Author: Arthur Hayes
Translated by: Shen Chao, Wu Shuo
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 instructions of certain well-known centralized exchanges (CEX), they can achieve so-called 'extreme returns.' These instructions include: boosting certain metrics, hiring certain individuals, allocating a specific number of tokens, launching tokens on specified dates, or even temporarily altering launch plans. These companies, driven by desire, have forgotten the needs of users and the original purpose of cryptocurrencies. If you too are afflicted by this ailment, come to my clinic; I have the cure. Let me explain it to you in detail.
I believe that the reasons cryptocurrencies have become one of the fastest-growing networks in human history can be attributed to the following three factors:
Government control - Large corporations, big tech, big pharma, big military, and other giants control most major governments and economies through their vast wealth and power. Although global living standards and life expectancy have significantly improved since the end of World War II, for the 90% of the population who possess very few financial assets and have almost no political voice, this growth has stagnated or even regressed. The decentralized nature of cryptocurrencies is precisely the antidote to combat this concentration of wealth and power.
Revolutionary technology - The Bitcoin blockchain and the various blockchain technologies derived from it are considered a revolutionary innovation. Starting from a humble beginning, Bitcoin has proven to be one of the most stable and secure currency systems globally. The Bitcoin network itself offers a nearly $20 trillion bounty for vulnerabilities (obtaining Bitcoin through double-spending), yet no one has been able to breach 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 November elections in the US this year, the economic power of cryptocurrency supporters was fully demonstrated. Like many countries, the political system in the US relies on the 'money game.' Practitioners in the cryptocurrency industry have become one of the groups contributing the most to political candidates, directly facilitating the victory of candidates who support cryptocurrencies. Bitcoin, as the fastest-growing asset in human history, has enabled the cryptocurrency community to exert significant influence in political activities.
Although most people in the cryptocurrency community understand why this movement succeeded, there are occasional instances 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 cryptocurrencies. Yes, they may believe in the idea of 'by the people, for the people'; yes, they may create amazing technologies. But if users cannot profit from it, the promotion speed of any cryptocurrency product or service will slow down.
Since the hype of 2017 has faded, the way capital is raised has gradually deviated from its original intention. In the past, capital formation relied on stimulating community participation and the desire for wealth, but today it has been replaced by high fully diluted valuations (FDV), low circulating supply, and tokens supported by venture capital (VC). However, these VC-backed tokens have performed poorly in this bull market (from 2023 to present). 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 the high prices. As a result, the internal market-making teams of exchanges, airdrop token recipients, and third-party market makers have dumped these tokens into a liquidity-starved market, leading to dismal price performance. As an industry, why have we forgotten the third pillar of the cryptocurrency value proposition — helping retail investors create wealth?
The current cryptocurrency issuance market has become similar to the IPO system of traditional finance (TradFi). Retail investors often end up as 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 through the internet. If a Meme is attractive enough, users will buy it, hoping that others will follow suit.
The capital formation method of Memecoins is more egalitarian. Teams usually release the entire token supply at issuance, and the initial FDV is typically only a few million dollars. They usually start trading on decentralized exchanges (DEX), and speculators bet on which Meme will draw attention in the industry and drive up token demand.
For ordinary speculators, the most appealing aspect of Memecoins is that if they participate early, they may leap up one or two notches on the wealth ladder. Nevertheless, every participant understands that Memecoins essentially have no intrinsic value and do not generate any cash flow, thus fully accepting the risk of potentially losing all funds just to chase 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 Memecoins = 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 viral nature of Memes.
So, what are VC tokens?
Practitioners in traditional finance (TradFi) often lack genuine professional skills. I have experienced this firsthand because I found that the skills required for this job are very limited in my work in investment banking. Many choose to enter TradFi because it offers lucrative salaries 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 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 those in finance.
