CoinJie.com Report:
Author: Jocy Lin, Founder of IOSG Ventures Source: X, @JinzhouLin
This year’s Token2049 conference has grown in scale, with attendance reaching twice that of last year, surpassing 20,000 people. Even Grab drivers marveled at the number of participants in the cryptocurrency event, which seemed to exceed the number of Formula 1 spectators. In multiple events, overseas attendees and speakers accounted for more than half, undoubtedly making this conference the most successful and profitable edition in Token2049 history.
Why are so many US GPs coming to Asia? Why are numerous “unicorn” projects coming from afar? It’s because they want to tap into the active Asian community to achieve their fundraising goals in a financially tight market environment.
During this week, many LPs were able to meet with an average of three US GPs per day. Currently, we see that the new fund size of PM funds has been reduced to $800 million, the fundraising target of another P fund has dropped from $800 million to $200 million, and the initial fundraising target of D fund is expected to be $250 million. This clearly indicates that global crypto funds are facing a new round of financing challenges: due to poor performance in the previous cycle, fund sizes have generally decreased, and LPs have become more cautious. LPs affect the VC GP market, and VC markets have stricter requirements and selection criteria for early-stage entrepreneurs, making it even more difficult for entrepreneurs to raise funds. At the same time, listing requirements for exchanges like Binance will also be further raised.
In the first half of this year, funds that made great strides (some achieving three valuations in the same financing round) are now being introspected by LPs. Funds and big players who were crazy about OTC trading and secondary transactions at the beginning of the year are now doubting the industry. The volatility and reflexivity of the crypto industry are awe-inspiring. The financing market is becoming worse, even very bad. Most active investment deals are happening at low valuations and in new directions.
Projects with valuations around $100 million that have not yet completed their Token Generation Events (TGEs) have abandoned plans to list on Binance due to the difficulty. Infrastructures with valuations between $300 million and $500 million are still struggling to raise funds (basically accepting investors without discrimination). And for those projects that have completed TGEs, if the initial strategy is not good, the Fully Diluted Valuation (FDV) compared to the last VC round valuation has dropped an average of 80%. Projects with liquidity on Binance are still hoping for a market turnaround, while those not listed on Binance have already started planning new projects or the next stage of work.
Industry confidence has been severely damaged, and support for innovation is at risk.
In this industry, everyone is busy doing something. Some create false data and revenue to deceive exchanges and investors, while others engage in academic discussions in technical communities but forget that good infrastructure is for gaining applications and users. Exchanges have become the biggest winners thanks to their revenue models, providing the best working environment and income in the short term, but making it more difficult for startups to attract top talent. This is somewhat similar to the prosperity of the 2049 conference, where few people discuss how to acquire real users and revenue, as well as stable and sustainable business models.
The performance of altcoins may be worse than expected, forcing industry participants to reconsider innovation and real use cases. The interests of VCs, exchanges, project teams, and retail investors are not aligned, and all parties have become victims of the market. Without reforms, the industry will only head towards a dead end, unable to attract new money, talent, and users, even if Bitcoin succeeds, the entire Web3 industry will still fail.
Here, I advocate for adjustments to the utility and unlocking clauses of tokens. Traditional IPOs only require a lock-up period of 6 months to a year, while the overall lock-up period for investments in early-stage seed round companies in crypto has reached 3 to 4 years.
Most project tokens have no utility. Market makers are willing to make markets and adjust prices in the first half year after listing, but afterwards, project teams and exchanges do not care about the price, nor do they take responsibility for VCs and retail investors who bought in the secondary market. After numerous instances of harm and losses, more people’s support and confidence in innovation have been severely damaged.
If everyone is waiting for a big rebound in the bull market but not thinking about the application scenarios that will bring in real users, they will end up with nothing. Those who have enjoyed the early dividends of the industry do not understand the hardships of others. The largest 16-letter fund in the United States operates independently and can sustain itself with billion-dollar funds every ten years without the need to cooperate with any institutions or market forces. Most successful founders do not care about young entrepreneurs like they did five or ten years ago. However, the industry is currently facing great difficulties, and we need these successful forces to show us the direction and bring faith, so that more people can persist and see the dawn of the next bull market.
What lies ahead for Ethereum?
Ethereum is facing unprecedented scrutiny. Since the launch of ETFs, there has been a net sell-off/fund outflow of over $1.2 billion from Ethereum. This has led to a crisis of trust among core Ethereum researchers/EF, developer community organizations, ConsenSys-related businesses, and external investors. Vitalik Buterin needs to provide better guidance and goals for different stakeholders because Ethereum has become a decentralized business entity that is extremely large in both the crypto market and even the traditional market. Such a business entity has never existed in history, and it will continue to pose increasingly severe challenges to the entire Ethereum community and Vitalik Buterin to the point where a breakthrough is necessary for progress. After “The Merge” transition to Proof of Stake (PoS), due to the substantial reduction in ETH issuance and the existence of burning mechanisms, Ethereum will actually enter a 20-month deflationary period. Due to the lackluster performance of L1 transactions in the past few months, gas prices on L1 have been in single digits for a long time, causing Ethereum to return to an inflationary trend, and the total supply may return to the level it was at when “The Merge” was implemented.
