Author: Arthur Hayes
Translated by: Deep Tide, Wu Says
Original link:
https://cryptohayes.substack.com/p/the-cure?utm_source=%2Finbox&utm_medium=reader2
Main Text
People sometimes act irrationally due to desire or blindness. Unfortunately, many Maelstrom portfolio companies seem to have contracted a 'CEX Transmission Disease.' Some affected founders mistakenly believe that by following the directives of certain well-known centralized exchanges (CEX), they can achieve so-called 'extreme returns.' These directives include: inflating a certain metric, hiring a particular individual, allocating a certain number of tokens, launching tokens on a specified date, or even temporarily altering launch plans. These desire-driven companies have forgotten the needs of users and the original purpose of cryptocurrencies. If you are also afflicted by this disease, please come to my clinic; I have the antidote. Let me explain in detail.
I believe that the reason cryptocurrencies have become one of the fastest-growing networks in human history is primarily due to the following three reasons:
Government Control - Giants such as large enterprises, big tech, big pharma, and the military-industrial complex control most major governments and economies through their immense wealth and power. Although the global standard of living and life expectancy have significantly improved since the end of World War II, this growth has stagnated or even regressed for the 90% of the population who hold very few financial assets and have little political voice. The decentralized nature of cryptocurrencies is a remedy against this concentration of wealth and power.
Revolutionary Technology - The Bitcoin blockchain and the various subsequently derived blockchain technologies are considered a revolutionary innovation. Starting from a seemingly insignificant beginning, Bitcoin has proven to be one of the most stable and secure monetary systems in the world. The Bitcoin network itself offers nearly $20 trillion in bug bounties (obtained through double-spending attacks on Bitcoin), yet no one has been able to breach the security of this system to date.
Wealth Effect - The value increase of cryptocurrencies and their derivative tokens has made many users overnight millionaires. The economic power of cryptocurrency supporters was fully demonstrated in the U.S. elections this November. Like many countries, the U.S. political system relies on the 'money game.' Practitioners of the cryptocurrency industry have become one of the largest groups contributing to political candidates, directly facilitating the victory of candidates who support cryptocurrencies. Bitcoin, being the fastest-growing asset in human history, has allowed the cryptocurrency community to exert significant influence in political activities.
Although most people in the cryptocurrency community understand why this movement is successful, there are occasional instances of 'amnesia.' This amnesia manifests in changes to the capital-raising methods. Sometimes, project parties achieve great success by catering to the community's desire for wealth; while at other times, underfunded founders forget why users chose cryptocurrencies. Yes, they may believe in the idea of 'by the people, for the people'; yes, they may create amazing technology. But if users cannot profit from it, the promotion of any cryptocurrency product or service will become slow.
Since the 2017 boom subsided, the capital raising methods have gradually deviated from their original intent. In the past, capital formation relied on igniting community participation enthusiasm and wealth desires, but now it has been replaced by high fully diluted valuations (FDV), low circulating supplies, and venture capital (VC) supported tokens. However, these VC-backed tokens have performed poorly in the current bull market (2023 to present). In my article, I mentioned that the median performance of tokens issued in 2024 is about 50% lower than mainstream coins (such as Bitcoin, Ethereum, or Solana). Although retail investors can finally purchase these projects through centralized exchanges (CEX), they are unwilling to pay the high prices. As a result, the internal market-making teams of exchanges, recipients of airdropped tokens, and third-party market makers have sold these tokens into illiquid markets, leading to poor price performance. As an industry, why have we forgotten the third pillar of the value proposition of cryptocurrencies - to help retail investors create wealth?
Today's cryptocurrency issuance market has become similar to the traditional financial (TradFi) IPO system. Retail investors often become the 'greater fools' for VC tokens. However, in the cryptocurrency field, there are always alternatives - Memecoins. Memecoins are tokens with no practical use, whose only function is to spread meme content via the internet. If the meme is engaging enough, users will buy it in hopes that others will follow suit.
The capital formation of Memecoins is more equitable. Teams usually release the entire token supply at issuance, with initial fully diluted valuations (FDV) typically only in the millions of dollars. They often start trading on decentralized exchanges (DEX), with speculators betting on which meme will gain attention and drive token demand.
For ordinary speculators, the most attractive aspect of Memecoins is that if they can participate early, they may leap up one or two percentiles on the wealth ladder. Nevertheless, every participant understands that Memecoins essentially have no intrinsic value, do not generate any cash flow, and thus fully accept the risk of potentially losing all their funds in pursuit of the dream of wealth. More importantly, no institution stops them from purchasing these tokens, nor are there hidden capital pools waiting to dump token supplies when the price is high.
To better understand the different types of tokens and their sources of value, I would like to establish a simple classification framework. First, let’s start with Memecoins:
Intrinsic Value of Memecoins = Influence of Meme Propagation
This is very intuitive. As long as you are active in any community (online or offline), you can understand the power of meme propagation.
So, what are VC tokens?
