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Return to growth-driven: How can VC coins escape the dilemma of narrative?

BeWater

24-09-12 15:24

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Original title: "BeWater Research｜Return to Growth Drive: How Can VC Coins Get Out of the Dilemma of Narrativeism?"

Original author: Loki, BeWater Venture Studio

TL;DR

· The essence of the "VC Coin Collapse" is the overinvestment and irrational valuation in the primary market during this cycle, which allows VCs and projects that should have been eliminated to survive, raise funds, and appear in the secondary market at unreasonable valuations.

· In the absence of external cash inflows, the degree of involution in the crypto market is extremely high and has formed a pyramid-like class structure. The profits of each level come from the exploitation of the level below it and the withdrawal of liquidity from the market. This process will lead to an increase in distrust in the next level, making involution more and more serious. In addition to VCs, there are also a large number of higher levels in the pyramid.

· In the era of great internal circulation, the mortality rate of projects and tokens will increase significantly. The top-down "technical theory", "background determinism" and "narrativeism" will change from sufficient conditions to necessary conditions to a greater extent. The only thing the market believes in is real growth, real user growth, real income growth and real adoption rate growth.

1. It is not just VC coins that are in crisis, but the entire crypto market

VC and "VC coins" have become the scapegoats in the era of great internal circulation. Although there are many opinions that VC coins have become the culprit of this round of "bull market without mutual acceptance", this is not the case. As long as we compare them, we can soon find that it is not only VC coins that have significantly underperformed BTC and continued to fall, but also the fully circulated altcoins, Meme coins and even ETH. The initial circulation rate of most tokens in the DeFi Summer era did not exceed 5%, which shows that the simple circulation of tokens cannot explain the continued collapse of Alts.

From a macro perspective, the constant era of "a deterministic bull market every four years" no longer continues. Since Q2 2024, the market has been in an abnormally low liquidity state. On the one hand, the top of BTC's share lags behind the top of BTC's price. In the past few cycles, the top of BTC's share usually corresponds to the bottom of the market cycle, but the breakthrough of BTC in this bull market did not bring about a general rise in altcoins, including ETH. This also proves one point: It is not just VC coins that are in crisis, but all tokens or the entire crypto market.

Source: Tradingview

This is not difficult to understand. On the one hand, the BTC halving leads to a reduction in supply, driving the supply and demand curve online until a new balance, but after multiple halvings, the marginal effect of the BTC inflation rate continues to weaken, and the larger base also limits the multiple space. The BTC ETF drives the price increase and the halving cycle overlaps in time, giving us the illusion of a bull market, and this bull market is likely to not exist from the beginning. On the other hand, since the birth of BTC, the global economic cycle is generally still in an upward or stable cycle, so the so-called "cycle" is more like a small cycle within the trend line, but this trend is also changing.

2. The "VC Coin Effect" is just the prelude to the era of great internal circulation

From the industry perspective, the consequences of overinvestment and mispricing are emerging.In 2021, we proposed the "VC Happiness Index" indicator, which is calculated by dividing the growth of the current cycle's cryptocurrency market value by the total amount of blockchain industry financing in the previous cycle. The logic of this indicator is also very simple. The purpose of VC investment is to generate profits, so their investment needs to be realized through the growth of the market value in the next cycle.The higher this indicator is, the greater the probability that VC will earn high returns.

Here, a cycle theory similar to the Merrill Lynch clock will actually be formed. The speculative market value of cryptocurrencies is largely driven by exogenous factors. If there is little investment for a period of time, then the next cycle will easily produce a wealth effect and create a bull market, which will bring Fomo sentiment and financing convenience, leading to overinvestment. Overinvestment makes it impossible to realize the next cycle, forming a bear market, and the bear market will lead to insufficient investment, and the cycle will repeat.

Source: CBinsights, public data

2020-2021 is the happiest time for VCs in the post-ICO era. VCs with normal rhythms have made money in 2021-2022, which has led them to expand their financing scale several times. Therefore, we can see that the total financing amount in 2021-2022 exceeds 30 billion US dollars, and projects with valuations of hundreds of millions or even billions of dollars are coming one after another, but to date, there are only 30 crypto projects with annual agreement revenue exceeding 30 million US dollars.

