Key Takeaways

  • This report examines several observations in the crypto market, focusing on valuation, the risks associated with centralization, the need for improved transparency in fund usage, and the rationale for rebranding.

  • Market participants, including venture capital (“VC”) funds, centralized exchanges, and retail users, are becoming more aware of valuation. This increased awareness has led to more informed investment and operational decision-making.

  • The concentration of token ownership poses risks, including potential exploits and governance issues. Ensuring decentralized control and broad participation is crucial for the integrity and resilience of crypto projects, fostering long-term trust and stability.

  • There is a growing call for greater transparency in how project funds are used. Detailed disclosures can foster responsible financial management and build trust among stakeholders.

  • Rebranding can be a strategic move to signal a renewed focus, attract new investors, and align the project with updated goals. However, it must be driven by legitimate business needs and not be used to obscure or hide certain actions. Investors should conduct thorough due diligence to understand the rationale behind any rebranding efforts.

Overview

Having been to a few crypto events in recent weeks, we've had the chance to speak to industry leaders, investors, project teams, retail users, and other market participants. These conversations have given us valuable insights into what the community is thinking about.

In this report, we aim to share a few insights we have gathered from these conversations, offering our thoughts of the current landscape. Specifically, four broad themes and observations came up in our conversations:

  • Valuation Remains High (in Certain Market Segments): Several VC funds have either slowed their pace of deployment or are looking at other sectors with more reasonable valuations.

  • Centralization Risks Often Overlooked: The risks associated with concentrated token ownership should not be underestimated.

  • Improve Transparency in the Use of Funds: Recent events have prompted calls for disclosures on how treasury funds are being used, given their direct impact on token holders and the community.

  • Rebrand, But for What Purpose?: Rebranding can serve as a strategic initiative to indicate a refreshed focus, draw in new investors, and align the project with its updated objectives. However, it should be motivated by genuine business needs and not used to conceal or obscure certain actions.

1. Valuation Remains High

TL;DR: While token valuations have somewhat declined, there are still certain parts of the market that command a premium. 

During discussions with several venture capitalists at Token2049, a recurring observation was noted: valuations in certain sectors of the primary market remain high. 

This observation aligns with our earlier findings. In our May report, we highlighted the issue of elevated valuations, particularly in the context of tokens with low circulating supplies. To recap, there is an observable trend of token launches occurring at high valuations with limited circulating supply. This trend is especially pronounced when comparing tokens launched in recent years. At their peaks, some of these recently launched tokens have reached valuations similar to the largest tokens in the market, which have been around for years.

Additionally, the issue of low initial circulating supply is further compounded by the continued launch of new tokens. As more tokens are introduced with low circulating supplies, the supply of circulating tokens in the secondary market will increase exponentially over time as future tokens get unlocked. For example, if most tokens launch with less than 10% of initial circulating supply, the industry will face a significant amount of token unlocks in the next 1-2 years. Without a corresponding increase in capital and investors to absorb this supply, many tokens will suffer in terms of performance. Addressing this challenge can present growth opportunities for the industry as it adapts to evolving market conditions.

What has been done?

Since we published our report on “Low Float & High FDV: How Did We Get Here?”, we have observed numerous discussions on this topic and importantly, increased awareness among market participants. Some actions undertaken include:

  • VC Funds: Conversations at Token2049 reveal that VC funds are looking for opportunities in other sectors where valuations are more reasonable. Some have also slowed their pace of deployment this year, maintaining discipline by focusing on fundamentals. 

Data from PitchBook’s Crypto VC Funds report also reveal that the interval between fundraising rounds has progressively lengthened, with the median time between rounds more than doubling from 1.1 years to 2.4 years. The report highlights that this extended period indicates that fund managers are taking longer to return to the market, likely because they are dedicating more time to managing their portfolios and deploying capital at a slower pace during the crypto bear market.

Figure 1: VC deal-making activity has hit a four-year low in terms of the number of monthly deals

Source: The Block, as of September 27, 2024
  • Centralized Exchanges: Exchanges such as Binance have called for high quality projects with low to medium valuations, and moderate token float during the token generation event (“TGE”) to apply for listing. Additionally, projects should ideally demonstrate product-market fit and show sustainable user growth. 

  • Retail Users: While we do not have data on hand to show what actions have been taken, we have observed much discussion about this phenomenon on social media, demonstrating increased awareness, and hopefully, encouraging more to conduct their own due diligence before investing. 

2. Centralization Risks Often Overlooked

TL;DR: Centralization risks should not be underestimated. In the worst cases, they may expose other stakeholders to direct or indirect losses.

An often-overlooked aspect of crypto projects is the risk of centralization. We believe its implications should not be underestimated, and in this section, we share some of our observations, and methods for detecting centralization. 

Centralization risks significantly impact decision-making processes, treasury management, and overall governance. When power is concentrated in the hands of a few individuals or entities, it can lead to several adverse outcomes. In the worst-case scenario, this concentration of power may result in exploits, rug pulls, and other malicious activities that are detrimental to the community. 

