In-depth discussion on the significant drop in the price of Friend.Tech tokens and its impact on project planning and user retention.

Guests: Haseeb, Tarun, Jason, Tom

Compiled by: zhouzhou, joyce, BlockBeats

Editor's note: This podcast delves into the impact of the significant drop in the price of Friend.Tech tokens on project planning and user retention. It also discusses the ethical issues of cryptocurrency project exits, especially when projects are accused of "running away" after token issuance, as well as the different roles of venture capital and liquidity funds in the cryptocurrency market. Additionally, the program analyzes the negative effects of airdrop mining and the impact of hedge funds on market liquidity and efficiency. The podcast also mentions the conflict between market speculation and long-term value creation, as well as the potential for improving market efficiency.

This podcast raises and discusses the following core issues:

• Significant drop in Friend.Tech token price.
• Project exits and ethical issues.
• Different roles of venture capital and liquidity funds.
• Negative impact of airdrop mining.
• Market strategy deficiencies and arbitrage behavior.

TL;DR:

Significant drop in Friend.Tech token price: The 96% drop in the price of Friend.Tech tokens reveals the risks of issuing tokens without sustainable product planning and user retention strategies.

Project exits and ethical issues: The token issuance of early-stage projects has sparked discussions about the ethical obligations of project teams when exiting, especially when the project is accused of "running away" after termination.

Role of venture capital in the cryptocurrency market: Low barriers to entry have led to a large influx of venture capital into the cryptocurrency market, driving up project valuations and resulting in excessive hype and underdelivery.

Challenges of early token issuance: Early token issuance often confuses market signals, damaging the long-term potential of projects and user retention.

Venture capital vs. liquidity funds: Discussion on whether venture capital is extracting value from the cryptocurrency market or if liquidity funds can improve market efficiency.

Hedge funds and market efficiency: The question of whether hedge funds can improve market efficiency by increasing market liquidity and price discovery remains a topic of interest.

Airdrop mining and wash trading: Airdrop mining affects project metrics by generating false user growth data, leading to value extraction.

Haseeb: Today, our special guest is Jason Choy, the entrepreneurial tycoon of Tangent. Jason, do you live in Singapore? Is American politics a hot topic in the Singaporean circle?

Jason: Recently, everyone has been paying attention to the United States. I usually operate according to U.S. time. In the past few weeks, we've been watching the movements of the Federal Reserve and political debates all day. To be honest, this is my least favorite part of the crypto cycle.

Haseeb: Have you been following the DeFi project of World Liberty Financial and the Trump family?

Jason Choy: I heard that the project is related to Aave and seems to coincide with a significant surge in Aave's token price. But other than that, I haven't paid much attention to this project. Is there anything we should be aware of?

Tarun: I think I mentioned that this project seems like a "rug-style scam" or a "poor man's exit scam."

Significant drop in Friend.Tech token price

Haseeb: The dominant news story this week is Friend.Tech, a SocialFi project that essentially allows you to bet on creators, buy their tokens, and join the creators' chat rooms. It was very popular in the summer of 2023, but gradually cooled off. This year, they launched their own token, but its performance has been less than ideal, with the token price plummeting almost 96%, now down to around $10 million from an initial market cap of about $230 million. Recently, Friend.Tech has faced various criticisms.

About 4 days ago, the Friend.Tech project transferred control of the contract to an invalid address, essentially burning their own admin keys. As soon as this news came out, the price of Friend Token plummeted, and many people claimed that Friend.Tech was "running away," meaning they issued tokens and then left, abandoning the project, which is just an empty shell because it can't operate.

An interesting detail is that Friend.Tech did not sell their tokens. According to our understanding, the tokens were not sold to investors, and even the team did not hold these tokens. So this was a so-called "fair distribution" of tokens, and the team also stated that they had no plans to shut down or abandon the project, and the application is still running. However, it seems that everyone interpreted this as Friend.Tech running away.

This incident has sparked a broader discussion about the responsibilities that cryptocurrency project teams should bear after launching products and tokens. This story is a bit strange because Friend.Tech did not sell the tokens to retail investors, and the team itself did not hold these tokens. So I would like to hear everyone's thoughts on the Friend.Tech controversy, especially regarding the responsibilities that cryptocurrency entrepreneurs should bear when launching products?