The high salary allure of TradFi makes the entry barrier to this industry more dependent on social background rather than personal ability. For example, your family background, the reputation of your university or boarding school, often matters more than your intellectual level. This system has made the TradFi industry a closed elite club, further solidifying existing social stratification 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 enormous capital. This funding primarily comes from endowment funds, pension funds, insurance companies, sovereign wealth funds, and family offices, usually managed by traditional finance (TradFi) professionals. As fund managers, they must fulfill their fiduciary responsibilities to clients and can only invest in venture capital funds deemed 'appropriate.' This 'appropriate' standard typically means that these funds must be managed by 'qualified' and 'experienced' professionals. The definition of 'qualified' often closely relates to the managers' educational backgrounds and professional experiences: they usually graduate from a handful of top universities globally (like Harvard, Oxford, Peking University, etc.) and enter major investment banks (like JPMorgan, Goldman Sachs), asset management firms (like BlackRock, Fidelity), or tech giants (like Microsoft, Google, Facebook, Tencent) early in their careers. Without such a background, the gatekeepers of TradFi careers would deem you incapable of managing others' funds.
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 greatest dilemma is 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, even if it fails, they can attribute it to 'bad luck' and retain their position. Therefore, to mitigate career risk, they tend to choose funds that meet traditional standards rather than risk trying new possibilities.
This logic extends to the selection of entrepreneurial projects. Venture capital firms tend to support projects whose founders' backgrounds fit the stereotype of 'successful founders.' Business founders need to have experience in large consulting firms or investment banks and graduate from the world's top universities; technical founders need to have accumulated experience in successful tech companies and hold advanced degrees from prestigious universities. Geographic location also becomes a consideration: VC firms in Silicon Valley are more inclined to invest in companies located in the San Francisco Bay Area, while Chinese VC firms are more focused on projects in Beijing or Shenzhen.
Ultimately, this model has created a highly homogeneous investment environment: everyone's background, way of thinking, values, and even geographic locations are highly similar. Because of this, such an environment both limits innovation and makes the decision-making of venture capital more conservative.
After the bubble burst of the 2017 hype, founders of crypto projects had to make compromises to secure venture capital (VC). To raise funds from top VCs located mainly in San Francisco, New York, London, and Beijing, they had to cater to the preferences of VCs.
The value of tokens in the eyes of VCs = the founder's educational background, career experience, family background, and geographic location.
For venture capital, the importance of the team far outweighs that of the product. If the founder fits a certain stereotype of a 'successful founder,' funding will come easily. These founders are perceived to inherently possess the 'right' qualifications, and even if it takes them burning through hundreds of millions before finding product-market fit, there will always be a few teams that succeed and give birth to the next Ethereum. As for those failed teams, the investment decisions of VCs won't be questioned because the founders they supported are already widely regarded as the most likely to succeed.
Clearly, when VCs choose whom to fund, expertise in the crypto field is not a key consideration. This selection criterion has led to a disconnect between VC-backed projects and the final retail investors. The goal of VCs is to secure 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, at the current price, your investment has grown by 9,000 times. However, the current crypto capital operation model has made such returns nearly impossible.
Venture capital profits from the transfer of worthless and illiquid SAFTs (Simple Agreements for Future Tokens), with each transfer accompanied by a valuation increase. When a problem-riddled crypto project finally lists on a centralized exchange (CEX), its fully diluted valuation (FDV) often exceeds $1 billion. To achieve a 10,000 times return, the FDV of this project must grow to an extremely large number—perhaps even exceeding the total value of all fiat assets, and that's just for one project.
If the VC coin model is rejected by ordinary users, then what is fundamentally meaningful?
The intrinsic value of an ICO = the explosiveness of content dissemination + technical potential
Meme - A project that can align with the current trends in the crypto space in terms of design and target 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 objective of the project is to attract users at the lowest cost and monetize the product or service through these users. A widely discussed project often quickly attracts users into its marketing funnel.