Practitioners in the traditional finance (TradFi) industry often lack real professional skills. I have deep insights into this, as I found that the skills required for this job are actually quite limited during my work in investment banking. Many choose to enter TradFi because it offers lucrative compensation without requiring much substantive knowledge. As long as a young person possesses basic high school algebra knowledge and a good work attitude, I can train them to perform any front-office financial service job. However, professions such as doctors, lawyers, and engineers require time and technical accumulation, even though the average income of these professions is far lower than that of finance practitioners.
The high salary appeal of TradFi makes the entry barrier to this industry more reliant on social background rather than personal ability. For example, your family background, the reputation of your university or boarding school, is often more important than your intellectual level. Such a system has made the TradFi industry a closed elite club, further entrenching existing social hierarchies and racial biases.
Let us apply this framework to analyze how VCs raise funds and allocate resources.
To find winners like Facebook, Google, Tencent, or ByteDance, top venture capital (VC) firms need to raise huge amounts of funds. These funds primarily come from endowment funds, pension funds, insurance companies, sovereign wealth funds, and family offices, which are usually managed by traditional finance (TradFi) people. As fund managers, they must fulfill their fiduciary responsibility to clients and can only invest in what is considered 'appropriate' venture capital funds. This 'appropriate' standard often means that these funds need to be managed by 'qualified' and 'experienced' professionals. The definition of 'qualified' is often closely tied to the manager's educational background and work experience: they typically graduate from only a few top universities in the world (like Harvard, Oxford, Peking University, etc.) and enter large investment banks (like JPMorgan, Goldman Sachs), asset management firms (like BlackRock, Fidelity), or tech giants (like Microsoft, Google, Facebook, Tencent, etc.) early in their careers. Without such a background, the gatekeepers of TradFi's professional threshold would consider you unqualified to manage other people's money.
This screening mechanism has led to a highly homogeneous group: they look similar, speak similarly, dress similarly, and even live in the same global elite circles.
For fund allocators, the biggest dilemma lies in career risk. If they choose a fund with a non-traditional background and it fails, they may lose their job; but if they choose a fund that meets traditional standards and it fails, they can attribute it to 'bad luck' and keep their position. Therefore, to mitigate career risk, they tend to choose funds that meet traditional standards rather than take risks on new possibilities.
This logic extends to the selection of entrepreneurial projects. Venture capital firms tend to support projects whose founders fit the stereotype of 'successful founders.' Business-oriented founders need to have experience in large consulting firms or investment banks and graduate from top global universities; technical founders need to have experience in successful tech companies and hold advanced degrees from well-known universities. Geographic location also becomes a consideration: venture capital firms in Silicon Valley are more inclined to invest in companies located in the Bay Area of California, while Chinese venture capital firms focus more on projects in Beijing or Shenzhen.
Ultimately, this model has formed a highly homogeneous investment environment: everyone's background, way of thinking, values, and even geographic locations are highly similar. Because of this, the environment both limits innovation and makes venture capital decision-making more conservative.
After the bubble burst of the 2017 boom, founders of crypto projects had to make compromises to obtain venture capital (VC). To raise funds from VCs primarily located in San Francisco, New York, London, and Beijing, they had to cater to the preferences of these VCs.
Token Value in the Eyes of Venture Capital = Founder's Educational Background, Work Experience, Family Background, and Geographic Location
For venture capital, the importance of the team far outweighs the product. If the founders fit a certain stereotype of 'successful founders,' funding will be easily secured. These founders are seen as naturally possessing the 'right' qualifications, even if they take burning hundreds of millions of dollars to find product-market fit; there will always be a few teams that succeed and produce the next Ethereum. For those failed teams, the decision-making of venture capital will not be questioned, as the founders they supported are simply the ones generally considered most likely to succeed.
Clearly, when venture capital selects funding targets, expertise in the crypto field is not a key consideration. This selection standard leads to a disconnect between VC-supported projects and the eventual retail investors. The goal of venture capital is to keep their positions, while the goal of retail investors is to achieve financial freedom by betting on tokens that can soar 10,000 times. In the early days, such returns were possible. For example, if you bought ETH at about $0.33 during the Ethereum presale, your investment would have grown by 9,000 times at current prices. However, today's crypto capital operation model has rendered such returns nearly impossible.
Venture capital profits by transferring worthless and illiquid SAFTs (Simple Agreements for Future Tokens) between funds, each transfer accompanied by a value increase. When a troubled crypto project eventually lists on a centralized exchange (CEX), its fully diluted valuation (FDV) often exceeds $1 billion. To achieve a 10,000-fold return, the project's FDV must grow to an extremely large number - even surpassing the total value of all fiat assets, and this is just for one project.
If the VC coin model is rejected by ordinary users, then what is essentially meaningful?
Intrinsic Value of ICOs = Content Propagation Explosiveness + Technical Potential
Meme - A project that can align its appearance and target positioning with the current trends in the crypto field possesses meme value. If its meme content is engaging enough and can spread rapidly, it can bring widespread attention to the project. The core objective of the project is to attract users at the lowest cost and monetize through these users. A project that is widely discussed often quickly attracts users into its marketing funnel.
