Don't be obsessed with burdens, love technology, and believe in something.
Author: Pavel Paramonov
Compiled by: Deep Tide TechFlow
This article discusses the recent situation with @celestia and @polychain where Polychain sold $242 million worth of $TIA. I will explore the pros and cons of this situation and what lessons we can learn from it.
Original tweet link: Click here
Did you anticipate that investors would not make money?
Many people (including excellent researchers) believe that Polychain's actions are highly predatory and filled with uncertainty. How can a top-tier fund sell such a large allocation to the public market and harm the price?
First, Polychain is a venture fund whose job is to make money from liquid assets purchased during times of low liquidity (I can't believe I'm saying this).
The risk of Polychain investing in Celestia lies not only in its early stage but also in the early stage of concepts like external data availability layers. At that time, the concept was still new, and many people (especially "Ethereum supporters") did not believe in it.
Imagine if you discovered Spotify in 2008 and believed that people would listen to music through streaming services instead of CDs and MP3 players: you would be called crazy. When you are not only a novice but also want to operate and create a new market in data availability throughput, financing feels like this.
Polychain's job is to take risks and earn returns, just like everyone else. Founders take the risk of creating a company that may fail, and people generally make choices every day, taking on certain risks.
Everything we do is about making choices and taking risks, with the only difference being the nature and size of the risks.
Polychain is not the only venture capital firm making investments; there are many different venture capital firms.
Interestingly, no one blames them because it is harder to find their trading data. However, Polychain's sell-off alone would not cause such a severe data crash. It should be noted that the hatred directed solely at Polychain is unwarranted because:
Their job is to take risks and make money, and they do it well.
They are not the only ones selling; there are other investors.
Are these actions beneficial for investors? Yes.
Are these actions ethical for the community? You know the answer.
Did you anticipate that the team would not make money?
Well, you might have indeed anticipated that. There is a significant problem with the profitability of cryptocurrencies: most protocols do not make money themselves, and they do not consider profitability at all. According to defillama, Celestia currently generates about $200 in daily revenue (equivalent to the salary of a chief software engineer in Eastern Europe) and has distributed about $570,000 in token rewards.
This is just the team's on-chain profit and loss statement; we know nothing about their off-chain profit and loss statement, but I believe the costs for such a large team are also high. Currently, some KOLs are righteous in saying, "Web3 protocols should be profitable, and businesses should make money." Are we crazy to hear such statements?
Yes, we are indeed, and the main problem is not the business model. The main issue is that some teams treat token sales as profit and build their business models on that basis without considering the consequences.
If token sales equal the business model, then there is no need to consider the business model and cash flow, right? That's right, but investors' money is not infinite, and tokens are not infinite.
Meanwhile, venture capital invests in startups that are highly likely to achieve great success. Many companies are currently not profitable, but they may bring something revolutionary or interesting enough to attract others to explore and develop these ideas.
In any case, you wouldn't expect the core team to sell tokens, would you? The reality is that when your protocol is not making money, you have to make money from elsewhere. The foundation must sell some of its own tokens to pay for infrastructure development, employee salaries, and a host of other expenses.
Original tweet link: Click here
At least covering expenses is one of the reasons I want to believe for the sale. There are many other reasons and different perspectives to consider: on one hand, they "abandoned" their community; on the other hand, they built this protocol and heavily promoted it, so maybe they should at least sell something? "Selling" refers to a portion, not the whole.
Ultimately, this is a token/equity issue, which is why crypto VCs are not fond of equity. Selling on the public market is easier than private placements or waiting for exits, and the time cycle is shorter.
Token economics is not the main issue; the tokens are
Clearly, investors are increasingly favoring token trading over stocks. We live in the era of digital assets, so investing in digital assets is a good choice, right?
This trend is not always as simple as it seems. Interestingly, many founders themselves realize that their products may not need tokens, and they prefer to raise funds through equity financing. Nevertheless, they often face two major challenges:
As I mentioned earlier, most native crypto VC firms do not like equity (because exits are more difficult)
Equity valuations are often lower than token valuations, so people want to raise more funds
This situation not only creates a dilemma but also actively incentivizes people to choose the token model. Token issuance satisfies more investors because it provides a clear exit strategy for the public market, which in turn makes fundraising easier. For teams, this means higher valuations and more funds available for development.
Your company's core value remains unchanged. You can retain 100% equity while raising substantial funds through these "artificial" tokens. This approach can also attract more investors focused on token investment opportunities.
Unfortunately, in the current situation, in 99% of cases, the token model makes retail investors poor while making venture capitalists rich. Or, as @yashhsm puts it: infrastructure/governance tokens are the suited memecoins.
However, when $TIA was launched, it brought substantial returns to retail investors, soaring from $2 to $20. People thanked the team for making them wealthy and staked tokens to receive different airdrops. Yes, we have experienced such moments, that was in the fall of 2023…
After the price began to drop, people suddenly started spreading a lot of FUD about Celestia: rumors about the team's strange behavior, predatory token economics, mocking on-chain revenue, etc.
It is a good thing when issues are pointed out, but if those who once praised Celestia now view it as a "dumpster" solely because of price behavior, that is unfortunate.
What conclusions can we draw from this situation?
VCs are rarely your friends. Their core business is making money, and your core business is also making money, and the core interest of VCs' LPs is also making money.
Don't blame those VCs who sold tokens: their tokens have been unlocked, they have full ownership of the assets, and they can use those tokens as they wish.
Blame those VCs who sell tokens while writing on Twitter about how they crave those tokens: that is deceitful and should not be tolerated.
Business models should not revolve solely around token sales. Find a profitable model, or even if the technology is great, if it doesn't make a profit, people will still buy it.
Token economics is open to everyone: if a team unlocks tokens, they have full ownership of their assets and can dispose of them as they wish. However, if you are confident in what you are building, then selling large allocations is debatable.
Equity investment is less popular, and some token valuations are artificial, not based on any metrics.
Teams should pay close attention to token economics in the early stages, as this may come at a high cost in the future.
Technological innovation is unrelated to token prices.
When rankings rise, people are happy; when rankings fall, some issues become apparent. If those who once praised the project now hate it, that's a problem.
Don't be obsessed with burdens, love technology, and believe in something.
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