Meme Magic or VC Tragedy? Decoding Tokenomics and the Future of Financing

Web3 financing is at a turning point.

Author: Newman

ICO Craze: The Historical Background of Web3 Financing

The ICO frenzy of 2017-2018 was a key moment in the field of encryption financing, characterized by:

• Minimum Lock-up Position and substantial returns: VC enters the project at a lower valuation relative to ordinary investors, and without a Lock-up Position period, thus achieving substantial returns (e.g., @Zilliqa realized a 50x rise after the ICO in January 2018).
• Liquidity concentration: At that time, there was only a small amount of token issuance in the market every week, and investors had limited choices. This scarcity drove demand and amplified returns.
• VC as a signaling effect: The attractiveness of VC is mainly not in its capital (most ICO projects do not need too much funding in the stage without products), but in its signaling effect. By attracting a few well-known VCs to raise millions of funds, the project can attract more participation from ICO investors.

However, this period is not sustainable. eyewash, fund Rug Pull, and unclear regulation have undermined market trust.

By 2019, regulation began to shape a more structured financing environment. The characteristics of this period include:

• Longer lock-up period: When VC enters the private sale round, it needs to accept a longer lock-up period. The market no longer supports the ‘same-day unlock’ behavior driven by speculation in the early stages.
• Decentralized Liquidity: The market is oversaturated with too many ICO projects launching simultaneously. Investor demand is no longer concentrated on a few projects, and the hype that early success relies on begins to weaken.
• VC as the funding source for builders: founders need VC funding to develop products, and then launch Token. This marks a shift in the financing landscape from speculative ICOs to a more product-focused approach.

After 2019, the market transitioned to what is now commonly referred to as the ‘low circulation, high FDV (fully diluted valuation)’ environment, with Tokenissuance typically having a low circulating supply at launch, and a high FDV valuation.

Challenges Currently Faced by VC

Despite VC playing an important role in history, it is facing more and more challenges in today’s market:

1. Mismatch of Tokenomics

• Historically, VC entered at a low valuation with a short lock-up period, which is not in line with the interests of ordinary investors. This has led to reputation issues and lack of trust.
• Poorly designed Tokenomics (such as low circulation, high FDV) leads to the project experiencing ‘continuous and expected dumping’ after going online.

2. The reduction in VC funding demand

• More affluent founders: Successful founders no longer rely on VC, but use personal resources to launch projects.
• Retail-driven model: projects such as Memecoin and high-circulation issuance (refer to @HyperliquidX for details) demonstrate that some projects can succeed without VC involvement.
• Signal attenuation: Although some mainstream VCs still have influence in infrastructure projects, their influence in Application Layer projects has significantly decreased.

3. Mismatch between Product and Market

• For most Web3 projects, the community and users are the driving force of success. However, VC is not good at engaging with the community.
• Therefore, the role of traditional VC is gradually being replaced by well-known angel investors. These angel investors often have closer connections with end users and can better promote community-driven growth.

The future role of VC

Although the demand for VC funds may be uncertain, in certain specific contexts, VC still has significant significance:

1. Depth participates in the ecosystem

• VC needs to actively participate in ecosystem activities, such as Mining, Memecoin transactions, and other retail-level operations.
• To maintain correlation, VC needs to not only exist as an institution but also become a player embedded in the Depth trench. This participation enables it to provide unique insights into evolving growth hacker strategies, Tokenomics design, and market strategies.

2. Provide strategic value

• Founders are paying more and more attention to VCs that can provide real value (such as operational support, Tokenomics guidance, and professional market knowledge).
• Although angel investor can also provide assistance, their focus on portfolio management is not as good as VC.
• VC needs to transition from passive funders to active strategic partners.

3. Selective Participation

• VC can focus on a small number of investment projects, concentrate on contributing to these projects, and use a “cast net” approach for smaller investments at the same time.
• The founder prefers to maintain a smaller investor structure, favoring investors who can bring substantial contributions with a smaller quantity.

