Interpreting the logic behind VC coins, what else is worth paying attention to?

Original title: "Interpreting the logic behind VC coins"
Original source: Aquarius

How do fund project parties organize projects and what VC coins are worth paying attention to? Research Lead @ Aquarius Shaman Demon King deciphers the logic of VC coins, with the following highlights:

1. VC projects such as Ethena, IO and MSN quickly attract money through high valuations and market heat. The market appeal of such projects has weakened, and investors have turned to MEME projects.

2. This round of financing boom has led to a market bubble, and high-valuation projects are difficult to deliver on expectations. People who try to profit from venture capital have poured into the market, further exacerbating the chaos.

3. Idealists are difficult to sustain, puppet projects rely on capital operations, and top teams such as Zama and Fhenix focus on long-term technological innovation and are expected to go further.

4. North American fund investment focuses on technical sentiment, while Asian fund investment seeks market effectiveness, but Asian projects are more difficult to obtain long-term financial support than North American projects.

5. Projects with excellent products, such as those invested by Paradigm, have long-term potential. In this round, retail investors need to stand from the perspective of the project party to profit from VC.

6. Technical capabilities and information channels help identify whether a project is a gathering, and projects with potential problems can still be judged based on fundamentals.

7. The "gold mine and human mine" theory reveals that there is no real gold mine in the market, projects rely on new users for consumption, and transactions are mostly worthless cycles.

8. The "human mine" in the current market is VC itself, and the participants who profit from this round of market are those who cut VC together with the project party.

9. The cost of wool is low and the risk is controllable. Through airdrops and pledge diversification strategies, you can get stable returns, which is suitable for long-term persistence.

10. Be wary of high-valuation and low-circulation projects, and inflation pressure is high. You can check the distribution of currency holding addresses through blockchain browsers such as Etherscan. If most of the tokens are concentrated in actual circulation, then it is a good project.

11. ETH has rigorous technology and high security, which is suitable as an ideal project for Crypto people, but the technology has no direct correlation with the price of the currency.

1. VC projects such as Ethena, IO and MSN quickly attract money through high valuations and market heat. The market appeal of such projects has weakened, and investors have turned to MEME projects

A large number of projects in the market this year are led by large VCs, especially in the fields of Staking and CeDeFi. Projects listed on top exchanges such as Binance are almost all driven by these VCs. The rise and fall of VC-led projects in this round of market history can be analyzed through three projects:

The first project is Ethena, which is a typical VC-operated project. Ethena performed well in the VC round through high valuation and strictly controlled whitelist Mint mechanism. Although it brought certain benefits to retail investors in the early stage, the price of Ethena's token fell sharply over time, and many VCs' investments were still locked. Terms such as "1+3" (i.e., three years of linear release after one year of cliff period) promoted by North American VCs, although it seems to protect the interests of VCs, in fact many investors are still locked in.

The second project is IO. After announcing the financing of 30 million US dollars, this project attracted great market attention. But the actual situation is disappointing: the project's technology was not mature when it was raising funds, the team was still in the formation stage, and there were even loopholes in security, which eventually led to the project being hacked. Despite this, IO was successfully listed on Binance, but many retail investors did not get the expected returns after participating, and even suffered a back-loss situation.

The third project is MSN. The founder of this project attracted a lot of investment through extensive publicity and KOL endorsement. But the project quickly lost momentum after listing on OKX, and the value of the token fell rapidly, almost to zero. The project party had already arranged an exit channel, and gained benefits by harvesting retail investors and other VCs, and finally the project withdrew from the market.

There are also relatively successful VC projects, such as EtherFi, Bouncebit and Eigenlayer, but they are highly homogeneous: from the beginning, these projects have determined the trading platform, execution team and liquidity exit plan. After that, they will look for VCs for financing and find people willing to "carry the sedan chair". In fact, the technical part of many teams is outsourced, and the quality is generally poor. If you look closely at the contracts of these projects, you can see that their processes and technical levels are relatively mediocre. VC projects use high valuations and market heat to make quick profits, but as the market becomes familiar with these routines, the attractiveness of VC projects gradually weakens, and investors begin to turn to other types of projects, such as MEME.