Jason: I did indeed buy those tokens and suffered quite a bit on Friend.Tech. I had a lot of airdrops and keys, and I also joined the club and was very active on this platform. At least in publicly available wallets, I was probably one of the largest holders at the time. So now my token value has shrunk by 96%, but I still think that they launched an app we liked, and at least for a while, people did use this app. They also fairly distributed this token without engaging in large-scale internal sales. I think their real problem lies in user retention and the timing of token issuance.

An anonymous developer created an app that everyone discussed, which is a typical phenomenon in the crypto space. In the previous DeFi cycle, we saw many such cases, but there are not many in this cycle. A topic will attract everyone's attention, and people will discuss it for weeks, and that was Friend.Tech's moment. And this project has also spawned many clone versions, such as Stars Arena on AVAX, and a bunch of other imitators. This reminds me of the previous DeFi, so I was excited, thinking that maybe we will see a wave of new social app trends from here, but it hasn't happened yet.

Haseeb: Tom, how do you see this situation?

Tom: I think these things involve the team's sense of responsibility or the so-called "running away" behavior. The most serious "running away" may be those worst ICOs—raising a lot of money, making a lot of promises and visions, but ultimately delivering nothing. I think these were the teams often accused in the 2017 wave of projects. Then you look at some tokens or NFT projects, like projects such as Stoner Cats, maybe they didn't promise to develop a TV show, but if you're just selling a JPEG, that's acceptable. There are also some meme coins that have no expectations or promises, and no clear vision, they are just what they are.

The Friend.Tech team did not allocate tokens, they just developed a product, but I think people seem to be more angry at Racer and the Friend.Tech team than at other teams. Compared to teams that did nothing, Racer is under even greater pressure, which is a bit strange. Because the team did not retain tokens, they made money through transaction fees—they earned about $50 million from platform transaction fees. Usually, this income would go into the DAO's treasury, and the team might receive funding from it, but in the case of Friend.Tech, all the income was completely privatized, and the team directly profited from these transaction fees.

Isn't this what everyone wants? Decentralization, no administrators, you operate it yourself, and no one can "run away" from you. But depending on people's moods or the development of public opinion, things have turned negative. I'm not sure why the Friend.Tech team is being targeted this way, especially when there are worse examples in the crypto space.

Haseeb: Indeed, the anger stems from the fact that everyone knows that Friend.Tech made over $50 million in transaction fees over the course of a year and a half, but that money did not flow into Friend.Tech's tokens. I saw Hasu provocatively point out that when tokens are issued, people naturally understand that the token will accumulate value in the product's ecosystem, but this token seems to be used to join clubs or something, and it's not the thing that accumulates value from the business. The business accumulated $52 million in value, and that's it. So, at least one logically valid complaint is that they knew people had these expectations, but still chose to do things this way, which violated expectations.

Tom: I think if it were a more traditional project, the team allocated tokens, then the team made money by selling tokens, the funds flowed into a multi-signature wallet, and then the team ran away, people would have more reasons to be dissatisfied. But in the case of Friend.Tech, from the beginning to now, everything about the flow of transaction fees, payment methods, and system operations has been very transparent, with no changes.

So, on the surface, I can understand why people would have negative emotions, but at a deeper level, I don't think it's that big of a problem. I think Friend.Tech has its unique aspects, and it's essentially a meme token, which was clear from the beginning.

Jason: I think many of these issues could have been resolved by delaying the token issuance, as they launched the token before there was any value accumulation mechanism, and they hadn't found the product-market fit loop. I think the app had strong viral spread at the beginning, but they didn't address two major issues. The first issue is that the platform naturally becomes a small circle, for example, the price of buying Keys is built into the price curve. So Friend.Tech's groups quickly exclude many people as the price rises to 5 ETH, and as a result, these groups have a hard time expanding beyond 30 people, so they never solved the expansion problem.