Source: Token Terminal

The prosperity of 2020-2021 has allowed some funds that should have closed down or should have closed down in the future to survive, and they have also received money that they should not have raised. These funds have allowed some projects that should not have existed to continue to exist in 2021-2022, and even raised unreasonable amounts of money at unreasonable valuations, which ultimately led to these projects appearing in the secondary market at unreasonable valuations in 2023-2024.

So far, it seems that VC is the culprit of the market downturn, but things are still changing rapidly. This large-scale (-3, -3) is like a black hole, engulfing more and more participants, and VC is the weaker party in this battle royale game due to contract and vesting restrictions. According to the ranking of "easier to obtain low cost and high circulation rate", VC can only be ranked to the 6th layer.

In the absence of external cash flow (market-wide protocol income or new funds entering), the profit of each layer comes from the exploitation of the layer below it and the withdrawal of liquidity from the market. This process will lead to the intensification of distrust in the next layer, making the internal circulation more and more serious.

3. Growth, growth, growth!

The mortality rate of projects and tokens will increase significantly in the era of great internal circulation. The top-down "technology theory", "background determinism" and "narrativeism" will be transformed from sufficient conditions to necessary conditions to a greater extent. The core driving factor will switch to "real growth", real user growth, real income growth and real adoption rate growth.

(I) Organic growth: The salary of a qualified CMO should not be lower than that of a CTO

There are two common misconceptions in the current market:

1. Technology or products are more important than the market.The essence of all protocols or projects is a business, and the essence of business is profit, so everything can be simplified into two steps: (1) create a product; (2) sell the product. For most Crypto projects, (1) corresponds to technology and products, and (2) corresponds to the market. Sufficient liquidity means that supply exceeds demand, and any product can find a suitable buyer, but in the era of great internal circulation, liquidity is severely scarce, and the only thing a project faces is growth or death.

2. Data growth means growth. It is undeniable that task platforms/social tools/operational activities are playing an increasingly important role, but neither the Marketing Team nor the Marketing Agency should rely too much on them and become the porters of tools.

Through the task platform, we can achieve social media growth, package and wholesale KOLs to forward repeated information, accumulate GM/GN in Discord to 1000+, open 1000 more accounts under the incentive of Airdrop Hunter, attract big investors with 8% fixed income, and finally 500,000 community scale, 1 million exposures per day, 200,000 valid accounts, 1 billion US dollars TVL and other cold data appear in the financing deck and exchange listing decision meeting... This is obviously a kind of "real growth", and "real growth" should be highly integrated with product strategy, match the operation route, and maintain a high proportion of retention when non-sustainable factors (such as lottery, short-term incentives, points) are eliminated.

A truly excellent CMO should spend 70% of his time on strategic observation and thinking, 20% of his time on making plans, and 10% of his time on execution and achieving 100%+ results.

(II) The first step of KOL cooperation is one-on-one communication with the CEO

The role of KOL is underestimated and mismatched, and the core reason is the wrong path. On the one hand, KOL or KOL round has almost become a derogatory term recently, because some KOLs or matrix accounts promote indiscriminately and without any bottom line, which makes people "talk about KOLs". However, there are still many very high-quality KOLs in the market. The 80/20 rule also exists in market growth, and 80% of the influence is provided by 20% of the people. And these KOLs often have multiple attributes. What they can provide is far more than the market and brand level, including product and strategic level suggestions, resource networks, and even some KOLs can not be less than the investment of small and medium-sized VCs. These KOLs contribute their own value while shouldering the blame of "cutting leeks" and even losing more money, from the first level to the 1.5 level, then to the KOL round, and finally to the secondary market.

This is a typical "adverse selection". The lower the quality of the KOL, the stronger the motivation to participate in promotion or the KOL round, and the lower the quality of the project, the more favorable the conditions are, and it can even be sold in a package. For founders, are you really willing to believe that a KOL who is willing to take on any promotion task can bring growth to your project?

In a sense, KOLs are also a kind of customers. On the one hand, if even 10-20 KOLs cannot believe in your plan, how can the market believe it? On the other hand, if the founder is not familiar with the key KOLs, how can he be familiar with the entire track? So the solution is also very simple. KOL List, Agency or middleman can only play a supporting role. The founder or team member must have at least one-on-one communication with each important KOL.

