Conversation with Tangent Co-founder: Liquidity Fund vs Venture Capital, Who is Truly Driving the Crypto Market

Tangent is a company focused on blockchain technology and DeFi solutions, dedicated to providing users with innovative financial services and improving the efficiency of traditional financial systems using the transparency and security of blockchain.

Compiled & Translated by: Deep Tide TechFlow

Guests: Jason Choi, Co-founder of Tangent

Hosts: Haseeb Qureshi, Managing Partner at Dragonfly; Tom Schmidt, Partner at Dragonfly; Tarun Chitra, Managing Partner at Robot Ventures

Podcast Source: Unchained

Original Title: VC vs. Liquid Fund & Inside Friend.Tech's Exit - The Chopping Block

Broadcast Date: September 14, 2024

Background

In this podcast discussion, participants including DeFi expert Tom, Tarun from Gauntlet, and Jason Choi from Tangent discussed the challenges of venture capital in the crypto market and the limitations of airdrops. They also emphasized the potential of DeFi protocols in improving market efficiency. As the market continues to evolve, improving investment quality and the actual value of projects will become a focus of the industry's attention.

Tangent is a company focused on blockchain technology and decentralized finance (DeFi) solutions. It is dedicated to providing users with innovative financial services, using the transparency and security of blockchain to improve the efficiency of traditional financial systems.

Key Points

Friend.Tech Token Collapse: The 96% price drop of Friend.Tech's token highlights the risks of launching tokens without sustainable product planning and user retention strategies.

Project Exits and Ethics: Early token issuance has raised concerns about the ethical responsibility of teams abandoning projects, with accusations of "rug-pulling" on the rise.

Impact of Airdrop Farming: Airdrop farming distorts actual user engagement, leading to inflated metrics that inaccurately reflect product-market fit and real user growth.

Venture Capital in Crypto Space: Low barriers make venture capital firms (VCs) overvalue projects, often leading to overhype and unfulfilled crypto projects.

Challenges of Early Token Issuance: Early token issuance often harms long-term project potential by confusing market signals and damaging user retention.

Venture Capital and Liquidity: The debate continues on whether venture capital extracts value from the crypto market or if liquidity can improve market efficiency.

Hedge Funds and Market Efficiency: Hedge funds may improve market liquidity, but their impact on long-term crypto growth is still under scrutiny.

Speculative Market and Long-Term Value: The crypto market continues to strive to balance short-term speculative behavior with creating sustainable long-term value.

Impact of US Politics in Singapore

Widespread Attention to US Politics

Jason pointed out that US politics holds a significant position in discussions in Singapore. Almost every day, there is a focus on US dynamics, especially political debates. He mentioned that their work has become like a macro fund during this time, as they have been closely following political events, which has made him somewhat unhappy.

Focus on Trump Family Projects

Haseeb mentioned the Trump family's projects related to DeFi, and Jason stated that his understanding of this project is limited to some surface information and its relationship with the Aave token price.

Social Media Reactions

Tarun mentioned that some of his comments on certain projects have sparked a lot of reactions, especially when he referred to a project as a "rug-pull" or "poor man's exit scam," which received a lot of intense feedback. Therefore, he chooses to avoid further comments on such projects to avoid more controversy.

Current Status of Friend.Tech

Haseeb mentioned that the Friend.Tech project has recently attracted widespread attention. Friend.Tech is a social finance project that allows users to support creators by purchasing their tokens and joining creator chats. Despite causing a frenzy in the summer of 2023, the token's performance has been poor since its launch, with the price currently down 96% from its all-time high.
Haseeb also mentioned that the project team transferred control of the contract to an invalid address four days ago, sparking accusations of an "exit scam."

Team's Explanation and Market Reaction

Despite the team's statement that they did not sell the tokens and the token issuance was fair, the market reaction remains strong, with many believing the project is "exiting" or "abandoning." Haseeb raised that this event has sparked a broader discussion about the responsibility of crypto product teams.
Jason stated that he was an active user of Friend.Tech and, despite the token price collapse, he believes the project did attract a large number of users in the early stages.