The second issue is that the value creators obtain on this platform is one-time. If you earn fees by others buying your keys, once someone buys your keys, you have no incentive to continue providing value because you can't earn money once people join your group. You could say that if creators are not active, people can sell their keys. But in reality, creators also don't have much incentive to remain active because creators didn't initially hold keys, and creators have to buy their own keys.

If they had addressed these issues before issuing tokens, they might have been able to maintain some momentum. If I remember correctly, they issued the token when the user curve started to steeply decline, almost like a desperate attempt to attract people back with the promise of airdrops, so they rushed to launch the token.

Haseeb: This did indeed trigger a wave of user growth, and everyone returned to the platform, seeing new features and a new club system. But the features didn't work, and the experience was very poor. It's more accurate to say that they wasted the opportunity to attract users back through airdrops. As a startup, this situation is really difficult to handle. Friend.Tech finally made its debut on the biggest stage in the crypto space, but messed it up, and it will be very difficult to seize a similar opportunity again.

Tarun: I was active for a while, but it eventually turned into people buying my keys just to ask me questions. I thought at the time, I don't have time to be a constant answering machine, isn't ChatGPT already available? But I want to say that Friend.Tech actually got the "hype + entertainment" metaverse gameplay wrong. They were actually the first to create this model, burning keys, collecting fees, which is exactly the same as the gameplay of the entire meme coin—someone injects liquidity, they burn keys, and the fees are split between creators and the platform. This is exactly what Friend.Tech did, except they may have done it too early. Because Friend.Tech's gameplay suddenly became mainstream on the Solana chain, but Friend.Tech itself failed to seize the opportunity.

Haseeb: I think what Friend.Tech didn't understand, or what Pump.fun did understand, is that you can start from a bonding curve, but you can't stay on the bonding curve forever because it will eventually collapse. You have to switch at some turning point, rather than continuing to stay on the bonding curve.

Tarun: I think part of the reason people are dissatisfied with Friend.Tech is that they now see some more successful mechanisms, and the early Friend.Tech seems less impressive in comparison, but I think they were actually on the right track. You could say that Friend.Tech figured out this gameplay before meme coins became popular. But I feel that its social aspect is very fake. I remember at one point, I returned to the platform and found that all my key holders were bots, asking me the same questions about 500 times.

Haseeb: Why were they asking these questions?

Tarun: I think they were probably hoping to get a larger airdrop reward through a large amount of interaction. Because at that time, everyone was trying to "farm airdrops," so some places became very strange. I think initially, these rooms were quite interesting and unique, but they later turned sour. When I felt that Friend.Tech had really entered the mainstream, it was when OnlyFans creators started joining, and at that point, it was no longer just a niche crypto project, but something that truly attracted the public.

Tom: Indeed, OnlyFans' revenue eventually reached $8 billion, and 80% of that revenue went to the creators, not the platform's founders.

Jason: There are also some local celebrities on Friend.Tech who have made a big impact on the platform. These are some good signals from creators' platforms, where creators can build their own careers through the platform.

Jason: Friend.Tech did show some early signs of success, but it seems that their team didn't have enough iteration on the core product concept. They seemed to see that everyone liked the platform and thought things would naturally go in the right direction, but their infrastructure was really poor.

Haseeb: The speed of adding new features was too slow, and the chat experience did not improve. I think they seemed to have fallen into their own product trap because the product initially showed some promise, and they felt they should stick closely to the initial direction. Friend.Tech didn't really develop beyond the initial framework; it was just an app for "chatting with people who have your keys," and that's it. I think they didn't have enough willingness to try new gameplay, maybe they should have done something closer to the spirit of meme coins.

Tarun: Yes, at some point, you feel that joining someone's group chat isn't particularly appealing. Initially, the questions I received were quite interesting, but later the questions became about which token I thought would rise, or which project I favored. And I also think Racer's Twitter performance during that time was a bit off-putting, which was one of the reasons I stopped using Friend.Tech.

I used to really like his research-oriented Twitter content, which was very profound and niche. But since he started Friend.Tech, his content hasn't been as good. I think this product not only didn't give me good content, but also lowered the quality of his content as a creator, it's a lose-lose situation. Now, if you want good content, you have to buy his keys and enter Racer's exclusive room, and you won't get good content publicly.

