Article source: Arthur Hayes
Author: Arthur Hayes
Translation: Shen Chao, Wu Shuo
Original link:
https://cryptohayes.substack.com/p/the-cure?utm_source=%2Finbox&ut_m_medium=reader2
Main text
People sometimes act irrationally due to desire or blindness. Unfortunately, many Maelstrom portfolio companies seem to have contracted a 'CEX transmitted 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: boosting certain metrics, hiring certain individuals, allocating a specific number of tokens, launching tokens on specified dates, or even temporarily changing launch plans. These desire-driven companies have forgotten the needs of users and the original purpose of cryptocurrencies. If you are also troubled by this disease, please come to my clinic; I have the antidote. Let me explain it to you in detail.
I believe that the reasons why cryptocurrency has become one of the fastest-growing networks in human history are primarily threefold:
Government control - Giants such as large corporations, big tech, big pharma, and the military control most major governments and economies through their vast wealth and power. While global living standards 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 almost no political voice. The decentralized nature of cryptocurrencies is the antidote to such wealth and power concentration.
Revolutionary technology - The Bitcoin blockchain and the various blockchain technologies derived from it represent a revolutionary innovation. Starting from a humble beginning, Bitcoin has proven to be one of the most stable and secure monetary systems globally. The Bitcoin network itself offers nearly $2 trillion in bug bounties (obtaining Bitcoin through double-spending attacks), yet no one has been able to compromise the security of this system to date.
Wealth effect - The value growth of cryptocurrencies and their derivative tokens has made many users overnight millionaires. In the US elections this November, the economic power of cryptocurrency supporters was fully demonstrated. Like many countries, the political system in the US also relies on the 'money game.' Practitioners in the cryptocurrency industry have become one of the groups contributing the most to political candidates, directly contributing to the victories of candidates who support cryptocurrencies. Bitcoin, as the fastest-growing asset in human history, has enabled the cryptocurrency community to play a significant role in political activities.
Although most in the cryptocurrency community understand why this phenomenon is successful, there are occasional bouts of 'amnesia.' This amnesia manifests in the changes in capital-raising methods. Sometimes, project teams achieve great success by catering to the community's desire for wealth; at other times, cash-strapped founders forget why users choose cryptocurrency. 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 speed of any cryptocurrency product or service will slow down.
Since the bubble burst in 2017, capital-raising methods have gradually deviated from their original intent. In the past, capital formation relied on igniting community participation enthusiasm and desire for wealth, but now it has been replaced by tokens with high fully diluted valuations (FDV), low circulating supply, and VC support. However, these VC-backed tokens have performed poorly in the current bull market (from 2023 to now). In my article, I mentioned that the median performance of tokens issued in 2024 is about 50% lower than that of 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 their high prices. As a result, the internal market-making teams of exchanges, airdrop token recipients, and third-party market makers dumped these tokens into a liquidity-starved market, leading to dismal price performance. As an industry, why have we forgotten the third pillar of cryptocurrency value proposition—helping retail investors create wealth?
Today's cryptocurrency issuance market has become similar to the initial public offering (IPO) system of traditional finance (TradFi). Retail investors often become the 'bag holders' of VC tokens. However, in the cryptocurrency space, there is always an alternative—Memecoins. Memecoins are tokens without practical use, whose only function is to spread Meme content through the internet. If the Meme is engaging enough, users will buy it, hoping that someone will follow up with a purchase later.
The capital formation process of Memecoins is more egalitarian. Teams typically release the entire token supply at launch, with initial FDVs usually only in the millions. They often start trading on decentralized exchanges (DEX), where speculators bet on which Meme will attract attention in the industry and drive up 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. Nonetheless, every participant is aware that Memecoins, by their nature, have no intrinsic value and will not generate any cash flow. Thus, they fully accept the risk of potentially losing all their funds, simply in pursuit of the dream of wealth. More importantly, there is no institution preventing them from purchasing these tokens, nor are there hidden capital pools waiting to sell unlocked token supplies at high prices.
To better understand the different types of tokens and their sources of value, I hope to establish a simple classification framework. First, let’s start with Memecoins:
The intrinsic value of Memecoin = The influence of Meme dissemination
This is very intuitive. As long as you are active in any community (online or offline), you can understand the power of Meme dissemination.
So, what are VC tokens?