2. This round of financing boom has led to a market bubble, and high-valuation projects are difficult to deliver on expectations. The influx of people trying to profit from venture capital has further exacerbated the chaos

The investment strategy of the last round of VC was relatively stable, and most investors received good returns. This successful experience led to a boom in this round of financing. Many funds under the name of cryptocurrency venture capital have flooded into the market and successfully raised a large amount of funds. The original VC institutions have also rapidly expanded their scale. This influx of funds was not accompanied by significant technological innovation, and a bubble appeared in the market.

Since LPs have time requirements for funds, VC institutions have to invest funds in the market within a limited time. This leads to two situations: either investing in some projects with low valuations but mediocre performance, or competing to invest in a few so-called top projects, resulting in these projects being given high valuations far exceeding their actual value. This bubble valuation makes the market's expectations for these projects far exceed their due levels.

Take Ethena as an example. Although it is not a bad project, and projects like WorldCoin and RNDR may not perform badly, the valuations of these projects have been pushed too high and are difficult to match the actual market performance. At the same time, VC institutions not only need to invest funds, but also hope to make profits in these highly valued projects, resulting in the emergence of projects like IO and MSN. IO is a typical VC-led project, while MSN is obviously an example of the project party harvesting VC in turn.

The chaos in this round of the market can be attributed to the excess of funds in the primary market, but the scarcity of high-quality projects. Many people have poured into the market, trying to profit from venture capital, further exacerbating the chaos in the market, which is a typical bubble phenomenon.

3. Idealists are difficult to sustain, puppet projects rely on capital operations, and top teams such as Zama and Fhenix focus on long-term technological innovation and are expected to go further

In North America, it is more common that some project parties are idealistic and hope to change the world through their own efforts. Such entrepreneurs are usually young people who are starting a business for the first time, especially those white people who are deeply influenced by Silicon Valley culture or founders who have been exposed to American culture. They often think that what they are doing is not just to make money, but to create a truly valuable product. Although such projects may obtain financing in the early stage, they are often difficult to sustain and eventually disappear.

Another type of entrepreneur is the "puppet" founder who is pushed to the front. Their projects are not based on team strength from the beginning, but rely on well-designed publicity and a strong support system behind them. The foundation may have preset the profit path of the project, including who will increase the TVL of the project, who will provide support, and which ecosystem will promote the development of the project. For such projects, the importance of the team itself is reduced, and more is the success in capital and market operations.

There is also a team that has planned from the beginning how to profit from the project and exit the market. If they can successfully cut leeks on the exchange, they will quickly profit from retail investors. If this is not possible, they will also make a lot of money through financing.

In addition, there are some projects that fully cooperate with VCs to release some short-term profitable "dog" projects, with the main goal of quickly obtaining funds. The operating model of this type of project is simple and crude, especially in the Asian market.

There are indeed some excellent projects in the market that are made up of top scientific and technical teams. For example, the Zama and Fhenix teams that are working on fully homomorphic encryption (FHE) have raised huge amounts of money, with Zama raising $75 million. Most of these team members are real scientists, similar to those in the Ethereum Foundation, who focus on academic research and the development of the blockchain industry, publish academic papers, and promote industry progress.

There are also some projects such as those invested by Paradigm, where the project teams are very clear about what they are doing and are seriously advancing. However, in the current market cycle, the performance and future success of such projects are still full of uncertainty, so they have not attracted everyone's attention, but it is believed that these projects will still exist in the industry in 3 to 5 years.

4. North American funds focus on technology and sentiment, while Asian funds focus on market effectiveness, but Asian projects are more difficult to obtain long-term funding support than North American projects

There are significant differences in investment mentality between North American and Asian funds. North American funds are generally not impatient and are willing to support some projects that are difficult to succeed in the short term or even in the next market cycle, especially those "scientist" projects that have an improvement on blockchain technology. Asian funds pay more attention to realistic results, and are more concerned about how to obtain more liquidity from the chain, and how to make the project widely recognized and loved in the market, focusing on data performance and market acceptance.

