Compilation of the original text: Lynch, Chain Catcher

Compilation of the original text: Lynch, Chain Catcher

Over the past year or so, there has been an overwhelming sentiment in the market that"Evil VCs have an unfair advantage and they've been dumping tokens on us". This sentiment has become so popular that it has become an effective marketing and community building tool for crypto projects.

You can hardly blame retail investors for resonating with such populist rhetoric. It feels a bit like VC has cheat codes. First, of course, VCs have access to the best offers, making money is easy for them. And some VCs have different cheat codes, they're just in the right place at the right time, with the right amount of cheek or guts. In the end, the US SEC gave all VCs the biggest cheat code: they scare entrepreneurs so that they can only seek financing from professional investors.

Ordinary retail investors can only buy IDOs that are overpriced or buy them in the secondary market. Most markets are like this.

There is enough data to show that the chance of retail investors winning is close to zero. It is obvious that some aspect of this "game" system has been manipulated in order to compete with ordinary people.

They don’t even want to hide it, proudly post their portfolios on their website bragging about getting a 100x return from investing in a certain token, not realizing that the data is a straight line down and the insiders are the Ultimate winner.

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Venture capital institutions

There are two extremes of crypto VCs: the first being legitimate co-builders and crypto-native long-term thinkers. They are the ones who keep building along with their portfolio partners and keep the builders alive in a bear market.

At the other extreme are start-ups that only exist in frothy bull market conditions. They have no theory, vision or belief. Funds are only provided for short-term investment projects, and the goal is to quickly resell them for profit in a bull market. They invested in "Polkamon" or something. They fund technically unsound projects to buy relationships with important market players.

It's a range, so it's kind of nebulous, and sometimes funds or VCs move around that range in one way or another. In my opinion, the latter type is a demonic entity made up of sociopaths. The first type is indeed very rare.

Due to the excellent transparency of the blockchain, you can see the proportion of positions held by VCs. For example, many "reputable" VCs prematurely sold their L1 competitor tokens. Some long-term diamond venture capitalists still have 100% positions established many years ago, and this investment method has nothing to do with price.

Of course, you can also see which VCs have funded projects that are either technically or not worthwhile. Some well-known VC-funded projects seem to me more like a joke than an investment because they know that when these projects are listed on Binance, they will definitely profit. Others choose to invest only in those projects that they believe have long-term value and will promote the progress of the industry.

The main incentive structure differences between the two extremes of VC areinvestment period。

If you want to maximize returns on a 20-year timeline, you need to have access to the top 1% of quality deals at least 15 years into the future. This means that your status is extremely important in the eyes of founders.

Since everyone can see which funds are selling in real time, the VC's "conviction" becomes a measurable indicator for retail investors. Since retail investors are also core users of encryption protocols, the status of VC in the minds of founders will also be affected by the ideas of retail investors.

If VCs are known for frequently dumping tokens, retail investors will be skeptical of the projects these investors are backing.

But if the VC wants to maximize its return in 2 years, reputation becomes less important. There will be no need to hunt for the top 1% of quality deals in twenty years. There will be no need to care about what the founders think, nor will it really care if retail investors know that you will dump your tokens on the single market to them as soon as they are unlocked.

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Scam Origins: Fundraising

In a bull market, founders can almost guarantee profits for VC investors by creating predatory token economics that only favor early backers.

Investors with vision and conviction are willing to take long-term risk: they accept long payback periods and provide generous funding for founders and projects they believe are important to shaping the future. Gaining support from these investors is often difficult.

But it's much easier to raise money from mercenary investors. A project can have multiple leverages available. If a founder wants to raise $5 million, on day two all they need is a platform and nothing else.

Think of it this way.

Imagine you have the opportunity to invest in a project with a valuation of $250 million and your tokens are locked for 4 years. They will have a massive airdrop, so a large supply will be distributed for free and used as an incentive for the first 10 years. If you compare the project valuation, your investment may have a return of 20 times. But you have to take a big risk: no one knows the state of the market in 4 years, no one knows whether the team can deliver, the airdrop recipient may just sell it, and the valuation of 250 million US dollars is not enough for a pre-product plan Still pretty high.

Now imagine that you have the opportunity to invest in a project with a valuation of $10 million. Most of your tokens are locked for 3 months, but you get 20% of them on day one. A market cap of $10 million is really small by comparison. In fact, you only need to get a fully diluted valuation of $50 million on day one, and you can sell that 20% of your tokens to get back your initial investment.

Additionally, the project will carry an IDO of 20x the price on a popular YouTuber’s launchpad. That's a pretty good deal. Not to mention, this project also became a commercial video for another popular YouTube channel, and three of the most influential people are also participating in the seed round! This is less risky because market conditions 3 months from now are easier to imagine than market conditions 4 years from now, and everyone in the market who owns this token has a higher cost base than you.

In the previous example, you needed to be confident that the team was able to execute on its mission and that their product was important.

And in the second instance, it felt like "pie in the sky." All you need to do is hope there is enough liquidity to sell your 20%, risk-free, and without having to believe in something.

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ordinary people

So it's no surprise that populist rhetoric is starting to connect with market participants. Now, projects can attract disillusioned market participants in order to effectively build a community. Come on, join us. Fuck his lawyers, VCs, banks and exchanges, the whole system is rigged. You can follow us to make money.

Community, users, and attention are the most important parts of building a crypto project. The founders discovered they had their own cheat codes.

But since the incentives are the same, you can also apply the extreme mental model of previous VCs to any other market participant. They're all just people trying to make money with different cycle goals.

Projects that use anti-VC rhetoric as a mechanism for community growth are not immune to adversarial incentive structures in the marketplace. You won't be surprised when your favorite anonymous Twitter writer tells you to go 'in his suit'.

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incentive structure

Explaining the incentive structures behind financial products and complex cryptographic schemes is a deliberate superpower in a market with many retail investors and increasingly obscure token economics.

"Show me your incentives and you'll get results" - Charlie Munger

Most cryptocurrency projects, regardless of their industry or marketing style, can be reduced to variables that are useful for your choice in the market. If you know the other players in the market and understand their incentives, there are no surprises.

However, crypto market participants seem to imply a rather (3,3) mentality. This is the only financial market where someone exercises their right to sell assets and it is considered a betrayal of the community.

Maybe it comes from the same place as "wagmi" or "hodl". Perhaps, it has its roots in why we end up in these markets: for all to be in them, to escape the tyranny of the old power structures that bound us.

It enables bad actors to abuse these ideals as they tweet "wagmi" while funding a seed round of "let them eat cake" tokens, which they don't actually believe in, but what they do know is that other Token economics will benefit them anyway.

"Don't trust, verify" is a Bitcoin buzzword for a reason. I think many market participants will benefit from this mentality.

If you're making a decision without understanding the financial incentives of investors in your field, I hope you don't bet more than you can afford.