As a professional translator, I believe the most important thing that founders can offer to the community and venture capitalists is substantial market traction.
You can sell hope and dreams during the initial public offering, but if people don’t have a reason to hold onto it, they will sell. In this case, no matter how you design the token economy, people will exit. And when they leave in large numbers, the price will only go one way – down. Regardless of interest rates, the price of Bitcoin, or the TPS (transactions per second) of Ethereum, this fact remains unchanged.
The price will plummet.
Many times, well-intentioned founders put in the effort to attract attention from the news by acquiring various partner logos and indicators. This is reasonable because it’s a narrative-driven market. You want to show people that you’re working hard, but ultimately, we need to achieve economic functionality in the capital market.
If all the news, logo collections, and community engagement cannot be translated into value capture or the actual significance of holding these tokens, people will eventually exit. We are currently in an era of low circulation and high FDV (Fully Diluted Valuation) because many founders believe that initial liquidity is all their tokens can achieve. About 18 months later, the trading price of the tokens may drop by 90%.
I see this situation particularly evident in the DeFi (Decentralized Finance) sector – where power laws are quite cruel. The first two or three lending platforms obtained high valuations due to their high TVL (Total Value Locked). However, as the market becomes saturated, by the time the seventh or eighth platform arrives, TVL or fees become irrelevant, and the market only recognizes the major leaders like Aave and Compound. But when new lending methods emerge, such as Pendle and Ondo, the market will adjust accordingly.
The same applies to the perpetual contracts (perps) market. In the early stages, you may be the first perpetual contract platform on a particular chain, thus obtaining a valuation premium. However, eventually, the market will consolidate based on trading volume (e.g., GMX), asset types (e.g., Aevo), and user experience (e.g., Hyperliquid).
In other words, we are witnessing a market that operates quickly and ruthlessly efficiently. In the late 90s, you could be popular because you were “online.” In the early 2020s, you could be popular because you were “on-chain.” But as the market develops, capital and attention will concentrate on things that are useful, desirable, and engaging.
In the discussion of “low circulation, high FDV,” many details are overlooked, and many projects lack real traction or core indicators. In other words, what we (likely) see is just a repricing of protocols/venture capital in the market. Unfortunately, many retail investors buy these tokens at extremely high prices and suffer losses as a result. By the way, I believe regulatory measures (implemented on exchanges) are steadily addressing this problem.
In 2018, if you invested in 10 seed-stage projects, you could potentially see 7-8 of them listed on exchanges if you were smart enough. By 2021, this number has dropped to 3-4. I believe by 2024, this number will decrease to 1-2. Why? Because exchanges require traction, key performance indicators (KPIs), supporters, standardized token economic models, and community participation before listing tokens. For capital-intensive products like staking, you can rely on abundant venture capital and some hedge funds to showcase TVL. But for consumer-oriented applications, it’s not that easy to operate.
Lastly, the rules for startups also apply to entrepreneurs in the cryptocurrency field.
Tokens are a multiplier of power. If you have market traction, it will amplify your advantage. If you don’t, it will drag you down.
Regulatory measures by exchanges mean that founders need to think more carefully before launching tokens.
What kills you is not FDV or circulation, but spending 18 months making noise without tangible results.
Another way to think about it is whether users of the product want to hold shares. If I use Hyperliquid (which I do), I may not want to sell my shares. And my shares should make me more willing to participate in governance and management.
In my opinion, even in 2024, the potential of using tokens as retention and governance tools is still not fully explored.