Project exits and ethical issues

Haseeb: I want to focus on the issue of how founders in the crypto space should exit. In traditional startup companies, closing a startup is normal. But in the crypto space, closing a project is strange, the main problem is the lack of standards, and there are no ready-made exit processes or guidelines, and people don't know how to wrap things up, and what responsibilities founders should bear. I'm curious to know what cases you've seen in this regard?

Jason: In the early stages, the success and failure of projects often vary greatly. If I were to give some advice to founders on how to make the right decisions when they realize the project is not working, I think it's relatively simple to close a project very early on, before the token issuance, when your stakeholders may only be four or five people, such as angel investors and a leading venture capital firm. You just need to communicate with them, handle the dissolution of the company with a lawyer, and proportionally return the investment, which is basically a very simple process. But once you issue tokens, you no longer face just a few investors, but potentially thousands of token holders.

Haseeb: So you think the solution to this problem is to control the timing of token issuance? You shouldn't issue tokens before the project is ready, unless you are sure you have found product-market fit and are ready to accelerate growth through token injection. Do you know of any examples of successful token exits? For example, FTT, even though its project has stopped operating, the token is still trading. And there's Luna, which no longer has substantial development, but the token still exists.

Tom: Yes, Luna has a version called Luna Classic, which we like to call the classic version in the crypto space. In fact, something similar just happened this week with Vega, a decentralized derivatives platform with its own chain, proposing to gradually exit and shut down the chain. This kind of thing is quite simple, even though it's decided through community voting, the team has essentially decided to exit and gradually leave the scene.

It reminds me of the discussion about IoT smart home devices. When companies that manufacture these devices go out of business or want to stop services, people often complain, "Why did you ruin the device I spent $1000 on?" They would hope the company would open-source the code so users can run their own servers. If a company can do that, it's undoubtedly the best approach. But this involves costs and legal issues, and very few teams actually open-source their code.

Jason: Indeed, if you can do that, it's the best path. In the crypto space, for example, if you want the community to take over, then open-source the front end and let users operate and govern it themselves. It's more difficult if you unilaterally shut down the project. To achieve this, complete decentralization is needed, or at least close to complete decentralization. Projects like Friend.Tech have servers hosting chat messages and are responsible for many operational aspects. Without these functions, Friend.Tech is almost nothing.

Tom: Yes, there are almost no projects that are completely decentralized and gradually shut down. The only examples I can think of are Fei and Rari Capital, but this is really rare. In most cases, as long as someone is willing to run the infrastructure, they can continue to exist and trade forever, like Ethereum Classic (ETC). The standard for whether a token is "dead" or not is quite unique in the crypto space. Although these tokens still exist on the chain, and some exchanges still provide liquidity, by most standards, they are basically considered "dead."

Haseeb: Tangent Fund does both early-stage venture capital and liquidity market investments and token issuance, right?

Jason: Yes, that's correct.

Venture Capital vs. Liquidity Funds

Haseeb: Recently, many people on Twitter have been discussing the dynamic relationship between VC funds and liquidity funds, believing that VC funds are net extractive for the crypto industry, meaning they take more money out of the crypto ecosystem than they put in. VC funds invest in new projects, usually entering at low valuations, and when these projects mature and list on major exchanges, VC funds sell their tokens, extracting funds from the crypto ecosystem rather than injecting funds. So this argument believes that more VC funds are detrimental to the industry, and they should allocate capital to the liquidity market, directly buying already listed tokens in the market instead of continuing to invest in new projects.

More and more people agree that VC funds are "extractive" or net negative for the industry, considering your previous work at Spartan, which does both liquidity market and venture capital investments, how do you view this debate? And what is Tangent's position on this?

Jason: Not all VCs are the same. I think in 2020, compared to the Web2 field, the barrier to entry for establishing crypto funds was relatively low, as it was the first time for many people to enter this field. As a result, there are a large number of funds in the market, and their quality requirements for projects are also low, leading to many random projects receiving funding. After these projects list, people blindly speculate, and ultimately the trend of many tokens is one-way downward. This gives the impression that VCs just buy in at low prices and then try to sell at unreasonable high valuations when they list on exchanges.