Views on Team Responsibility

Tom further analyzed the scope of team responsibility, believing that compared to some obvious "rug-pull" projects, the situation with Friend.Tech is more complex. He pointed out that while the team did not retain tokens, they profited from platform transaction fees, which has caused dissatisfaction among users as these earnings did not translate into token value.
Haseeb also added that there is a gap between user expectations for the token and the actual situation, leading to disappointment.
Jason concluded that Friend.Tech may not have done well in the timing of token issuance and failed to establish an effective value accumulation mechanism. They also had issues with product market adaptability, as despite performing well in the early stages, they failed to sustain user attraction. Overall, this event has sparked a deep discussion about the responsibility of crypto project teams and provided important lessons for similar projects in the future.

Future of Friend.Tech

Platform Limitations and Challenges

Jason mentioned that the design of Friend.Tech leads to a very small user base. Due to the token's price curve, users are quickly excluded, making it difficult for the platform to expand to more users. Additionally, creators' earnings on the platform mainly come from users purchasing their tokens, and once users enter the group, creators have no incentive to continue providing value. This mechanism makes many creators not actively participate after entering because they do not hold their own tokens.

Timing and Impact of Token Issuance

Haseeb believes that while the token issuance of Friend.Tech attracted a large number of users in the short term, the platform's infrastructure and user experience have not improved. He pointed out that while the token issuance brought back users, the platform still has many issues and poor user experience.
Haseeb likened this situation to a comedian's first appearance on TV, where if the performance is poor, there may not be another chance.

Reflections and Recommendations for the Future

Tarun mentioned that he has less emotional connection to Friend.Tech but believes that the project was ahead in some aspects. He mentioned that Friend.Tech attempted to incorporate elements of meme tokens to some extent but failed to effectively implement these ideas.
Haseeb further added that the Friend.Tech team failed to iterate enough on the core product, leading to a stagnation of innovation on the platform.

Decline in User Experience and Content Quality

It was mentioned in the discussion that over time, user inquiries became repetitive, and creator interactions gradually decreased. Tarun even stated that creators' performance on the platform was affected, leading to a decline in their content quality.
Haseeb believed that Friend.Tech did not find a good balance between user engagement and content creation, ultimately leading to user fatigue in the user experience.

Shutting Down Startups

Norms and Challenges of Startup Closure

Haseeb mentioned that startup closures are quite normal, especially in the crypto industry. Many early-stage startups may realize that they cannot achieve their initial goals and therefore need to consider an exit. Unlike traditional industries, the crypto industry lacks clear exit norms or processes, leaving founders confused when closing projects.

Founder's Exit Strategy

Jason believed that the closure process in the early stages of a startup is relatively simple because there are no tokens at this time. Founders can work with lawyers to gradually liquidate the company and refund investors proportionally. However, once tokens are issued, the situation becomes complex as founders need to deal with thousands of token holders, not just a few investors.

Timing of Token Issuance

Jason emphasized that founders must be cautious when deciding to issue tokens. Token issuance should occur when the project has achieved some level of product-market fit, rather than as a "desperate move" when the project is in distress. He mentioned that some projects are considering how to gradually shut down tokens and refund investors proportionally after going through legal procedures.

Successful Closure Cases

Haseeb and Tarun mentioned some successful token closure cases, such as Vega and Fei, which used community voting and buyback mechanisms to handle the closure process. These methods not only allow community involvement in decision-making but also provide some compensation to investors.

Possibility of Decentralization and Open Source

Tom suggested that ideally, founders should consider open-sourcing the project, allowing the community to continue operating it. This approach can somewhat alleviate user disappointment with the project's closure, as users can maintain and manage the project themselves. However, completely decentralized products are not common, and many projects still rely on centralized infrastructure.

Venture Capital Funds and Liquidity in the Crypto Market

Haseeb mentioned that there has been a heated discussion on Twitter recently about the dynamics between venture capital (VC) funds and the liquidity market. A tweet by Arthur Chung sparked this discussion, claiming that in the current crypto market, VC funds are actually "net extractors," meaning they withdraw more funds from the crypto ecosystem than they invest. The core of this viewpoint is that VC funds often invest in new projects at low valuations and then sell tokens on exchanges at high valuations, thus extracting funds from the ecosystem.