Practitioners in the traditional finance (TradFi) industry often lack real professional skills. I have experienced this firsthand, as I found that the skills required for the job in investment banking are quite limited. Many choose to enter TradFi because it offers lucrative compensation without needing to master too much substantive knowledge. As long as a young person has a basic knowledge of high school algebra and a good work attitude, I can train them to handle any front-office financial service job. However, professions like 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 allure of TradFi makes the entry barrier to this industry more dependent on social background rather than individual capability. For instance, your family background, the reputation of your university, or boarding school often holds more importance than intellectual capacity. Such a system makes the TradFi industry a closed elite club, further entrenching existing social classes and racial biases.
Let’s 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 substantial funds. These funds mainly come from endowments, pension funds, insurance companies, sovereign wealth funds, and family offices, which are typically managed by traditional finance (TradFi) professionals. As fund managers, they must fulfill their fiduciary duties to clients and can only invest in what is deemed 'appropriate' VC funds. This 'appropriate' standard usually means these funds need to be managed by 'qualified' and 'experienced' professionals. The definition of 'qualified' is often closely related to the manager's educational background and work experience: they typically graduate from a few of the world's top universities (such as Harvard, Oxford, Peking University, etc.) and have early career experience in large investment banks (like JPMorgan, Goldman Sachs), asset management companies (like BlackRock, Fidelity), or tech giants (like Microsoft, Google, Facebook, Tencent, etc.). Without such a background, TradFi's gatekeepers would consider you incapable of managing other people's money.
This screening mechanism leads to a highly homogeneous group: they look alike, speak alike, dress alike, and even live in the same global elite circles.
For fund allocators, the greatest 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 select a fund that meets traditional standards, even if it fails, they can attribute it to 'bad luck' and keep their position. Therefore, to mitigate career risk, they tend to choose funds that conform to traditional standards rather than take risks exploring new possibilities.
This logic extends to the selection of entrepreneurial projects. Venture capital firms are more inclined to support projects whose founders' backgrounds fit the stereotype of 'successful founders.' Business-oriented founders need to have experience in major consulting firms or investment banks and graduate from the world's top universities; technical founders need to have experience in successful tech companies and hold advanced degrees from reputable universities. Geographical location also becomes a consideration: Silicon Valley VCs are more inclined to invest in companies located in the Bay Area of California, while Chinese VCs focus more on projects in Beijing or Shenzhen.
Ultimately, this model creates a highly homogeneous investment environment: everyone's background, mindset, values, and even geographical locations are highly similar. Because of this, this environment both limits innovation and makes venture capital decisions more conservative.
After the bubble burst in 2017, founders of crypto projects had to compromise 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 investors.
The token value in the eyes of VCs = Founder's educational background, work experience, family background, and geographical location
For VCs, the importance of the team far outweighs the product. If the founder fits a certain stereotype of a 'successful founder,' funding will flow easily. Because these founders are considered to inherently possess the 'right' qualifications, even if they only find product-market fit after burning through hundreds of millions of dollars, there will always be a few teams that succeed and give birth to the next Ethereum. And for those failed teams, VCs' decisions will not be questioned because the founders they supported are generally regarded as the most likely to succeed.
Clearly, when VCs choose whom to fund, expertise in the crypto space is not a key consideration. This selection criterion leads to a disconnect between VC-supported projects and the end retail investors. VCs aim to preserve their positions, while retail investors aim to achieve financial freedom by betting on tokens that could skyrocket 10,000 times. In the early days, such returns were possible. For example, if you bought ETH at around $0.33 during the Ethereum presale, your investment has grown by 9,000 times at current prices. However, the current operational model of crypto capital has made such returns nearly impossible.
VCs profit by trading worthless and illiquid SAFTs (Simple Agreements for Future Tokens) between funds, with each transfer accompanied by an increase in valuation. When a troubled crypto project finally lists on a centralized exchange (CEX), its fully diluted valuation (FDV) often exceeds $1 billion. To achieve a 10,000x return, the project's FDV must grow to an extremely large number—potentially exceeding the total value of all fiat assets, and this is just one project.
If the VC coin model is rejected by regular users, then what is essentially meaningful?
The intrinsic value of 1CO = The explosive power of content dissemination + Technological potential
Meme - A project that aligns with the current trends in the crypto space in terms of design and positioning possesses Meme value. If its Meme content is engaging enough and can spread rapidly, it can attract widespread attention for the project. The core goal of the project is to attract users at the lowest cost and monetize through these users for the product or service. A project widely discussed can quickly draw users into its marketing funnel.