Technical Potential - This often occurs in the early stages of a project, such as Ethereum, which raised funds before development. This model relies on the community's trust in the team, that as long as the community provides funding, the team can develop valuable technology. Potential technology assessment can begin from the following aspects:
Does the team have experience in developing significant products in Web2 or Web3?
Is the proposed technical solution feasible?
Can the technology solve a globally significant problem and attract millions or even billions of users?
Technical founders can achieve the above goals, but they are not necessarily the ones favored by venture capital (VC). The crypto community does not place much value on family background, work history, or prestigious university degrees. While these conditions can be beneficial, they are meaningless if the team does not produce excellent code. The community is more willing to support Andre Cronje than some 'elite' who graduated from Stanford, worked at Google, and is a member of The Battery.
While the majority of initial coin offerings, that is 99.99%, will approach zero after one cycle, there are still a few teams that can develop technologies that gain value by attracting users, thanks to their strong memetic effect. Early investors in these may achieve returns of 1,000 times or even 10,000 times. This is exactly what they are pursuing. Speculation and volatility are characteristics, not flaws. If retail investors want stable and conservative investments, they can choose to trade on traditional financial (TradFi) stock exchanges. In most countries, IPOs (Initial Public Offerings) require companies to be profitable, and management must make various disclosures to ensure financial transparency. However, the problem with IPOs for most retail investors is that they cannot deliver life-changing returns, as early venture capitalists have already siphoned off most of the profits in the process.
In its purest form, it allows any team with internet access to showcase their project to the crypto community and secure funding. The team will launch a website detailing who they are, what they plan to build, why they are qualified, and why the market needs their products or services. Investors can then send cryptocurrencies to a blockchain address, and after a certain period, they will receive tokens. All details, such as timing, fundraising amount, token price, technical type, team composition, and investors' geographic locations, are completely determined by the team, without the involvement of any intermediaries (such as venture capital funds or centralized exchanges). This is precisely why centralized intermediaries hate ICOs - because they are completely bypassed. However, the community is very supportive because it provides opportunities for people from different backgrounds and allows those willing to take high risks to have the chance for high returns.
Thanks to tools like Pump.fun, it is now possible to launch a token in just a few minutes, and we have more liquid decentralized exchanges (DEXs). This differs from previous cycles, where it could take months or even years from subscription to token delivery. Now, investors can immediately trade newly issued tokens on platforms like Uniswap and Raydium.
Due to Maelstrom's investment in the Oyl wallet, we have had a sneak peek at some potentially disruptive smart contract technologies being developed on the Bitcoin blockchain. Alkanes is a new meta-protocol aimed at bringing smart contracts to Bitcoin via the UTXO model. I cannot claim to fully understand how it works. However, I hope that more capable individuals can check their GitHub repository and decide for themselves whether they want to develop based on it. I hope Alkanes can drive explosive growth in issuance on Bitcoin.
Today, retail crypto enthusiasts are showing great interest in meme coins (Memecoins), hoping to trade these highly speculative assets on decentralized exchanges (DEXs). This demand allows unverified projects to trade immediately after token delivery, enabling the market to price them freely.
Although I have always been critical of Solana, I have to admit that Pump.fun has had a positive impact on the industry. This protocol allows ordinary users to issue their own meme coins and start trading within minutes without a technical background. Continuing this trend of 'democratizing finance and crypto trading,' Maelstrom has invested in a new platform that may become the go-to for meme coins, cryptocurrencies, and even newly issued spot trading.
Looking back to 2017, popular projects often led to overwhelming loads on the Ethereum network, even causing it to paralyze. Gas fees soared, making network usage costly, and many could not afford it. By 2025, whether on Ethereum, Solana, Aptos, or other Layer-1 blockchains, the cost of using block space will become extremely low. Current transaction throughput has improved by orders of magnitude compared to 2017. If a team can attract a large number of eager speculators, their ability to raise funds will no longer be hindered by the blockchain's low speed and high fees.
Retail crypto investors also need to take action and 'reject bad investments' with practical actions.
'Rejecting bad investments' means:
Reject projects that are VC-backed, have overly high fully diluted valuations (FDV), but very low actual circulating supply.
Reject tokens that list on centralized exchanges (CEX) at high valuations.
Reject those who criticize so-called 'irrational' trading behavior.
Reflecting on 2017, many projects were of extremely poor quality. Among them, the most destructive was EOS. Block.one raised $4.1 billion in cryptocurrency to develop EOS. However, after its launch, EOS almost vanished. In fact, this statement is not entirely accurate; surprisingly, even a failed project like EOS still maintains a market value of $1.2 billion. This indicates that even projects like EOS, once emblematic of the peak of the bubble, still have a value far above zero. As a person who loves financial markets, I must admit that the structure and execution of EOS are classic case studies. Project founders should study seriously how Block.one raised the most funds ever through token sales.