Such incidents not only erode trust but also jeopardize the long-term sustainability and credibility of the project. Therefore, ensuring decentralized control and broad participation is crucial for maintaining the integrity and resilience of crypto projects.

On the other hand, decentralization ensures that no single entity has control over the entire network, promoting transparency, security, and trust among users. Decentralization manifests in various ways:

  • Infrastructure: Hardware distributed across multiple nodes, data centers and geographies reduces single points of failure, making it much harder for malicious actors to compromise the network. Decentralized infrastructure also has benefits in terms of network security, availability, and censorship-resistance.

  • Governance: Decentralized decision-making and governance are integral to the crypto industry, empowering communities and ensuring that no single entity has unilateral control over the direction and development of blockchain projects.

  • Token Distribution: A diverse token distribution promotes inclusivity and fairness, fostering a sense of ownership and participation across a large community of users and supporters. It also contributes to democratic decision-making in the case of governance tokens.

For this section, we will focus primarily on centralization risks associated with token distribution.

Case Study: Concentration of Token Holders in Memecoin “Z”

For illustrative purposes, we have analyzed a memecoin project, which we refer to as 'Project Z' to maintain anonymity. In the case of Project Z, several indicators suggest a high concentration of token ownership, along with on-chain activities that could potentially prove detrimental to token holders.

At first glance, it may appear that Token Z is widely distributed, with nearly 200,000 addresses holding the token. However, a closer examination of on-chain transactions reveals that many of these addresses are interconnected, likely indicating ownership by a single entity. This distribution strategy appears intended to artificially inflate the number of token holders.

Figure 2: A majority of the token supply is held by related addresses

Source: Binance Research

Furthermore, even among the unrelated addresses, the majority of tokens are held by a small number of large holders, commonly referred to as “whales.” Small retail users constitute only 3.5% of this group, representing a mere 0.5% of the total token supply.

Figure 3: Whales hold a large portion of the token supply among unrelated addresses

Source: Binance Research

Implications

In this case, we identified potential indicators of front-running, with a significant portion of the token supply acquired by related addresses within the first hour of the token sale. Furthermore, the substantial concentration of tokens held by these related addresses poses a considerable risk of dumping pressure should this group decide to liquidate their holdings.

Next Step: Analyze Token Ownership

To clarify, it is not uncommon for a small group of insider wallets to hold a significant portion of tokens, particularly during the initial stages of a project's launch. We are not suggesting that investors should automatically view this characteristic as a red flag and avoid such projects entirely. However, concentrated token ownership does introduce higher levels of risk, such as the potential for rug pulls and a lack of decentralized decision-making, compared to a more diversified token holder base. This risk is particularly pronounced for tokens with speculative characteristics and minimal utility, such as memecoins. By analyzing token ownership, investors can gain a more comprehensive understanding of the risks associated with a particular token. On-chain data visualization and intelligence tools such as Bubblemaps and Arkham may be helpful for such purposes.

3. Improve Transparency in the Use of Funds

TL;DR: Greater transparency in treasury fund usage fosters responsible financial management and encourages active participation from governance token holders. We should strive to make detailed fund disclosures the norm.

To fund operational costs and expansion plans, project teams often need to raise capital through primary markets (e.g., venture capital funding, ICOs, launchpads) or secondary markets (e.g., sale of treasury tokens on centralized and decentralized exchanges).

Figure 4: The crypto industry has raised US$5.7B from VCs year-to-date, an increase of 26.6% year-on-year

Source: DeFi Llama, Binance Research, as of September 26, 2024

However, transparency regarding the utilization of these funds is often lacking. While some DAOs or foundations provide detailed disclosures on their treasury fund usage, not all projects follow this practice. Although there is no formal obligation for such disclosures, stakeholders would undoubtedly appreciate greater transparency. This is particularly important when entities sell native tokens to cover expenses, as such actions directly impact token prices.

We contend that managing a well-run project is akin to running a company; project teams have fiduciary responsibilities and must act in the best interests of their stakeholders, including users, token holders, and investors. By providing appropriate disclosures, especially concerning financial matters, project teams are further incentivized to make informed decisions and maximize stakeholder value.

Case Study: Polkadot and Ethereum Foundation

Polkadot

Following the publication of its treasury report in July, Polkadot has come under significant scrutiny over concerns that it may only have a financial runway of two years, and due to a sharp increase in the pace of spending, which tripled in the first half of 2024. 

Figure 5: Outreach expenses account for the majority of Polkadot’s spending in the first half of 2024

Source: Polkadot, Binance Research

Transparent disclosures play a key role in fostering stakeholder trust and encouraging informed discussions around spending and project sustainability, thereby mitigating the risk of similar issues arising again. In this regard, Polkadot’s consistent publication of its treasury report is a much-welcomed initiative. 

Ethereum Foundation

The series of ETH sales (approximately US$9.67M worth of ETH sold year-to-date) by the Ethereum Foundation has prompted speculation about the underlying motivations, especially given the already fragile market sentiment. 

