Token issuance has gone from venture capital-led to community-driven. Is community fundraising really a good thing or a trap?

Original title:The Illusion of Change: Balancing Community and Financial Incentives

Original author: Francesco

Original translation: TechFlow

Community-led token issuance is emerging, a trend that challenges traditional institutional investor-led models.

To analyze this change, we will explore recent trends, including the cases of Hyperliquid and Echo, while evaluating community sentiment and market performance of different token distribution methods.

Community-led token issuance: New trends rise

Community-driven fundraising has rebounded significantly in recent months.

There seem to be several key factors behind this trend.

1. The market’s positive sentiment towards community financing

In the past token issuance model dominated by venture capital (VC), tokens often perform poorly after issuance.

Low circulation, uneven token allocation, and strict token unlocking plans often lead to continuous price declines. Over time, market sentiment has gradually tended toward a community-led issuance model.

This trend shift has been largely affected by Hyperliquid. Hyperliquid's case shows that a mature product, if combined with a well-built community, can not only reduce its dependence on VC funds, but also effectively avoid the common problems of the token's value drop after issuance.

Furthermore, as more and more new tokens enter the market, projects need to find ways to stand out from the competition, and community engagement is becoming a key differentiator. Therefore, the "fair issuance model" has returned to people's sight.

This trend also brings new opportunities for retail investors to participate in investment projects that were previously limited to institutional investors. In some cases, the community-led model even allows retail investors to acquire tokens at a better price than traditional investors.

2. The dilemma of venture capital support

Today, users are increasingly skeptical about projects that allocate most of their tokens to venture capital and other institutional investors. This puts the project team in a dilemma: how to maintain fairness in token allocation while ensuring the necessary funds.

While many founders value democratic participation in the community, they often face a more practical question: how to raise enough funds to complete product development.

Although the community-driven distribution model provides a more equitable distribution mechanism, it also brings uncertainty about financial stability and strategic investor support.

Even so, this model still has unique advantages:

• Help the project build a loyal user base

• Promote the iterative development and testing of products

• Make the project focus more on long-term value creation rather than short-term investor interests.

If the token allocation structure is overly dependent on institutional investors, it often leads to a mismatch between short-term price fluctuations and the project's long-term strategic goals. This problem is usually manifested through a strict token unlocking mechanism, which further affects the healthy development of token economics.

In addition, excessive control by institutional investors will also weaken retail investors' voice in project governance and long-term development. This lack of participation may lead to a decrease in community activity and ultimately lose investor interest and attention.

Common pain points

• Privileges Question: Early investors and advisers often get better terms and priority access tokens than ordinary community members, creating obvious injustice.

• Governance Insufficient Impact: Although many projects claim to be community-led, retail token holders often have limited influence in actual decision-making.

• Contradiction between strategy and market sentiment: Project teams usually focus on long-term development, but token prices are often dominated by short-term trading sentiment.

Community preference: What do users care about the most?

It can be seen from social media discussions and the rise of platforms like Echo that cryptocurrency users are increasingly dissatisfied with the phenomenon of special treatment for venture capital and institutional investors.

The community is increasingly calling for a more equitable investment environment.

Key expectations of the community

• Equal investment opportunities: The community wants to enjoy similar investment conditions as venture capital, including fair token pricing and a simpler engagement process.

• Clear token economic model: Clear token allocation rules are the key to building investor trust.

• Inclusive participation mechanism: Investment opportunities should not be limited to "whales" (high net worth individuals), but should be fairly open to all investors.

• Diversified ways of participation: Whether it is by providing liquidity, participating in platform construction, or directly purchasing tokens, users should join the project in various ways.

Structural considerations

• Clear token unlocking mechanism: A clear unlocking plan can effectively alleviate market volatility and prevent insiders from suddenly selling tokens.

• Balanced governance architecture: Although large token holders have greater influence, small investors can be strengthened through commissioned voting or a governance model based on holding time.

• A clear reward allocation mechanism: Projects should develop a transparent reward framework, such as creating value for token holders through pledge rewards, token repurchase or income sharing.

• Community-centric development: regular interaction with the community, transparent governance processes, and financial support for community-driven projects are key to maintaining long-term engagement.