Different Types of Venture Capital Funds

Jason believed that this view is oversimplified and cannot be generalized. He pointed out that the low barriers in the crypto industry lead to varying project quality among VC funds. While it is true that some funds buy tokens at low prices and sell at high valuations, it does not represent the entire VC industry. He emphasized that the surplus of funds in the market has intensified competition for quality projects.

Investment Opportunities in the Early Stages

Jason further explained that Tangent aims to focus on early-stage investments because many large funds often cannot effectively support these startups. They hope to fill this gap by providing small investments. Additionally, he mentioned that the price discovery mechanism in the liquid market is relatively inadequate, leading to a lack of consensus on token valuations, which is also the issue Arthur mentioned.

Uniqueness of the Crypto Market

Tarun pointed out that the crypto market blurs the boundaries between private and public investments, and the influence of venture capital in the crypto field is greater compared to traditional markets. He believed that investors in the crypto market can directly influence project liquidity and market pricing, whereas in traditional venture capital, investors have relatively weaker control over the final public price.

Pricing Efficiency in Private Markets

Tarun also mentioned that pricing efficiency in private markets may be lower than in public markets. Due to competitive pressure, investors often need to complete transactions at prices higher than they consider reasonable, leading to more unstable and inefficient pricing in private markets.

Winner's Curse

The "winner's curse" mentioned by Haseeb is a well-known phenomenon, first discovered during the 1960s when the US government auctioned off oil blocks in Alaska. In the auction, oil companies could take samples from the land and then decide how much they were willing to bid. As each bidder only sampled a specific area, it could lead to some bidders overestimating the value of the entire land, resulting in overbidding and ultimately causing the "winner's curse."

Winner's Curse in Crypto Venture Capital

Tarun believed that the winner's curse not only exists in crypto venture capital but in all venture capital, although it is more severe in the crypto field. He pointed out that private investors in the crypto market are often also public market investors, participating in the liquidity formation process during token issuance and trading with market makers. This participation allows them to intervene more in asset listing.

Impact of Market Intervention

Haseeb further explained that Tarun's point is that intense competition in venture capital transactions often leads to overpriced deals, and the eventual winner may suffer losses in expected value.
Tarun added that while they may seem to have won the deal on the surface, without intervention, the final value may be lower than their expectations. Private funds in the crypto market can intervene more in the process of assets becoming public, unlike the pricing mechanism dominated by intermediaries such as banks in traditional public markets.

Dynamics of Public and Private Markets

Value of Brand and Liquidity

Tarun believed that in tech venture capital, the value of the brand is higher because investors are more willing to pay a higher price for a well-known brand before liquidity. In the crypto market, the premium of the brand is relatively lower. Haseeb countered that in the early stages of crypto projects, brand influence is very important because many projects have not yet launched products, making the brand an important signal.

Stage Differences and Investment Strategies

In the discussion, Haseeb and Tarun also discussed the differences between the crypto market and traditional tech investments. Haseeb pointed out that while brand influence is significant in the early stages, it may diminish in later stages. Tarun believed that the lack of later-stage financing stages in the crypto market makes brand influence more prominent in the early stages.

Liquidity Events and Market Speculation

Jason mentioned that public markets in the crypto space often give projects a premium far above their actual value, allowing venture capitalists to reap substantial returns when the project goes public. For example, if a venture capitalist invests in a new Layer 1 project at a fully diluted valuation (FDV) of $30 million, and the project's market valuation reaches $1 billion three months after listing, it creates a "fiduciary duty" for the venture capitalist - in this scenario, they are almost obligated to sell their tokens.

Impact of Rapid Listing

Jason further pointed out that the liquidity window in the crypto market allows projects to raise funds in a short period, significantly different from the seven to ten years it typically takes for startups to go public in traditional markets. While Haseeb questioned the idea of tokens being launched in a short time, stating that no one can launch tokens in two months, Jason believed that, even if not two months, the time is still significantly shorter compared to traditional markets.

Market Speculation and Valuation Pressure

Jason believed that this rapid listing dynamic results in projects not being able to realize their full potential, partly due to the significant speculative premium imposed by the market on new projects. Almost all projects entering the crypto market, even with a little potential, are accepted by the market at high valuations, but these projects often struggle to achieve these high valuations in the early stages.

