryptocurrency’s 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 "takers" of VC tokens. However, in the world 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 over the Internet. If the Meme is engaging enough, users will buy it in the hope that others will follow up and make a purchase later.

Memecoin’s approach to capital formation is more egalitarian. The team typically releases the entire token supply upon issuance, and the initial FDV is usually only a few million dollars. They typically start trading on decentralized exchanges (DEXs), with speculators betting on which meme will attract attention in the industry and drive demand for the token.

For ordinary speculators, the most attractive thing about Memecoin is that if they can get involved early, they may jump a notch or two on the wealth ladder. Nonetheless, it is clear to everyone involved that Memecoin essentially has no intrinsic value and does not generate any cash flow, and therefore fully accepts the risk of losing all their funds just to chase the dream of wealth. What’s more, there is no institution preventing them from purchasing these tokens, and there is no hidden pool of capital waiting to sell off the unlocked token supply at high prices.

In order to better understand the different types of tokens and their sources of value, I hope to establish a simple classification framework. First, let’s start with Memecoin:

The intrinsic value of Memecoin = the influence of Meme spread

This is very intuitive. As long as you are active in any community (online or offline), you can understand the power of memes.

So, what are VC tokens?

Practitioners in the traditional finance (TradFi) industry often do not have real professional skills. I know this firsthand because working in investment banking I discovered that the skills required for the job were actually very limited. Many people choose to enter TradFi because it offers generous salaries without requiring much substantive knowledge. As long as a young person has basic high school algebra knowledge and a good work attitude, I can train them for any front-office financial services job. However, occupations such as doctors, lawyers, and engineers require time and skill accumulation, although the average income of these occupations is much lower than that of practitioners in the financial industry.

The attractiveness of TradFi’s high salary makes the entry barrier to this industry more dependent on social background rather than personal ability. For example, your family background and the reputation of your college or boarding school are often more important than your intelligence. Such a system makes the TradFi industry a closed elite club, further entrenching existing social class and racial prejudices.

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 huge sums of money. These funds mainly come from endowments, pension funds, insurance companies, sovereign wealth funds and family offices, and these fund pools are usually managed by traditional finance (TradFi) people. As money managers, they must fulfill their fiduciary duty to their clients and only invest in venture capital funds that are deemed "suitable." This "suitability" standard usually means that these funds need to be managed by "qualified" and "experienced" professionals. These definitions of "qualified" are often closely related to managers' educational background and career experience: they usually graduate from a few of the world's top universities (such as Harvard, Oxford, Peking University, etc.), and entered large investment banks early in their careers ( Such as JPMorgan Chase, Goldman Sachs), asset management companies (such as BlackRock, Fidelity) or technology giants (such as Microsoft, Google, Facebook, Tencent, etc.). Without such a background, TradFi's career gatekeepers will assume you lack the ability to manage other people's money.

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

The biggest dilemma for money 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 criteria, even if the fund fails, they can attribute it to "bad luck" and stay Position. Therefore, to reduce career risk, they tend to choose funds that meet traditional criteria rather than taking risks and experimenting with new possibilities.

This logic extends to the choice of entrepreneurial projects. Venture capital firms are more likely to back projects whose founders’ backgrounds fit the stereotype of a “successful founder.” Commercial 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 well-known universities. Geography also becomes a consideration: Silicon Valley venture capital firms are more likely to invest in companies located in California's Bay Area, while Chinese venture capital firms are more focused on projects in Beijing or Shenzhen.

Ultimately, this model creates a highly homogeneous investment environment: everyone's background, way of thinking, values ​​and even geographical location are highly similar. Because of this, this environment both limits innovation and makes venture capital decisions more conservative.

When the bubble of the 2017 boom burst, founders of crypto projects had to make compromises in order to obtain venture capital (VC) capital. To raise money from VCs based primarily in San Francisco, New York, London and Beijing, they had to cater to their preferences.

Token value in the eyes of venture capital = founder’s educational background, professional experience, family background and geographical location

For VCs, the team is far more important than the product. If a founder fits a certain stereotype of a “successful founder,” then funding will come easily. Because these founders are considered to be born with the “right” qualifications, even if they have to burn hundreds of millions of dollars to find product-market fit, there will always be a handful of teams that succeed and birth the next Ethereum. For those teams that fail, the decisions of VCs will not be questioned because the founders they support are the type of people who are generally considered to be most likely to succeed.