This difference does not have an absolute distinction between good and bad, but reflects different investment logics and cultural backgrounds. Asia's technical level is generally high, and there are some projects with excellent performance, but these projects are often more difficult to obtain financial support than North American sentimental projects.

5. Projects with excellent products, such as those invested by Paradigm, have long-term potential. Retail investors need to stand on the project side to profit from VCs

Projects can be divided into two categories: one is projects with excellent products, and the other is projects where retail investors have the opportunity to participate and gain benefits. For projects with excellent products, taking Paradigm as an example, the direction of this fund's focus and the projects it has invested in have helped investors avoid many potential risks. Although the fund also experienced losses during the bear market, their research, published papers, and the technical logic of the projects they invested in show their serious attitude. Most of the projects invested by Paradigm have the potential for long-term survival. Even in the face of difficulties, they will persist because they are a crypto-native fund with research-driven core and have invested in companies such as Flashbots. These projects are worth paying attention to.

There are also some poorly performing funds in the North American market, such as PolyChain, and investors are advised to remain vigilant. Although projects with excellent products may not necessarily provide retail investors with opportunities to participate, those high-profile projects, such as IO, usually give retail investors the opportunity to participate. However, in the current market environment, retail investors need to change their original investment ideas. The past logic was to obtain financial returns from subsequent entrants through early investment, but this round needs to stand from the perspective of the project party and profit from VC together with them. Through this adjustment of thinking, even if you participate in some projects that are not completely ideal, you may still get a good return.

6. Technical capabilities and information channels help identify whether a project is a scam. Projects with potential problems can still be judged based on fundamentals. For people with certain technical capabilities, it is relatively easy to identify the authenticity of a project.

For example, by reading IO's technical documents, some unreasonable points were found, and the problem was detected. Projects with impure purposes will not invest too much energy in product development, so people with technical backgrounds are more likely to identify these problems. Some projects may be well hidden, but even so there are still some clues to be found.

If there are certain information channels in the circle, you can usually hear some rumors about the project, which often provide valuable clues. By combining rumors and technical understanding, many so-called "scam" projects can be identified. Even if there is an intention to scam behind some projects, if there is no bad reputation, the technology and fundamentals are still good, such projects can still be accepted. This is a reasonable judgment logic.

7. The "Gold Mine and Human Mine" theory reveals that there is no real gold mine in the market, projects rely on new users to consume, and transactions are mostly worthless cycles

The "Gold Mine and Human Mine" theory is a view formed after reflection on the market and the industry: Most projects are basically providing services or tools, like making "shovels", but what gold mines are these "shovels" digging? It turns out that there is no real gold mine in the market. The so-called gold mine is actually a "human mine" - those new users who are constantly attracted. After these new users enter the market, they often become the objects of later project operations and are "consumed". There is no actual rigid demand logic between many projects, but instead they present a mutually dependent gambling relationship. For example, Uniswap serves Aave, and Aave serves Uniswap. This relationship makes people question the nature of platforms such as Uniswap, which ultimately only provide a trading platform, and the content of most transactions is actually worthless "air".

The Chinese are better at reconciling with this reality, and entering the market does not necessarily pursue lofty goals. Through this "gold mine and human mine" theory, we can see through the market and find out where the "human mine" comes from. Although it sounds a bit cruel, it is indeed a methodology for analyzing industry problems.

8. The "human mine" in the current market is VC itself. The participants who profit from this round of market are those who cut VC together with the project party

The current market is obviously divided into multiple parts. Looking back at the grand occasion of the Inscription Project, the human mine at that time mainly came from retail investors. Just posting an inscription on the chain and revealing the name a little bit can trigger a strong FOMO emotion and attract a large number of retail investors to participate. This wave of retail investors, whether from Web2 or Web3, is driven by emotions.