Self-Correcting Market

Jason proposed that the market will eventually self-correct. As regular investors begin to realize that buying tokens at a valuation of several billion could lead to losses, this speculative behavior in the market may gradually diminish. He mentioned that token issuance in the last six months has shown a decline in prices for almost all newly issued tokens, except for a few highly liquid "meme coins." This indicates that investors are gradually recognizing this pattern, potentially leading to adjustments in future market behavior.

Hedge Funds and Market Efficiency

Market Volatility and Role of Venture Capital

Haseeb pointed out that over the past six months, the market has seen a significant decline, with almost all assets dropping by 50%. He emphasized that while he is a venture capitalist, he does not agree with the view that liquidity funds are beneficial to the market and venture capital funds are harmful. He believed that this view implies that the projects they have built have no real value, which is not the case.
Haseeb stressed that many projects funded by venture capital (such as Polymarket, Solana, Avalanche, Circle, Tether, and Coinbase) have actually driven the development of the crypto market, making it more valuable.

Role of Liquidity Funds

Haseeb further discussed the effectiveness of liquidity funds, stating that the performance of liquidity funds in the market may not necessarily contribute to the long-term development of projects. He believed that the goal of liquidity funds is to make short-term profits through frequent trading, rather than providing funds for new projects. The operational model of liquidity funds tends to extract value from the market in the short term rather than support long-term technical development.

Market Efficiency and Liquidity

Haseeb mentioned that the efficiency of the liquidity market is also worth considering. He questioned whether the entry of liquidity funds into the market would result in poor performance. He pointed out that the goal of liquidity funds is to make quick money rather than long-term investments, which could lead to them extracting more funds from the market rather than supporting the development of new projects.

Comparison of Venture Capital and Traditional Finance

Tarun also participated in the discussion, pointing out that there are also doubts about venture capitalists in traditional financial markets. He mentioned that many people believe that venture capitalists only inflate valuations among themselves, reflecting the tension between long-term investment and short-term gains in the capital market. He believed that this tension is one of the core conflicts of capitalism, leading to frequent trading activities.

Airdrops and Wash Trading

Lack of Market Financing Efficiency

Tom pointed out that the public market for cryptocurrencies performs poorly in providing and raising funds for token issuance teams. He mentioned that unlike traditional stock markets, teams cannot easily issue new tokens on the public market when they need more capital, and in most cases, teams actually sell tokens to venture capitalists rather than trading directly on the public market. This inefficiency in providing funds for teams in the crypto market is notable.

Relationship Between Hedge Funds and Retail Investors

Haseeb further discussed the relationship between hedge funds and retail investors, noting that discussions on Crypto Twitter often tend to support hedge funds, which contradicts the interests of retail investors.
Tarun mentioned that, similar to the GameStop situation, retail investors' attitudes toward hedge funds are complex, especially during market volatility.

Quality of Venture Capital and Market Perception

Jason mentioned that venture capitalists of different qualities significantly influence the market's perception of venture capital. He believed that projects supported by high-quality venture capitalists usually attract more capital, while low-quality venture capitalists may lead to a pessimistic attitude toward venture capital in the market.

Value of Liquidity Funds

When discussing liquidity funds, Jason emphasized that different liquidity fund strategies may have different impacts on the market. He pointed out that high-frequency trading funds may provide more liquidity to the market, while some theme-based funds may improve market efficiency by sharing their investment ideas, thereby shifting capital from lower-quality projects to higher-quality ones.

Impact of Wash Trading

Regarding wash trading, Tarun and Haseeb discussed the prevalence of wash trading and its impact on the market. Tarun mentioned that wash trading may be legal in some cases, but it can distort the true state of the market, and in the crypto market, the cost of wash trading may not be enough to suppress this behavior.

Controversy of Airdrops

Jason mentioned that systematic airdrop behavior may have a negative impact on projects, as it can lead to a false inflation of the project's user base, affecting the founder's judgment of the product's market adaptability. He believed that this behavior is not conducive to the long-term development of projects.

Future of the Market and Strategies

When discussing market strategies, Tarun expressed concerns about the lack of medium-frequency trading strategies in the current market, believing that this absence limits the maturity and efficiency of the market. He believed that the market needs more medium-frequency trading strategies to better facilitate price discovery under different market conditions.

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