Behind the Memecoin craze: the rise of retail investors and the bottleneck of innovation

Original author: @DefiSquared; twitter
Original translation: zhouzhou, BlockBeats

Editor's note: Retail investors want to take back power, complex token economics design is abandoned, exchanges continue to list low-quality tokens in order to increase user registration rates, resulting in a decline in listing quality and less innovation. The above reasons explain why memecoin currently dominates the market. The market is currently very enthusiastic about memecoin. If you want to change this trend, you need a truly innovative crypto narrative to replace it. Although AI has potential, its combination with encryption is still vague. There may be some breakthroughs in DeFi in the future, but it still takes time to verify.

The following is the original text (for ease of reading and understanding, the original content has been deleted and reorganized):

I am often asked a question recently: Will memecoins continue to dominate the market? In response to this topic, I have sorted out some thoughts and reviewed the relevant historical background.

First, I think the main factors driving memecoin’s dominance are as follows:

1. Despite the strong demand for new tokens, there is a lack of new innovation in the industry. (Has cryptocurrency reached the limit of development without introducing centralized elements?)

2. The deliberate removal of the actual use of tokens, so that their valuation is unrestricted.

3. Retail investors want to regain control.

4. When memecoin was listed on exchanges, the user registration conversion rate was extremely high, which stimulated exchanges to list a large number of low-quality tokens.

Looking back at the innovation process, we can see the technical advancement path in the crypto field:

2016: Basic smart contract functions, such as DAO and Etherdelta.

2017: Crypto is everywhere. For example, various tokens launched for dentists, taxis, etc.

2021: Finance combined with NFT. For example, lending, automated market makers (AMMs), DeFi, and collectibles.

2023: Infrastructure construction, such as the first layer network (L1), cheaper/faster transactions.

2024: Memes

These may seem unrelated on the surface, but in fact there is a very clear process of narrowing the scope. At first, this technology was like the "Wild West", and everyone felt that its possibilities were endless. However, with each cycle, the scope of application of the technology became more and more focused, until 2021, when the market felt that what could be done in a fully decentralized network had reached its limit.

Since then, the number of innovative dApps has decreased significantly, and the market has begun to focus on improving infrastructure. While infrastructure improvements can last for multiple cycles, retail investors are short-term focused, and when the market can no longer provide other innovations, memes become mainstream, but it should be noted that memes have always had a huge amount of attention. For example, Doge had a market value of $80 billion in 2021, but now memes have become the focus of the most popular trend.

The second factor that memecoin dominates the market is theoretical valuation. For a long time, there has been a joke in the industry that the most valuable projects should never launch real products, because once launched, the market can immediately quantify their valuations. DeFi in 2024 is a good example: in an efficient market, investors can look at the fundamentals of a project in less than five minutes, give it a valuation of 20 times the price-to-earnings ratio, and conclude that the project should not be worth more. This is the biggest reason why DeFi can no longer usher in a bull market in the current cycle.

In 2021, we saw projects that designed complex token economics so that few people could see the true benefits or whether the project was sustainable. This created some of the most sophisticated Ponzi schemes at the time, but ultimately, as these projects collapsed, the market's interest in opaque token economies disappeared.

So for memecoin, the solution was simple: just throw utility aside and the project became unquantifiable. Interestingly, the projects that tried to add utility to memecoin in this cycle actually hurt their valuations by doing so.

The most direct reason why memecoin dominated this cycle was, of course, that retail investors wanted to take power back from venture capital firms and large institutions and transfer it to ordinary investors. The reality is that this is just a small change in profit distribution, and unfortunately, retail investors still don't get the main benefits.

Instead, the gains went from VCs to the sharks (small, lean teams) who knew how to monopolize token supply, package it as “organic” market behavior, and then repeat it over and over again. This has happened so often in the market that it doesn’t even need to be named.

The key factor that makes this strategy so effective is that the market mistakenly uses market capitalization as a signal of legitimacy, which incentivizes those who monopolize token supply to artificially inflate valuations. Of course, the market is constantly gaming this, and solutions like Pump Fun have been created to limit this opaque supply monopoly. However, this has led to the creation of more sophisticated “sniping” and accumulation techniques, and the war is still going on. But in the end, the vast majority of profits from memecoins fell into the hands of these organized groups, and the occasional “organic win” is used to attract ordinary retail investors to continue to participate in the game.

Finally, let’s talk about exchange listings, which is rarely discussed, but exchanges have driven the current memecoin craze, and this is closely related to their incentives. In particular, exchange listing teams want to select tokens that can drive the most user registrations. That is, how many users can register and deposit to the exchange for the first time after a token is listed, and widely distributed tokens in new ecosystems are particularly good at this. For example, according to the Bybit CEO in an interview, the number of new users brought by clicker games on TON reached millions per listing (this number is shocking).

Popular memecoins are often widely distributed in small amounts because they are very easy for ordinary retail investors to understand, which also leads to high user registration and deposit conversion rates. However, the incentive mechanism behind this is actually misaligned. For the listing team, this looks good - the number of users has surged, and their performance targets (OKRs) have been met.

But the reality is that many of these new signups are not of high quality, and this phenomenon often prompts exchanges to list low-quality tokens in order to hit these numerical targets. In the long run, this will likely lead to a decline in the quality of listings, which will in turn affect innovation in the entire space.

With all this background, do I think the market attention for memecoins will be sustainable? At least in the medium term, I think it will. For memes to lose market attention, we need to see a truly crypto-native innovation narrative (i.e. decentralized hybrid technology) and good ponzinomics.

However, the sad reality is that this is much harder than it used to be. The closest thing to this right now is AI, but in most cases, people ask why this needs to use crypto technology?

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