Web3 Popularization | Why is it best for blockchain startups not to issue tokens?

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1 year ago

In the past two weeks, I had a discussion with an entrepreneur who is involved in auditing for encrypted funds. Our conversation touched on the differences between blockchain entrepreneurship and traditional internet entrepreneurship.

My viewpoint is: if traditional internet entrepreneurship is like a life-and-death struggle, then blockchain entrepreneurship is like a 99.9% life-and-death struggle.

Why do I hold this viewpoint? Isn't blockchain supposed to represent advanced productive forces and production relations?

For those familiar with Lawyer Honglin, they would know that I am very supportive of blockchain technology and also a fan of Bitcoin. However, this does not prevent me from recognizing the problems in the current blockchain industry entrepreneurship: projects that utilize blockchain technology and user-shared equity incentive thinking are more likely to succeed, but those that issue tokens, especially those listed on exchanges, are more likely to fail.

Based on my past experience in internet entrepreneurship and my observations of the current blockchain industry, projects that issue tokens seem to have a booster, leading to faster success or faster failure.

01. Creating Trouble for Yourself by Issuing Tokens and Digging Your Own Pit

At the end of 2018, during the cold winter, I spent several days in Beijing attending a course on token economy design hosted by Meng Yan. Originally, I wanted to learn this skill so that I could better persuade investors when I returned to Shanghai.

After completing the course, my biggest takeaway was that blockchain entrepreneurship is definitely not something that a startup team can handle.

Because of token design, this involves macroeconomic policy formulation related to currency economics (albeit in a mini version). On a smaller scale, you also face various microeconomic incentive designs for user or ecosystem behaviors, which is a concern that traditional internet entrepreneurs never have to worry about.

Traditional internet entrepreneurs only need to focus on: user needs, product development, marketing, revenue growth, etc. For blockchain entrepreneurs, the team faces the "economic model" design as a pitfall in the early stages of entrepreneurship.

You could say that the existence of tokens theoretically can reduce user acquisition costs or increase the efficiency of marketing, but the reality is that many users attracted through token incentives are not necessarily the target customers, but are just there to take advantage.

Many blockchain entrepreneurs that I have seen first complete the traditional Web2 project's product and business model, and then seek external service providers to design their own economic model. Although the final delivery of the white paper design may be from a newly graduated intern that you paid a high price for.

Of course, for those with sufficient budget, in this area, they may just copy from a competitor's white paper found on the market, just like the "User Agreement" and "Privacy Policy" on a website, adjusting the parameters and making do, because apart from those academic industry observers, no one seriously reads the project's white paper, let alone those incomprehensible economic models.

So it's not surprising to see those token projects that have gone online for a short time fall into a death spiral. For entrepreneurs who have issued tokens and listed on exchanges, from a mathematical perspective, the probability of project collapse is definitely high. This has little to do with whether the team has done a good job with the product or how quickly new users are brought in.

But when it collapses, it not only depends on luck, but also on the endurance of the project team. For example, when will the project collapse? It depends on how quickly the entrepreneur can bring in a new investor to take over, or how aggressively the project team manages the market value in the secondary market.

Listing is not the goal, but a major milestone event, just like issuing tokens. However, for traditional entrepreneurs who go public, at least they have gone through several years of experience before going public. This is not the case for token issuers.

Why do token issuers have to worry about managing the secondary market? On the surface, it is to create liquidity, but the truth may be: if the secondary market is not managed properly, the project may collapse at any moment. And many times, the project team brought this embarrassing situation upon themselves - yes, it was those investors from the encrypted funds that the project team sought out at the time.

Friends familiar with the operation logic of encrypted funds know that as a fund manager, their income comes from two sources.

The first is the annual management fee, which can cover the fund's daily expenses. To really make a big profit, they need to look at the returns after the project exits. So for the fund manager, unless 99% of the money in the fund is their own, they will definitely not be that loyal. The reason they are willing to take the risk of investing in such a startup project is only one: they hope to make money in a shorter time and then exit. After all, only the money in hand can be distributed as a bonus.

For entrepreneurs raising tokens, it may feel as easy as breathing to raise money, but from the perspective of investors in encrypted funds, which fund manager would hear that a project can exit in 9 months and not be confused?