Indeed, we have seen many such cases, but I wouldn't deny the entire crypto venture capital field because of this. Our approach at Tangent is that we believe that some of the capital in this field is over-allocated, with too much capital chasing too few quality projects. Just like in the Web2 venture capital field, eventually the VCs who are good at picking good projects will dominate the market. So when we created Tangent, our intention was not to compete with these large funds, so we hoped to support these companies by writing smaller checks.

I think the current liquidity market lacks a mature price discovery mechanism. For the valuation of early-stage companies, it is usually multiple mature venture capital funds competing to find a reasonable price. But in the public market, there seems to be little consensus, and there are generally no strict standards for token valuation, so we need a more rigorous price discovery mechanism.

Tarun: One interesting thing about the crypto space is that it almost always blurs the line between private and public investments. As you said, in the crypto space, it seems that everyone can participate. This is in stark contrast to traditional markets, such as private equity investments. Traditionally, you may only have one liquidity opportunity when a company goes public, and I haven't read any documents about frequent trading. In contrast, in the crypto market, investors not only participate in project launches but also help find liquidity, connect with market makers, and do a lot of related work themselves, leading to a different market structure, which is why the price discovery mechanism in the crypto market is relatively poor.

And I believe the pricing in the private market is more inefficient than in the public market. Many times, the final price of a trade is not what investors consider reasonable or are willing to pay. Due to competitive pressure, investors may have to pay a higher price to win the trade. This "auction" mechanism often leads to a lack of pricing efficiency.

Haseeb: Yes, the "winner's curse" does exist. The "winner's curse" refers to the phenomenon where the winner in a competitive auction often pays a price that exceeds the actual value of the target. Crypto investors seem more willing to take this risk. At the time, the U.S. government auctioned off oil field blocks in Alaska, allowing oil companies to collect a sample from the land and then decide on the bidding amount. Due diligence at that time was just someone going to the land to collect samples and measure, possibly without the current sonar technology. The problem is that this type of auction often leads to bidders paying too high a price because they made overly optimistic evaluations based on limited samples.

Tarun: That's right. Suppose a bidder samples a piece of land with a lot of oil, they would think the entire land is an oil field, while another person's sample location has no oil. In fact, the true value of the land should be the average of all bidders' information. But because this information is private and not shared among bidders, the eventual winner is often the one who bid too high. They may have just sampled a lucky oil field and incorrectly estimated the overall value of the land. This is the so-called "winner's curse"—even though you win the auction, what you actually win is an overpriced resource, which in this case is the asset you plan to resell in the future, only to find that you actually paid too high a price.

Haseeb: Do you think the "winner's curse" phenomenon is only present in crypto venture capital, or is it present in all venture capital?

Tarun: I think it's present in all venture capital, but it's more pronounced in crypto venture capital. Because private investors in the crypto market are also public market investors. They participate in the liquidity construction of token issuance, such as reaching agreements with market makers to provide supply. In traditional public markets, these processes are usually completed by bank intermediaries, with banks responsible for pricing and bookkeeping, but banks are not the owners of the assets, usually acting as third parties.

In the crypto market, private equity funds can intervene more when assets are publicly traded. In the public market, the intervention capability of private equity funds is very limited. So in the crypto market, although it may seem like the "winner's curse" on the surface, the actual situation is different because private equity funds can influence liquidity events.

Do you remember when Benchmark partners used to complain every other week about the unreasonable pricing by banks? They complained about how IPO prices were mispriced, leading to them losing control over the pricing. This affected how they priced Series C financing and also affected their pricing for Series A financing.

Market Strategy Shortcomings and Arbitrage Behavior

Tom: This could indeed have some additional impact, but I think the influence is not significant. As you said, at most, it's just making a referral to the market maker, but it doesn't mean direct involvement in pricing or negotiation. Sometimes you might lend assets to the market maker or engage in other operations. In traditional markets, these are usually done by third-party intermediaries, but in the crypto market, the role of intermediaries is not prominent.

Crypto investments are not a simple commodity auction. The highest bidding team does not always win, and in fact, teams with lower costs often obtain cheaper capital. This is also the reason why people often mention "European family office investing in Series A," because there are indeed low-cost funding options there. Well-known venture capital funds are often not the highest bidders, which also explains why they can achieve better returns.

