Author: DeFi Cheetah
Compiled by: TechFlow
The first problem - misaligned incentives
For many founders, their ultimate goal is to get their tokens listed, rather than to launch a great product. This is because listing a token brings immediate financial gains. While this approach may maximize profits in the short term, it is inconsistent with the long-term goals of industry health and value creation: the founders’ personal incentives run counter to the long-term development of the crypto industry.
More and more founders are looking for quick profits, which sets a bad precedent and makes people think that success is determined by token listing rather than product quality. This forms a negative feedback loop, attracting those who only want to make quick profits rather than driving meaningful innovation. This is also why some founders or early industry leaders have left the field, and the crypto industry is often stigmatized in other technology fields, especially AI.
When projects fail to deliver on their promises because their underlying products are weak or nonexistent, it leads to disappointment among investors and users. Over time, this erodes trust in the industry as a whole, making it more difficult for legitimate projects to gain support and for the industry to mature.
The second problem - resource misallocation
Many crypto venture capital companies are purely hype-oriented and focus more on whether the project can generate market enthusiasm (which will significantly affect the price of the token when it is issued) rather than the actual use of the product. Resources that could have been used to improve the technology, enhance security, or expand product functionality are instead used for marketing, creating hype, and increasing the value of the token. This misallocation of resources hinders the value creation of the industry, and bad money drives out good money.
I think it’s perfectly reasonable for VCs to pursue profits, as they need to serve the best interests of their limited partners (LPs); they are not engaging in philanthropy. In fact, VCs face a big challenge: most of the time they are unable to exit during market booms due to the long lockup period of their tokens, and are often mistakenly made the scapegoat for token price declines. (Anyway, this is another topic that I may come back to later)
The third problem: value creation is not necessarily reflected in market value
This makes it possible that crypto venture capital firms that invest in hardcore technologies may not be able to bring good returns to LPs, thereby reducing the motivation of other venture capital firms to make similar investments, leading to the second problem mentioned above. In particular, projects that do not match the current market hotspots find it difficult to gain attention in the community. Why?
As @cobie once said, "Most people in crypto are unable to adequately evaluate the technical and fundamental merits of a project on their own. Instead, average investors rely heavily on signaling and social proof in their decision making." Since the market is largely dominated by average investors, this leads to market inefficiencies (which is good for finding investment opportunities though), and many valuable projects are undervalued and valued far below those meme coins!
More specifically, protocol development and value creation by builders takes years, while traders in crypto bull markets typically focus on a cycle of weeks or even shorter periods. Therefore, the performance of project token prices is almost entirely determined by market attention. As a result, many projects spend more on business development and marketing than on R&D, and sensationalism is common.
Despite these problems, I remain optimistic about the crypto industry! The crypto industry has at least three value propositions that bring huge market opportunities and will have far-reaching impacts.
First, the ability to issue non-custodial assets (such as tokens rather than bank-custodial paper money) has attracted a large number of talented founders.
Despite the negative reputation of the crypto industry, it is generally easier to raise funds in this space, and since tokens are more liquid than stocks, valuations are higher. Tokens allow founders to access funds globally without geographical restrictions and get support from any investor with a higher risk appetite. The crypto industry has prospered mainly due to the ease of raising funds at an early stage, attracting a large number of talented builders.
Second, blockchain eliminates many intermediaries and reduces associated costs by allowing people to collaborate without trust.
For example, traditional exchanges need to share fees with various parties responsible for brokerage, margin, risk, settlement, custody, user interface, API, etc., while crypto exchanges do not have to pay these fees. Therefore, consumers can pay lower fees because service providers can reduce their fee rates, and service providers still earn more because the cost savings exceed the price reduction! Therefore, the total utility of the entire economic system is improved, and both consumer and producer surplus increase.
Finally, blockchain can be used as a medium for value transfer through cryptographic tokens.
Incentivizing users with tokens whose value is based on people’s perception of the future prospects of a project is much easier than for startups to spend actual dollars when they need it most. This helps solve the dilemma of early development.
More importantly, users can transfer and exchange values that are difficult for current network infrastructure to handle. For example, some people are rewarded with tokens for completing tasks, such as verifying transactions or providing computing power for decentralized networks. These processes can be carried out more smoothly through the replicable state machine of the blockchain. New ways of transferring value can give rise to new business models to meet needs that were previously unmet.
I write this because I know a lot of people are facing the same problems. Discussing it publicly may make more people realize that you are not alone - many people do feel the same way, and I think this also marks the embryonic stage of new technologies.