By applying the short-term investment approach of the secondary market to the traditional primary market, this means that for those who have successfully listed on exchanges, perhaps the happiest moment in their lives is the day they are listed, and then they face the crazy selling by investors as the unlocking period approaches. If the token price falls, uninformed retail investors will naturally follow suit, and thus the death spiral slowly begins to take shape, leading the project towards failure.

How can this rapid development of the death spiral be avoided? There is only one truth: protect the market. Find teams in the coin circle through personal connections that offer paid market value management. As for how long it can be stable, this usually depends on the project's budget and psychological endurance. So raising tokens may seem enjoyable at first, but managing market value reveals that it is actually a crematorium.

02. Unstable Main Business Leads to External Investments, Digging Your Own Grave

Another reason why blockchain startup projects are prone to collapse is the inflated ego of the founders, who are not content with being mere capital investors and attempt to become mature reapers.

How can the money raised by the project be turned into more money? There are two ways.

The first is to focus on the main business, overcome technical challenges, conduct user research, develop good products, build a rapport with users, and carry out effective marketing. This method has a higher success rate, but the path to becoming rich is slower. If the blockchain startup team is not exceptionally talented, it will take at least 3 to 5 years to establish a foundation, following the path of traditional internet company entrepreneurship.

The other way sounds more appealing - making investments. Use the project's name to exclusively name an ecological fund, and invest in projects that are perceived to have the potential to become rich, after all, the money is not earned by oneself, so it's not worth being stingy. This mysterious operation is something that friends in traditional internet entrepreneurship cannot understand.

Frankly, I have seen many blockchain entrepreneurs who have raised only tens of millions in funding, yet have all started their own investment funds and are eager to invest in external projects. This left me dumbfounded. It's as if you are treating venture capitalists as limited partners, creating a project to raise funds, and then acting as the general partner to make investments?

In the history of business, which company that has successfully survived did not focus on developing the main business in the early stages, becoming an industry leader or a leader before starting financial investments and preserving assets?

Blockchain entrepreneurs are starting to make financial investments externally when their main business is not yet running smoothly and the project cannot support itself. Isn't this digging their own grave?

Some may say that this is the project's ecological layout. But that's a bit far-fetched. After all, the vast majority of blockchain product users do not have daily, weekly, or monthly activity.

One important reason for this phenomenon is the impetuosity of blockchain entrepreneurs. It's easy to raise money in the market, so they want to learn from capitalists and use leverage in the market to seek greater returns. After all, making a good product, doing operations to attract users, and working hard for a long time is tiring. It's not as exciting as suddenly seeing a surge of tens of points in one night, is it?

This has led to the fact that the majority of blockchain projects have become layers of leveraged financial games. Over the past decade, the development of the blockchain industry has been very slow. Friends who like to play financial games in the blockchain industry should also have some doubts about where your money comes from.

03. Don't Use Chinese Regulatory Restrictions as an Excuse

When things are successful, they claim to be exceptionally talented and amazing in various ways. When things fail, they blame the unfavorable environment and policy issues. Is this really the case?

In the minds of many practitioners, doing blockchain entrepreneurship in China seems to be restricted in many ways. But I don't think so.

Those in the blockchain industry believe that the country is specifically targeting them with restrictions. In any other industry, it's actually the same. For example, the well-known initial coin offering (ICO) fundraising, many may not realize that during any development period in China, it seems that any industry's startup companies cannot directly raise funds from the public. So, blockchain entrepreneurs should not easily attribute crackdowns on illegal activities to themselves. In the eyes of regulators, there is really no special attention given to you.

04. Conclusion

In Mr. Muxin's collection of poems, there is a line that goes: "Sweet in curves, salty in straight lines."

Some of the words in this article may seem harsh, but as someone who was once considered a VC in internet entrepreneurship, after burning through hundreds of millions in investment and stumbling into numerous self-destructive pitfalls on the entrepreneurial path, and after seeing many blockchain entrepreneurs build high-rise buildings only to see them collapse, I still hope that everyone can consider how reliable their entrepreneurial projects are, and whether issuing tokens is really necessary. After all, once the arrow is released from the bow, there is no turning back.

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