Tarun: I believe a major difference between crypto venture capital and tech venture capital is that tech venture capital places more emphasis on branding because their liquidity cycle is longer. Therefore, startup teams are usually willing to accept larger discounts in exchange for high-profile brand support. In the crypto space, teams have much lower tolerance for this, especially after 2019.

Haseeb: Many well-known brand funds actually help you find clients, especially in the early stages.

Tarun: I agree that branding is very important in the early stages. But in the later stages, the market becomes more homogenized, and brand influence is relatively smaller. The issue is that the crypto space does not have a clear distinction between early and later stages; it's almost all early-stage until a liquidity event occurs, and Series B can be considered a kind of later stage. Traditional venture capital may have Series D or F rounds, but the stage division in the crypto space is not as distinct.

Haseeb: The premium for branding in the crypto space is higher than in traditional venture capital. In the seed or pre-seed rounds, branding is especially important because without a product, people rely on signaling. If a top fund participates and another is an unknown fund, there will be a significant difference in the trading price between the two. Therefore, crypto investment is not just a bidding for capital, but also a bidding for reputation. The balance between capital and reputation is more prominent in the crypto space compared to traditional venture capital.

Tarun: I agree with your point about the later stages, such as the F round, but in early-stage tech investments, especially in AI investments, I do believe that the influence of branding is on par.

Tom: In 2020 and 2021, many people believed that cross-border investment funds like Tiger Global would dominate the market and drive up prices. However, in the end, this argument did not materialize, and instead, the phenomenon of the "winner's curse" emerged. But this is not the norm in the venture capital market, and today's market is not like that. Therefore, it is difficult to be convincing to predict the future based on data points from a few years ago.

Jason: I believe that the public market in the crypto space has given projects valuations far higher than their actual value, allowing VCs to realize huge gains on paper. For example, we invested in a new Layer 1 project with a comprehensive diluted valuation (FDV) of $30 million, and three months later, when the token went live, the market pushed its valuation up to $1 billion. This almost forced VCs to sell tokens when they were unlocked, so the public market provided VCs with a cash-out opportunity.

Behind this phenomenon is the difference in liquidity windows between the crypto market and traditional markets. Traditional venture capital projects usually take 7 to 11 years to achieve liquidity, while crypto projects may be able to issue tokens a few months after the company is founded, achieving liquidity much faster compared to traditional venture capital. Especially with meme tokens, there are new tokens being listed almost every 15 minutes.

The existence of a liquidity window does exacerbate this phenomenon. Projects often do not have enough time to realize their vision, not only because VCs drive project progress or tokens are issued too quickly, but also because the market assigns a huge speculative premium to almost any potential crypto project, and this early overvaluation is difficult to sustain. So, I believe this issue will eventually self-correct, as retail investors have realized that buying new project tokens with an FDV of several billion dollars often leads to losses. We have analyzed the token issuance over the past six months, and almost all token prices are falling, except for meme coins.

Haseeb: The market has dropped significantly in the past six months, with almost all assets falling by around 50%, which makes me skeptical of that viewpoint. Ironically, we also manage a liquidity fund, and we tend to prefer long-term holding. I disagree with the idea that liquidity funds are beneficial to the industry while VC funds are harmful. His argument seems to assume that our construction in the crypto space has no real value, as if we are just playing a shell game.

If you think there is no real value to be built, why participate at all? In fact, the projects supported by VCs—whether it's Polymarket, Solana, Avalanche, or Circle, Tether, Coinbase—have expanded the landscape of the crypto industry and attracted more people to enter the market. Without these VC-backed projects, the value of Bitcoin and Ethereum might be much lower than it is now.

The viewpoint that there is nothing of value to build and that new projects are worthless is too narrow. Historically, this kind of skepticism about new technology is unfounded. Even if most VC-backed projects eventually go to zero, this is common in all venture capital in every industry. And buying into liquidity tokens is still necessary.