Trends: Impact on the market

As more projects adopt community-centric strategies, some key trends are emerging:

An innovative token issuance mechanism

• The community truly holds power: projects are moving from symbolic governance to substantial empowerment, allowing token holders to directly participate in agreement changes, fund allocation, and strategic decision-making. This includes adopting a weighted voting system and giving the community direct management of the funding pool.

• Diverse participation reward mechanisms: Many projects are beginning to try innovative reward methods, such as dynamic staking income, contribution-based token distribution, and reputation systems that reward long-term active participation, rather than just allocating rewards based on token holdings.

• Token Economic Model for Long-term Development: Projects focus more on designing sustainable token systems with built-in mechanisms to maintain token value, such as flexible supply adjustments, usage-based repurchase systems, and incentives linked to protocol growth measure.

• Reduce dependence on venture capital: Projects are exploring more diverse financing methods, such as community financing, protocol-owned liquidity (liquidity funds directly held and managed by the agreement), and revenue-sharing growth models, thereby Reduce your dependence on large-scale early investments in venture capital.

Major challenges facing the project

• Funding and Control Balance: Teams need to raise enough funds to support project development while ensuring that the community maintains sufficient ownership and decision-making power. To this end, a hybrid financing model may be needed to balance funding needs and community control.

• Drive long-term growth of the community: Sustainable community development needs to go beyond short-term incentives to attract and retain community members through education, shared goals, and real value creation. This can be achieved through ambassador programs, developer funding, and community-led marketing campaigns.

• Transparency becomes the new normal: projects must be regularly updated with progress, conduct open governance discussions, and maintain clear communication. These transparency measures have become a basic expectation of the community rather than an option.

• Building a sustainable revenue model: Projects need to develop mechanisms that can create stable returns for protocol and token holders, such as support for the long-term development of the project through service charges, platform fees or other value creation activities.

Case Study: Hyperliquid's VC-free model

Hyperliquid 's tokens' successful performance after distribution provides a reference for rejecting traditional venture capital financing:

• Not allocated to venture capital: Tokens are distributed entirely to platform users, not to venture capital institutions.

• Stable market performance: The price of tokens remains stable after distribution, without severe fluctuations.

• Organic community development: Project growth depends entirely on the participation of real users, not through artificial incentives.

• Contribution-based allocation mechanism: Token allocation is based on user's activities and actual contributions on the platform, rather than simply purchasing behavior.

However, Hyperliquid's user base has some unique characteristics that make it different from other projects that try similar community-driven approaches and may not be suitable as a general reference case:

• Mainly professional traders: The core users of the platform are not ordinary retail investors, but professional traders who often conduct large-scale transactions.

• Have the ability to hold for a long time: these users are well-funded and do not need to sell tokens quickly to achieve returns, thereby reducing the selling pressure in the market and promoting long-term holding behavior.

• It is naturally consistent with the platform 's interests: Since these users have already obtained considerable returns through transactions on the platform, their interests are closely linked to the development of the platform, and tokens are just additional rewards.

• Lower selling pressure: When users are already profiting in the transaction, they are not in a hurry to get short-term gains by selling tokens.

• No need to rely on token financing: Unlike many projects that rely on token sales to raise development funds, Hyperliquid does not need to fill the funding gap through token sales.

• Pure use reward mechanism: Tokens are distributed only to users who actually use the platform, not investors who buy tokens for future returns.

• Different holding mentality: Users who earn tokens by using the platform will have completely different psychological tendencies in the decision to hold and sell tokens compared to investors who directly purchase tokens.

While Hyperliquid's approach has been significantly successful, other projects need to recognize that their community may differ greatly from Hyperliquid's community. A strategy suitable for a platform with many wealthy and experienced traders is not necessarily suitable for projects targeting ordinary retail users.

This also raises a question worth pondering: Is community fundraising really more sustainable, or is it just shifting the pressure of selling from venture capital to retail investors who are more eager for quick returns? Venture capital often adopts a well-thought-out exit strategy, while retail investors in community fundraising lack the ability to invest in the long term due to limited funds, which can lead to more unstable markets and emotional fluctuations.

