Title: The Drainage Effect of "VC Tokens" and the Role of Exchanges

Author: Nan Zhi, Odaily Star Daily

Recently, in the general downturn of the market, the view that the excessive listing of "VC tokens" by exchanges has drained market liquidity has become increasingly prominent. Anti-VC sentiments have been brewing since the era of inscriptions, reaching the level of a flag and slogan during the surge in Meme coins, and this recent decline has intensified this contradiction to a whole new level.

In this article, Odaily will interpret whether VC tokens have drained the market, whether exchanges have facilitated this process, and what demands users have for token listings.

"VC Tokens" Siphoning Market Funds?

Regardless of the impact of exchanges listing "VC tokens," as the primary way for users to enter the crypto space is still through purchasing USDT or USDC, the total supply of stablecoins to some extent represents the total liquidity within the market. Therefore, we will initially compare the "increase in stablecoin supply" and the "increase in VC token market value."

Where did the increased funds go?

A year ago, the circulating market value of USDT was $83.2 billion, and it has now risen to $112.7 billion, an increase of $29.5 billion. Meanwhile, USDC has increased from $28.4 billion to $32.6 billion, with an increase of $4.2 billion. The combined increase in market value for both stablecoins over the past year is $33.7 billion.

Taking the circulating market value of the ten VC tokens listed in the past six months, the total is $5.47 billion (all figures in USD): PYTH ($1.1 billion), ENA ($950 million), STRK ($900 million), ZRO ($670 million), ZK ($600 million), ETHFI ($360 million), DYM ($270 million), ALT ($270 million), ATH ($250 million), EZ ($100 million).

Furthermore, in the second half of 2023, there are giant tokens like TIA ($1.17 billion) and SEI ($1.05 billion). It's important to note that these circulating market values have been calculated based on recent weeks' declines of at least 20%-30%. Therefore, we can preliminarily conclude that at least 50% of the increased funds have been captured by dozens of "VC tokens."

Existing tokens collectively draining funds

ARB was listed in March 2023 with an initial circulating supply of 1.275 billion tokens, calculated at a price of 1.25 USDT, resulting in an initial circulating market value of $1.02 billion. The current circulating market value of ARB is $2.5 billion, despite the token price dropping by approximately 40%. If we interpret the increase in circulating market value as a net inflow of funds, while holders continue to bleed, the funds can only be flowing into the unlocked portion.

Role of Exchanges

In the previous section, we concluded that "VC tokens" indeed have a significant siphoning effect on funds. But have exchanges facilitated this process?

Regarding this question, He Yi, co-founder of Binance, expressed his views on X platform: "The crypto industry is a free market, and liquidity and trading volume are shared among various trading platforms. Even if Binance does not list new projects, these projects still exist, and funds will flow to the entire industry. In addition to projects unlocked by VC investments, meme coins, on-chain dog coins, rug pulls, and fund pools will also divert funds. After ETF approval, funds from traditional financial markets will also flow directly into the crypto industry."

In summary, his viewpoint can be translated as "Tokens not listed by exchanges can still be sold elsewhere by VCs" and "Funds diversion cannot be solely attributed to VC unlocks." We have already proven through data in the previous section who the main player is in fund diversion. As for the former viewpoint, Odaily Star Daily believes it overlooks two important factors: "user attributes in different scenarios" and "leverage ratios in different scenarios."

In the on-chain scenario, apart from users focused on DeFi farming or rug pulls, due to the low risk-reward ratio and the ability to quickly offload through AMM features, most traders have a "disgust" mentality towards high market value projects. If a project has a circulating market value in the billions and an FDV that is sky-high, it is no different in the eyes of on-chain users from reserving 90% of SCAM dog tokens, leading to a significant decrease in willingness to take on such projects.

On the other hand, exchanges provide leverage far higher than on-chain, with leverage ratios reaching tens of times, providing ample liquidity for counterparties to offload, which on-chain trading markets cannot match.

Therefore, the "user attributes" and "leverage ratios" in different scenarios significantly affect the willingness and capacity of on-chain users to take on VC unlocked tokens. If token trading occurs outside of CEX, prices are more likely to quickly return to a reasonable range, rather than slowly declining with unlocks, or the situation where the circulating market value increases while token prices drop may not occur. It cannot be said that centralized exchanges have no impact on the VC unlock process.

Can Exchanges Do Better?

For exchanges, "heavenly" projects like ZKsync and LayerZero have no possibility of not being listed as long as the project team does not exit or hackers do not empty the coffers. However, for other currencies, users have many demands, and exchanges still have many better choices.

Providing Opportunities for "Valuable" Projects

Some valuable projects can generate extremely high profits and cash flow, such as the recent hot project Pump.fun, with an annualized income of up to $219 million, and many users are eagerly awaiting its token issuance and are willing to purchase. Or projects like BananaGun and Whales Market, with market values reaching $160 million and $40 million, respectively.

The data for these projects is not constructed by VC hoarding or rug pull interactions but is genuinely needed by users. In the previous bull market, projects like SOL and MATIC were able to develop after being listed on exchanges with market values in the tens of millions of dollars. However, in this round, we have not seen these projects have the same opportunities and treatment.

Compared to projects that go empty after token issuance, providing more opportunities for valuable projects is one of the fundamental demands of the majority of users.

Establishing Clearer Standards

How to determine valuable projects? Judging through financial data is a very direct and effective method. Here, financial data does not refer to easily manipulated metrics like address count or interaction count, but rather TVL, project income, and other more tangible data. Some users have questioned whether this may lead to entrepreneurship oriented towards exchanges. However, traditional markets such as the US stock market have not declined due to clear standards but have allowed truly valuable projects to gain more opportunities, rather than certain skin-deep AI projects, hoarding, and volume manipulation projects.

Furthermore, it may even be possible to establish delisting standards for these projects, achieving "leaving liquidity to those in need" and guiding the healthy development of the market.

More Transparent Information Disclosure

There is currently no way to query token operating data, such as when and how much unlocking will occur, within exchanges. Of course, the current market generally does not consider this to be the obligation of exchanges.

The power to go long or short is entirely in the hands of traders. However, assuming exchanges have clearly notified users of declining operating data and imminent large unlocks, but users still choose to take over, then there is no one else to "blame."

Conclusion

Blaming the entire market downturn on exchanges is not entirely correct, but believing that one's own side is completely correct and educating users is also not the best approach. As the current dominant force in the industry in terms of discourse and traffic, exchanges still have many better choices in guiding the healthy and rapid development of the industry and projects.

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