Recent / Upcoming Interesting Projects

1. Hyperliquid (@HyperliquidX)

• Possibly adopting a high circulation, VC-free issuance method to test whether the market can maintain price stability without long-term Lock-up Position.
• If successful, it may establish a new model for other projects, but also faces challenges such as the pressure of dumping on the first day.

2.BIO Protocol (@bioprotocol)

• Combining VC rounds and public auctions, allowing participants to exchange $BIO with WETH or original sub-DAO Token.
• Expand community membership through public auctions, while introducing VC investments to achieve wider community coverage.

3.Universal Basic Compute $UBC (@UBC4ai)

• Similar to the fair issuance of Memecoin, there is no team allocation, no presale, and no airdrop.

Potential New Financing Model

In order to transition from a low circulation, high FDV environment, we need an experimental phase to explore sustainable solutions. Here are some possible models:

1. VC and retail investors enter at similar valuations

• VC, similar or even identical valuation investment projects, may receive a larger allocation compared to retail investors, but they need to accept a more stringent Lock-up Position. This alignment ensures the interests of VC and retail participants are consistent, reducing the risk of VC dumping ordinary users.
• This mode may drive the project to a healthier and more organic rise.

2. No VC model

• The project raised funds directly from retail investors instead of seeking VC support.
• This will test whether the market can maintain price stability and rise without significant Lock-up Positions or VC participation. If successful, this model may set a precedent for other projects in terms of balancing Memecoin economics and operational/funding needs.

3. Model inspired by Memecoin

• The success of Memecoin is influencing structured projects to adopt simpler, community-driven Tokenomics:
• No foundation-held pools: no community/ecosystem pool, team and advisor pool, or treasury pool. Founders/developers need to buy tokens on the open market, aligning their interests with retail participants.
• 100% Initial Circulating Supply: Ensure Liquidity and reduce reliance on long-term Lock-up Position.
• For example, projects like Universal Basic Compute (@UBC4ai) and @pumpdotscience have launched $URO and $RIF, which adopt an issuance method similar to Memecoin, without VC funding, team allocation, Airdrop, or pre-sale.

The future direction of Tokenomics

With the continuous evolution of the market, the ideal Tokenomics structure (for non-Memecoin) is gradually becoming clear:

1. Aligning Interests

• VC enters at a valuation similar to that of retail participants and ensures long-term alignment of interests through Lock-up Position.
• The cost is that VC can receive a larger proportion of distribution compared to retail.

2. Relatively high initial circulation

• While referencing the Tokenomics inspired by Memecoin, the project should strive to achieve a 60%-70% Circulating Supply at launch to ensure Liquidity and reduce the possibility of manipulation.

3. Changes in the Token Pool Structure

• Unlike Memecoin, the project requires continuous operating funds, so it is not possible to achieve 100% initial circulation. 30%-40% of the Token can be allocated to the treasury pool for future financing, the team and advisor pool, as well as the investor pool, with a lock-up period set.

4. Expected Fluctuation in the past 7 days

• For projects that adopt the Airdrop strategy, a large supply will be unlocked on the first day, allocated to farmers and Non-fungible Token holders, especially for projects with high circulation. Similar to the case of direct listing by companies like Spotify, the large amount of circulating supply on the first day may result in extreme fluctuations in the first 7 days.

Conclusion: The Future of Web3 Financing and VC

Web3 financing is at a turning point. High liquidity and the absence of VC models are challenging traditional norms, but the role of VC remains crucial in areas that require significant upfront investment. The future of Web3 financing may combine the advantages of both.

• For founders: Streamlined investor structure and redesigned Tokenomics will enable the project to attract the community while remaining consistent with investors.
• For VC: The focus will shift from capital deployment to providing centralized value-added services to ensure its correlation in the rapidly changing ecosystem.
• For the market: riseHacker will rely on product innovation and improvement of Tokenomics, rather than relying on traditional mechanisms such as Airdrop.

As the market experiments with these new paradigms, successful cases will pave the way for broader adoption, creating a more sustainable and equitable funding environment for Web3.