Technical potential - Usually 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, namely that as long as the community provides funding, the team can develop valuable technology. The assessment of potential technology can start from several aspects:
Does the team have experience in developing important products in Web2 or Web3?
Is the proposed technical solution feasible?
Can this technology solve a globally significant problem, thereby attracting millions or even billions of users?
Technical founders can achieve the goals mentioned above, but they are not necessarily the objects favored by venture capital (VC). The crypto community does not place much value on family background, work history, or prestigious school degrees. While these conditions may be advantageous, they are meaningless if the team does not produce outstanding code. The community is more willing to support Andre Cronje rather than some 'elite' who graduated from Stanford, worked at Google, and is a member of The Battery.
Although most initial coin offerings, or 99.99%, will approach zero after a cycle, there are still a few teams capable of developing technologies that gain value by attracting users because their memetic effects are strong enough. Early investors in these may achieve returns of 1,000 times or even 10,000 times. This is precisely the goal they pursue. Speculation and volatility are characteristics, not defects. If retail investors seek stable and conservative investments, they can choose to trade on global traditional finance (TradFi) stock exchanges. 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, as early venture capitalists have already siphoned off most of the profits in the process.
In its purest form, it allows any team with an internet connection to showcase their project to the crypto community and raise funds. Teams launch 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 a blockchain address, and after a certain period, they will receive tokens. All details, such as timelines, fundraising amounts, token prices, types of technology, team composition, and the geographic location of investors, are entirely determined by the team without the participation of any intermediaries (such as venture capital funds or centralized exchanges). This is precisely why centralized intermediaries dislike ICOs — because they are completely bypassed. However, the community is very supportive because they provide opportunities for people from different backgrounds, allowing those willing to take high risks a chance to achieve high returns.
Thanks to tools like Pump.fun, it now takes just minutes to launch a token, while we have more liquid decentralized exchanges (DEX). This is different 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.
Thanks to Maelstrom's investment in the Oyl wallet, we got an early glimpse of some potentially industry-disrupting 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, but I hope those more capable can check out their GitHub repository and decide for themselves if they want to develop based on it. I hope Alkanes can drive explosive growth in issuance on Bitcoin.
Today, retail crypto enthusiasts show great interest in Memecoins, hoping to trade these highly speculative assets on decentralized exchanges (DEXs). This demand has allowed unverified projects to trade immediately after token delivery, thereby enabling the market to freely price their value.
Although I have been critical of Solana, I must admit that Pump.fun has brought a positive impact to the industry. This protocol allows ordinary users to issue their own Meme coins and start trading in just a few minutes without a technical background. Continuing this trend of 'democratizing finance and crypto trading,' Maelstrom has invested in a new platform that could become the preferred choice for Meme coins, cryptocurrencies, and even newly issued spot trading.
Looking back at 2017, a popular project often led to an overloaded Ethereum network, even causing it to crash. Gas fees soared, making network usage prohibitively expensive for many. By 2025, however, the cost of using block space will become extremely low on Ethereum, Solana, Aptos, or other Layer-1 blockchains. The current transaction throughput has improved by orders of magnitude compared to 2017. If a team can attract a large number of speculatively enthusiastic supporters, their ability to raise funds will no longer be hindered by the blockchain's slow speeds and high fees.
Retail crypto investors also need to take action and 'reject bad investments' with concrete actions.
'Rejecting bad investments' means:
Reject projects that are VC-backed, have excessively high fully diluted valuations (FDV), but low actual circulating supply.
Reject tokens that are initially listed at high valuations 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 fell off the map. In fact, this statement is not entirely correct; surprisingly, even a failed project like EOS still maintains a market cap of $1.2 billion. This indicates that even projects like EOS, which once marked the peak of the bubble, still hold value far above zero. As someone who loves financial markets, I must acknowledge that EOS's structure and execution are classic cases. Project founders should study seriously how Block.one raised the most funds in history through token sales.