About five years ago, when we visited the Ethereum official website, we could still see a list of several other L1 competitors at the bottom, allowing everyone to understand Ethereum’s shortcomings or problems encountered in a completely open, transparent, and comparative manner. Today’s Ethereum is stronger than ever before, but how to make the network more open and diverse is a problem that urgently needs to be solved.
Emphasizing our position, IOSG Ventures still sees Ethereum as the most successful technology ecosystem. The overall TVL (Total Value Locked) of the Ethereum ecosystem has grown from about $34 billion a year ago to $88 billion, a growth rate of 159.5%. This significant growth indicates the potential for Ethereum to drive new innovative projects in the future.
The crypto industry needs to return to practical use cases and avoid false prosperity.
The latest data from MetaMask shows that monthly active users have dropped from a peak of 30 million during the bull market to 1 million, marking a significant decline. The user activity of EVM-compatible L1/L2 chains has also decreased by over 50%. This liquidity dispersion has led to widespread dispersion among applications, developers (asset issuers), and users. Developers and users are quickly moving to chains with subsidies and memes, and there is too much fragmentation between different chains and L2. High-performance chains have not brought high-performance applications.
Airdrops and incentives have limited real user scale, and people are starting to grow weary of customer acquisition strategies through airdrops. Third-party research shows that user churn rates after airdrops end can reach as high as 80%, which is detrimental to founders and projects. For example, Friendtech, a previously influential and eye-catching project, has been abandoned by all users after the token was launched and the price was not sustained. The restaking track has encountered similar bottlenecks, with TVL leaving or switching to new protocols after the airdrop ends.
Western funds are not optimistic about TON and Web2 platforms. They believe that there are still some fundamental issues with Russia and the TON chain, so they neither favor nor answer the question of whether to invest or not. However, it is evident that TON has brought new vitality to the crypto market during this difficult period. Among the 900 million monthly active Telegram users, there are approximately 3 million genuine gamers, with a customer acquisition cost of around $0.7 per Ton user. The subsequent growth of Ton from Web2 to Web3 is likely to be applied in the growth of new L1/L2 platforms, and it can be expected that these platforms will specifically allocate a budget to subsidize user growth. At the same time, an opportunity can be seen. After the strategic deployment of cryptocurrency financial ETFs in the United States is completed, consideration will be given to integrating and infiltrating web3 applications into technology companies. A one-stop experience that is indifferent to the chain will become the new standard.
In the gaming sector, we have discussed with several gaming funds, including Bitkraft and Makers fund, which have transitioned from Web2 to Web3. However, their positions and performance in Web3 have not been as good as expected. Compared to the more mature Web2 gaming industry, they are still more willing to raise new Web3 funds from LPs, showing their enthusiasm for the new gaming paradigm in Web3. The gaming track has become exceptionally challenging, and stakeholders with long-term vision are considering what’s next after listing. Native crypto game funds are having a harder time, with 90% of gamefi projects experiencing post-listing declines (compared to the valuation in the last VC round). It seems that 3A games, full-chain games, and Degen game community platforms have all been abandoned by retail investors. Of course, Pirate Nation, invested by Paradigm earlier this year, and Small Brain, which recently completed its financing, still have a decent community base. The gaming track has become exceptionally challenging, and all parties are losing confidence. Crypto games are forcing participants to leave or create more innovative products and fun games. However, we are still continuing to look for teams that have faith in gaming and consensus in the crypto market.
I learned from someone responsible for listing at a major exchange that their current internal principle and consensus is to look for long-term entrepreneurs. Founders who manipulated data and cashed out after successful listings in the past have left the community with a bunch of debt claims. On the other hand, long-term visionary entrepreneurs, regardless of the stage, are committed to growth and finding more reliable and effective sustainable business scenarios.
At this year’s Token2049, I also saw more founders transitioning from traditional AI to Web3 entrepreneurship. These include computing represented by @gensynai and @hyperbolic_labs, Web2-type All-in players represented by @SchellingAI, and Title.xyz, which is dedicated to generating images/videos in the Midjourney artistic style. AI+Consumer+DeFi is becoming a new track that industry funds are actively betting on. More talents will undoubtedly bring better efforts and growth to the industry. Stay optimistic and move forward positively!
I call on more successful beneficiaries of the industry to pay more attention to the root problems currently faced by the industry, support the construction of public goods, and create a better business innovation environment for these long-term entrepreneurs. IOSG will take the lead in setting an example by providing support from 0 to 1 for early-stage entrepreneurs in the industry. We will also continue to reflect on and iterate our investment thesis, guiding entrepreneurs to think about new business models and customer acquisition methods.