Although this has been revealed to be related to treasury management activities for financing grants and salaries, many continued to demand greater transparency in terms of expenses and how money is being spent. In response, Josh Stark from the Ethereum Foundation clarified that the foundation will release a report covering its spending in 2022 and 2023.

This episode clearly shows the demand for more disclosures and transparency, especially from entities who have large treasury holdings and whose transactions can directly impact token prices. We believe every step taken to increase transparency is a step in the right direction.

Next Step: Make Disclosures a Norm

While it may not be feasible or reasonable to mandate that every DAO or foundation disclose how funds are used, encouraging voluntary transparency can significantly enhance trust within the community.

For the broader community, leveraging on-chain monitoring tools to detect large token movements is essential. For those who are less crypto-native or have limited time, setting up alerts to be notified of such movements can provide timely insights.

4. Rebrand, but for what purpose?

TL;DR: Projects sometimes opt to rebrand as a strategic move to signal a renewed focus, attract new investors, and align with updated goals. However, rebranding should be driven by legitimate business needs and not used to obscure or hide certain actions.

Projects occasionally opt to rename or rebrand their tokens. This can be a strategic move driven by various business, operational, or commercial purposes. For instance, a project may announce a strategic shift in direction or revamp its product suite, making it easier to start afresh with a new brand identity. Such rebranding efforts can signal a renewed focus, attract new investors, and align the project more closely with its updated goals and vision.

A recent example is the rebranding of MakerDAO to Sky, as part of its “Endgame” plan. The DAI stablecoin has been rebranded to USDS and can be swapped 1 to 1. A new governance token SKY has also been introduced as an upgraded version of MKR. Each MKR token is exchangeable for 24,000 SKY tokens. The rebranding initiative aims to make Maker's governance mechanisms immutable, ensuring sustainable and decentralized growth.

However, not all rebranding efforts are driven by legitimate business needs. There have been instances where projects rebrand their tokens without a clear or viable reason, sometimes with the intent to obscure or hide certain actions. 

For example, a project might change the name from Token A to Token B and simultaneously alter the tokenomics, such as increasing the token supply without providing a corresponding fair conversion rate (e.g., token supply increases 10X, but conversion rate remains 1:1). Such actions may mask underlying issues or create confusion, and potentially lead to financial losses for investors. 

Next Steps: Due Diligence and Active Participation

To navigate the complexities of token rebranding, users should take several proactive steps:

  • Analyze the Rationale for the Rebranding: Prospective investors should look into understanding the reasons behind the rebranding, the project's new direction, and any changes in tokenomics. Sources of information include the project's official announcements, whitepapers, and reputable cryptocurrency news outlets. 

  • Participate in Governance Decisions: Users should actively engage in governance forums and discussions, sharing their perspectives and encouraging project teams to address community concerns. Existing token holders, in particular, should take an active role in voting on rebranding proposals to ensure that the interests of all stakeholders are aligned. This proactive involvement not only fosters transparency but also helps future investors understand the rationale behind the rebranding and any associated concerns, enabling them to make more informed decisions.

  • Monitor On-Chain Activity: Utilize on-chain monitoring tools to track any significant movements of tokens. This can help identify unusual patterns or activities that may indicate underlying issues. Setting up alerts for large token transfers can provide timely insights and help users stay informed.

Looking Ahead and Closing Thoughts

As we look ahead, while there are undoubtedly areas for improvement, we remain steadfastly optimistic of the future of the industry. We believe that addressing the following will bring us a step closer to realizing its full potential.

  • Sustainable Valuations: We acknowledge that achieving more reasonable valuations will take time. There will always be areas of the market that command higher valuations, possibly due to a premium assigned by investors or the popularity of certain sectors. However, the trend toward more sustainable valuations is expected to continue as investors become increasingly discerning, favoring projects with solid fundamentals and realistic growth prospects over speculative ventures. This gradual shift could lead to a healthier, more stable market environment.

  • Balanced Approach to Centralization: While some degree of centralization may be beneficial, especially for new teams needing to make quick decisions or address issues like bugs more efficiently, maintaining decentralization remains crucial. Centralization can offer advantages in terms of speed and agility, but it should not come at the expense of the community's trust or the project's integrity. Striking a balance where decentralization is prioritized, particularly in areas where centralization could harm the community, will be essential for long-term success.

  • Enhanced Transparency: Transparency will remain a cornerstone of trust in the crypto space. Projects that provide clear, detailed disclosures about fund usage and governance will set themselves apart and attract more stakeholders. This push for transparency will also encourage responsible financial management and accountability.

  • Purposeful Rebranding: Rebranding can be a strategic move to signal a renewed focus, attract new investors, and align the project more closely with its updated goals and vision. However, it is crucial that rebranding efforts are driven by legitimate business needs and not used to obscure or hide certain actions. Investors should conduct thorough due diligence to understand the rationale behind any rebranding, ensuring it aligns with the project's long-term objectives and benefits the community.

By addressing the issues of valuation, centralization, transparency, and purposeful rebranding, the industry can build a more robust and resilient ecosystem. Stakeholders at all levels must work collaboratively to drive innovation while upholding the principles of decentralization and transparency.