(III) List protocol revenue as the highest priority growth indicator

The crypto market gives people a big illusion that it is easy to issue coins, easy to assetize, and easy to exit, which makes people ignore the fact that the growth of asset stimulation (including token/NFT/point issuance, task platform, incentive test network, etc.) is always one-time, and the real sustainable growth comes from the sustainable income brought by a sustainable business model.

The first step to sustainability is to have a reliable source of income. Objectively speaking, Crypto has not achieved large-scale adoption, which also means limited protocol revenue. Generally speaking, there are two sources of protocol revenue. The first is external sources, such as Tether can earn income by earning the interest rate difference between RWA and Stablecoin. The second is internal sources, such as public chains can earn Gas Fee, exchanges can earn transaction fees, and on-chain transactions and secondary market transactions are both objective transactions. If the agreement; the second step of sustainability is to ensure that the agreement has the possibility of achieving surplus. Protocol revenue is similar to the main business revenue of an enterprise, but the main business revenue does not mean profit. There is a saying that if a protocol needs to rely on issuing coins to maintain, then his issuance of coins is meaningless. The logic here is that issuing coins is a kind of "external blood transfusion". We can rely on blood transfusion to operate once or for a period of time, but it cannot be permanent. After many years of development, we can see that many protocols have done this, such as some exchange platform coins maintain net deflation, and the protocol revenue of some blue-chip public chains/DeFi has exceeded token inflation.

The third step of sustainability is to build an effective governance mechanism and economic model design. Even if the first two steps are achieved, we may still encounter some problems, such as some protocols paying tens of millions of dollars in operating expenses each year, some protocols lacking long-term incentives for teams to continue investing in construction after all tokens are released, unfair token distribution, etc. These problems require the joint efforts of multiple parties including the core team, investors, and the community to be solved.

(IV) 90% of projects do not have a real economic model

The problem faced by most "VC" coins is the mismatch between the growth of token circulation and business. For example, within the period of 6 months to 2 years after going online, the team/foundation/investor/developer incentives/users who started holding positions all began to unlock, the most notable of which are OP and ARB. The circulation rate of these two is still around 30% to date, and the peak period of ecological development is ahead of the token cycle. The problem of some new competitors is even more serious. A large number of ToC/ToB incentives ultimately did not form any retention. A true economic model needs to meet the following conditions:

1. It can earn or can earn sustainable protocol income in the future.For example, many protocols have achieved or may truly achieve sustainability, such as: (1) Curve protocol distributable income has exceeded inflation output. (2) MakerDAO's annualized protocol net income exceeds US$50 million, and the official implementation of Endgame also began this quarter. (3) Uniswap introduced front-end fees. Although it was questioned in the early stage, Uniswap has now earned tens of millions of dollars through this mechanism.

2. Match the token cycle with the project growth cycle. Increasing the initial circulation rate of tokens reduces the long-term inflation rate, reduces the market value miscalculation caused by "virtual circulation rate", extends/postpones the token unlocking cycle, and establishes a transparent and deterministic profit distribution/repurchase mechanism. These are shallow but effective solutions.

3. Treat incentives as investment behavior rather than consumption behavior. Many projects (especially large Infra of public chains) have launched large-scale ToC incentives in the past period of time, and have also derived an airdrop industry, but this incentive is essentially a consumption behavior. Users contribute Txs and public chains pay incentives. The problem is that this is a one-time behavior and most users will not stay. On the contrary, motivating developers is an investment behavior. With ecological projects, users' transaction needs can be met, Txs will be generated, and after the project is supported, the project can provide secondary incentives. This kind of investment behavior is sustainable.

4. Solve the class solidification problem of the chip structure. As we pointed out in the previous chapter, current market participants have formed a clear 7-layer structure, and the difference in chips at each level is becoming larger and larger. In this process, it is inevitable that there will be room for evil, such as distributing low-cost or free chips in an opaque manner through some means. After all these behaviors are accumulated, the weighted average chips will be infinitely reduced, which will lead to an inverted market valuation and aggravate internal circulation. There are only two end points for class solidification, one is reform and the other is revolution. It is unsustainable to dilute the chip cost without a lower limit. In fact, users have already voted with their feet and chose inscriptions and MEME.