Technological 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 be approached from the following aspects:
Does the team have experience developing significant products in Web2 or Web3?
Does the proposed technological solution have feasibility?
Does the technology have the potential to solve a globally significant problem, thereby attracting 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 importance on family background, work history, or prestigious school credentials. While these conditions may enhance an application, they are meaningless if the team does not produce excellent code. The community is more willing to support Andre Cronje than an 'elite' who graduated from Stanford, worked at Google, and is a member of The Battery.
While most initial coin offerings, or 99.99% of them, will approach zero after one cycle, there are still a few teams that can develop technology that gains value by attracting users because their dissemination effect (Memetic) is strong enough. Early investors in these may see returns of 1,000 or even 10,000 times. This is precisely the goal they pursue. Speculation and volatility are features, not flaws. If retail investors want stable and conservative investments, they can choose to trade on traditional financial (TradFi) stock exchanges worldwide. In most countries, IPOs require companies to be profitable, and management must make various statements to ensure financial transparency. However, for most retail investors, the problem with IPOs is that they cannot deliver life-changing returns because early venture capitalists have already squeezed most of the profits in the process.
In its purest form, it allows any team with an internet connection to showcase a project to the crypto community and obtain funding. The team launches a website detailing who they are, what they plan to build, why they are qualified, and why the market needs their product or service. Investors can then send cryptocurrency to an on-chain address, and after a certain time, they will receive tokens. All details, such as timing, amount raised, token price, type of technology, team composition, and investors' geographical locations, are entirely decided by the team without the involvement of any intermediaries (such as venture capital funds or centralized exchanges). This is precisely why centralized intermediaries hate 1COs—because they are entirely bypassed. However, the community is very supportive because it provides opportunities for people from different backgrounds, allowing those willing to take high risks to have a chance for high returns.
Thanks to tool frameworks like Pump.fun, it is now possible to launch a token in just a few minutes, while 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 trade newly issued tokens immediately on platforms like Uniswap and Raydium.
Due to Maelstrom's investment in the Oyl wallet, we got a sneak peek at some potentially disruptive smart contract technologies being developed using the Bitcoin blockchain. Alkanes is a new meta-protocol aimed at bringing smart contracts to Bitcoin through the UTXO model. I cannot claim to fully understand how it works. However, I hope those who are more capable can check out their GitHub repository and decide for themselves whether they want to develop based on this. I hope Alkanes can drive explosive growth in issuance on Bitcoin.
Today, retail crypto enthusiasts show 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 freely price their value.
Although I have always been critical of Solana, I must admit that Pump.fun has brought a positive impact to the industry. This protocol allows ordinary users, without a technical background, to issue their own Meme coins and start trading in just a few minutes. Continuing this trend of 'democratizing finance and crypto trading,' Maelstrom has invested in a new platform that could become the go-to for Meme coins, cryptocurrencies, or even newly issued spot trading.
Looking back at 2017, a popular project would often lead to the Ethereum network being overloaded or even paralyzed. Gas fees soared, making network usage prohibitively expensive for many. By 2025, however, the cost of using block space on Ethereum, Solana, Aptos, or other Layer-1 blockchains will become extremely cheap. The current trading throughput has improved by orders of magnitude compared to 2017. If a team can attract a large number of speculative supporters, their ability to raise funds will no longer be hindered by the blockchain's slow speed and high fees.
Retail crypto investors also need to take action and 'reject bad investments' with real actions.
'Rejecting bad investments' means:
Reject projects that are VC-backed, have excessively high fully diluted valuations (FDV), but have very low actual circulating amounts.
Reject tokens that are overvalued at their initial listing on centralized exchanges (CEX).
Reject those who criticize so-called 'irrational' trading behaviors.
Looking back at 2017, there were many low-quality projects. Among them, the most destructive was EOS. Block.one raised $4.1 billion in cryptocurrency to develop EOS. However, after its launch, EOS almost disappeared from sight. In fact, this statement is not entirely accurate; it is astonishing that even a failed project like EOS still maintains a market capitalization of $1.2 billion. This indicates that even projects like EOS, which marked the peak of the bubble, still hold value far above zero. As someone passionate about financial markets, I must admit that EOS's structure and execution are classic case studies. Project founders should study how Block.one raised the most funds in history through token sales.