Clearly, expertise in crypto is not a key consideration when VCs choose to fund. This selection criteria creates a disconnect between VC-backed projects and ultimately retail investors. The goal of VCs is to keep their jobs, while the goal of retail investors is to achieve financial freedom by betting on a token 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 make money by transferring worthless and highly illiquid SAFTs (agreed sales of future tokens) between funds, with each transfer accompanied by 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 this project must grow to an extremely large number - even exceeding the total value of all fiat assets, and this is just the case for one project.

If the VC coin model is rejected by ordinary users, what is essentially meaningful?

The intrinsic value of ICO = explosive power of content dissemination + technical potential

Meme - If a project can match the current trend in the encryption field in terms of appearance design and target positioning, it will have Meme value. If its meme content is attractive enough and spreads 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 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 where funding is raised first and then developed. This model relies on the community's trust in the team, that is, as long as the community provides funding, the team can develop valuable technology. The evaluation of potential technologies 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, attracting millions or even billions of users?

Technical founders can achieve these goals, but they are not necessarily the ones favored by venture capital (VC) investors. The crypto community doesn’t place much emphasis on family background, work history, or education from prestigious schools. These conditions are icing on the cake, but they mean nothing if the team doesn't actually develop great 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.

Although most initial coin offerings, that is, 99.99%, will be close to zero after one cycle, there are still a few teams that can develop technology and gain value by attracting users because their memetic effect is strong enough. People who invest in these early may get returns of 1,000x or even 10,000x. That's exactly what they're after. Speculation and volatility are features, not bugs. If retail investors want stable and conservative investments, they can choose to trade on the global Traditional Finance (TradFi) stock exchange. In most countries, an IPO (initial public offering) requires the company to be profitable and management needs to make various statements to ensure financial transparency. The problem with IPOs for most retail investors, however, is that they fail to deliver life-changing returns because early venture investors have already squeezed most of the gains out of the process.

In its purest form, it allows any team with an internet connection to showcase projects to the crypto community and receive funding. The team launches 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 cryptocurrency via an on-chain address, and after a certain amount of time, the investor will receive the tokens. All details, such as timing, amount raised, token price, technology type, team composition and investor geography, are decided entirely 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 communities are very supportive because they provide opportunities for people from all backgrounds, giving those willing to take high risks the opportunity to earn high rewards.

Thanks to tool frameworks like Pump.fun, it now only takes a few 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 immediately trade newly issued tokens on platforms such as Uniswap and Raydium.

Thanks to Maelstrom’s investment in Oyl Wallet, we’re getting a sneak peek at some of the potentially industry-disrupting 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 this works. But I hope someone more capable can look at their GitHub repository and decide for themselves if they want to build on it. I hope Alkanes will drive explosive growth 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 enables unverified 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 had a positive impact on the industry. This protocol allows ordinary users to issue their own Meme coins and start trading within minutes without any technical background. Continuing this trend of “democratizing financial and crypto trading,” Maelstrom has invested in a new platform that could become the go-to trading platform for meme coins, cryptocurrencies, and even newly issued spot currencies.

Looking back at 2017, a popular project at the time would often cause the Ethereum network to be overloaded or even paralyzed. Gas costs have skyrocketed, making network usage expensive and unaffordable for many. By 2025, the cost of using block space will become extremely low, whether on Ethereum, Solana, Aptos or other Layer-1 blockchains. The current transaction throughput has improved 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 hampered by blockchain’s slow speeds and high fees.

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

“Rejecting bad investments” means:

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

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

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

Looking back on 2017, there were many projects of extremely poor quality. The most destructive among them is undoubtedly EOS. Block.one raised $4.1 billion in cryptocurrency to develop EOS. However, EOS almost disappeared after its launch. 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 like EOS, which once marked the peak of the bubble, are still worth well above zero. As someone who loves financial markets, I must admit that the structure and execution of EOS is a classic example. Project founders should take a hard look at how Block.one raised the most money in history through a token sale.