The current situation is different. The liquidity of VC-led projects mainly comes from existing funds, and there is no obvious increase in the market. Even if there are incremental funds such as ETFs, these funds will not flow into the Altcoin market, forming an isolation phenomenon. Therefore, the "human mine" in the VC market is actually the VC itself. Since the last round of the market, VC has maintained the flow of funds by filling the gap from other channels, but in this round, the real profit is the participants who cut VC together with the project party.

9. The cost of wool is low and the risk is controllable. Through airdrops and pledge diversification strategies, stable returns can be obtained, which is suitable for long-term persistence

Large exchanges usually have restrictions on the sale of tokens by project parties, so project parties often legally distribute tokens through airdrops. Manta's airdrop rules are designed to allow project teams to obtain more tokens. This makes wooling a reasonable business, and participants get a share of the profits of project parties and VCs.

The cost of staking is relatively low, especially compared to speculating on contracts. Taking interactive staking as an example, the basic cost of an account includes three sets: Twitter, Discord and Telegram, and the cost of the three sets is about RMB 20 to 50. When operating on the chain, it is recommended to minimize the time spent on the main network and mainly interact on Layer 2, so that the GAS fee can be almost negligible. The cost of other expenses such as isolated IP and anti-witch tools is also relatively low, and the cost of the entire staking is controlled within a low range.

Although staking staking seems to require more funds, by dispersing the funds for staking, the risk can be reduced and considerable returns can be obtained. Using EtheFi as an example, such operations can get a minimum living allowance. By tracking on the chain, identifying the rules and loopholes that may exist on the project side, you can also get additional benefits. There are many ways to play staking. Whether the amount of funds is large or small, as long as you are willing to persist, you may get a good return. Compared with trading, the risk of haircuts is more controllable and the returns are more stable.

10. Be wary of high-valuation and low-circulation projects, which have great inflationary pressure. You can check the distribution of coin holding addresses through blockchain browsers such as Etherscan. If most of the tokens are concentrated in actual circulation, then it is a good project

For low-circulation and high-valuation projects, we need to be aware of the huge inflationary pressure that accompanies them. The continuous release of new tokens will have an impact on the market. Take Arbitrum's ARB as an example. Although its price performance was good in the early stage, holders do not have any means to increase interest rates, and they have to bear an annualized inflation rate of about 60%. This means that the value of the token is being continuously diluted, which is unfair to ordinary holders.

Although SUI is also a project that is highly dependent on VC, with a large circulation and continuous release of new tokens, it provides a higher reward mechanism on its chain, especially various DeFi applications. This allows users holding SUI to fight inflation through on-chain activities, thereby reducing the direct damage caused by inflation.

How to identify projects that need to be careful on the chain: Through blockchain browsers such as Etherscan, you can see the holders of each token address and their distribution. For example, if most of the tokens are concentrated in the addresses of exchanges or platforms such as Uniswap, this means that these tokens are in actual circulation. If the token accounts for a low proportion of the current circulation, even if the valuation is high and the circulation is low, this is a warning signal. Check the distribution ratio of exchange addresses and holding addresses. If most of the tokens are concentrated in actual circulation, then the project is relatively good.

11.ETH has rigorous technology and high security, which is suitable as an ideal project for Crypto people, but the technology has no direct correlation with the price of the currency

ETH has a good prospect and is often called the "scientist chain" because its underlying architecture, game theory design and cryptography design are very rigorous and are built by real scientists. In contrast, Solana, Ethereum's biggest competitor, is more like an "engineer chain". It is obvious that engineers lack clear guidance in the direction of improvement, and many technical problems are difficult to solve. For example, Solana frequently crashes and even needs to rewrite the code, which reflects the limitations of the engineer chain.

Each upgrade of Ethereum is very rigorous. Although some people believe that the degree of decentralization has decreased, the cryptography and game theory design behind it still ensures its security. Therefore, the future of blockchain needs one or two projects that truly have Crypto ideals, and Ethereum is one of the suitable choices. It should be made clear that the technical quality of the project has no direct correlation with the price of the currency.

This article comes from a contribution and does not represent the views of BlockBeats.