Furthermore, it is worth noting that although Hyperliquid distributes over 31% of the tokens, they are always focused on creating a quality product that users are truly willing to use.

This provides important revelation for other projects: the community itself cannot ensure the success of the project, and the project must be built on a solid foundation, such as providing an excellent product experience.

Key differences between different approaches

Although crypto communities enthusiastically embrace the transition from venture-led funding model to community-driven model, one fact that cannot be ignored is that the short-term profit-seeking tendency in human nature has not changed.

The key differences between these allocation methods are reflected in the following aspects:

(The original form comes from Francesco , compiled by Shenchao TechFlow)

Make investment opportunities more democratic

The rise of platforms such as Echo and Legion further drives the opening of investment opportunities traditionally limited to venture capital and institutional investors to a wider range of average investors.

In addition, these platforms provide a simplified operational interface for the protocol to conduct investment rounds, making it easier for the protocol to optimize its strategies when allocating tokens.

Current trends are changing, and these new developments have begun to influence how new projects redesign their tokens. It is worth noting that more and more projects are choosing to sell tokens on these platforms, and the recent MegaETH is one of them.

This change has brought about a more balanced stakeholder relationship and capital structure table, while the allocation of community funds continues to increase.

Echo and Legion methods:

• Focus on a community-driven development model

• Transparent token economy

• Balanced stakeholder relationships

• Innovative token allocation mechanism

There is no so-called "universal formula" in terms of token allocation and investment strategies.

However, the project can refer to the following new factors based on the current industry development trend.

Recommendations for future projects

For future projects that want to innovate the token allocation model, the following points can be considered:

1. Allocation policy

• Implement a fair and transparent community sales mechanism

• Ensure that the interests of token holders are closely linked to project success

• Develop innovative project financing methods

• Ensure wide distribution of governance rights and enhance community participation

2. Community participation

• Establish open and transparent communication channels

• Achieve community consensus around the distribution mechanism

• Maintain long-term activity in the community

• Provide practical use token holders to increase the added value of tokens

• Give the community an influence on the long-term development direction of the project

Who are the winners and losers in different token models?

(The original form comes from Francesco , compiled by Shenchao TechFlow)

Interesting part: Reality of mixed models

When venture capital (VCs) combine with communities:

• VC ' s harvest : a smaller share, but a better public image

• Project gains : More supporters, but more complex management

• The community’s gains : higher stability, but less token allocation

There is no absolute standard for the pros and cons of a token model, whether it is more inclined to investors or the community. This always depends on the perspective of different subjects, especially the demand of the market.

Conclusion and Thoughts

The rise of community fundraising marks a major shift from a traditional venture capital-led model to a community-driven model. More and more projects are aware of the importance of being aligned with community interests and no longer simply cater to large institutional investors. In this ever-evolving environment, the key to success may be to design a distribution mechanism that prioritizes community ownership and ensures long-term sustainability of projects.

Although there is no "universal formula", some emerging elements must be carefully considered for projects that wish to successfully launch.

Currently, we are in the transition phase of both modes, and many projects try to replicate the Hyperliquid model, but the results are varied. On the one hand, they strive to show a willingness to allocate a higher proportion of tokens to the community; on the other hand, they are limited by their relationship with existing investors, which limits their autonomy in token allocation. .

However, community participation is not sufficient to ensure long-term success of the project or consistency of incentives.

Retail investors tend to pay more attention to short-term returns when dealing with the tokens they acquire, and may even be more inclined to cash out quickly than traditional investors. In addition, retail investors lack mature exit strategies, which may have a greater impact on market price volatility.

Nevertheless, it is not impossible to achieve balance by considering these factors fully from the early stages of the project. Just as blockchain technology continues to evolve over time, the project's token allocation model needs to keep pace with the times. While the current pace of progress may not be as rapid as expected, we can still see the revival of the community-led model, which brings new hope.

The next few months will be a critical period for observing and evaluating this trend: Will the community really have fair investment opportunities, or are these changes just at the marketing level, with little substantial improvements to the traditional model?

This time, can we truly achieve a breakthrough?