Tarun: I believe VC funds have also driven the development of the entire industry, and we do need more liquidity funds, but completely denying the contribution of VC funds is unreasonable. You mentioned that the entry of liquidity funds into the market would increase market efficiency and be beneficial to the crypto industry. My rebuttal is that the operating model of liquidity funds is to buy early and sell at the peak, then look for the next opportunity. Their purpose is arbitrage, not long-term capital injection. If operated properly, liquidity funds ultimately extract more funds rather than inject more.

Tom: I have worked in both traditional finance and crypto private equity, and this kind of debate also exists in traditional finance. Some criticize venture capital for only inflating book values and not actually creating value, believing that capital should be more directed towards liquidity hedge funds. This is actually a classic contradiction in capitalism: the conflict between long-term but uncertain returns and the need to know all information now, which drives the existence of trading activities. I believe the public market in the crypto space has not performed well in raising funds for project teams. Unlike the traditional stock market, teams rarely sell tokens directly in the public market; it's almost all through sales to venture capital.

Haseeb: In the stock market, if a company needs funds, it can raise them by issuing new shares or debt, and the market usually takes an optimistic view. But in the crypto space, teams struggle to raise new funds through the public market, and token trading is more between retail investors, lacking effective financing channels. Most of Crypto Twitter seems to support hedge funds, which is contrary to the attitude in traditional markets. Hedge funds usually trade with retail investors, but Crypto Twitter supports them.

Tarun: Didn't you follow the GameStop event? That's the opposite situation. In the GameStop event, people hated hedge funds, while in the crypto space, people seem to favor hedge funds. Haseeb mentioned that retail investors participate in the crypto market through liquidity tokens, not through private placements, so they are more likely to resonate with liquidity funds.

Jason: Arthur mentioned that most VCs in the crypto space have underperformed because the low barrier to entry into the field in 2019 and 2020 led to many low-quality projects being funded and entering the market at overvalued prices. This quickly allowed VCs to cash out, leading to a negative view of VCs. But we are very cautious in choosing partners, such as co-investing with Dragonfly, because we have similar standards and tend to fund truly promising projects.

Additionally, the statement about liquidity funds "extracting value" is oversimplified. There are many different strategies within liquidity funds, and even high-frequency trading funds can add depth and liquidity to the market. Many crypto funds have similarities with VC funds; they are usually theme-driven, openly share investment logic, help make the market more efficient, and shift capital from low-quality projects to high-quality projects.

Haseeb: You mentioned that some hedge funds underperform, but there are also funds that are beneficial to the market, similar to Berkshire Hathaway, which improve market efficiency. So, which types of hedge funds are detrimental to the industry? Because your previous statement was somewhat vague. Are you referring to arbitrage funds being bad, or long-short funds being bad? Which funds do not meet your standards?

Jason: It's difficult to specifically say which type of fund is bad. For VCs, it's obviously not good if VCs keep funding projects that exit. But for liquidity funds, it's an open market, and anyone can participate. I don't think there is any legitimate fund strategy specifically supporting scams.

I believe there is a clear boundary between what is legal and what is "good" or "bad." As long as it's not illegal, I don't think I'm qualified to judge which type of fund is "bad" or "good." But I believe the most valuable funds for the market are those that are theme-driven and openly share investment philosophies. If given a choice, I would lean towards these funds rather than high-frequency trading firms. Theme-driven funds help the market better discover prices and shift retail capital from poor projects to good projects. Of course, their functions are different, so it's difficult to say which strategy has a net negative impact on the industry.

Haseeb: Tarun, what are your thoughts?

Tarun: You mentioned the word "illegal," which is somewhat subtle. The definitions in the crypto market are indeed somewhat vague, and many things, if delved into, may involve regulatory violations. For example, many companies engage in wash trading. I believe the market should develop to a point where the cost of wash trading is high enough to prevent this behavior. The goal of the crypto market is to prevent wash trading, rather than relying on SEC investigations like in traditional markets, which often lag behind events. If you look at enforcement cases, the results usually come five years later. The crypto market has not fully reached this level of regulation, and indeed, many people profit from this behavior without contributing to price discovery.

Types of Hedge Funds and Their Market Impact

Haseeb: Could you elaborate on other hedge fund strategies?

Tarun: I believe there is a lack of certain strategies in the crypto market, which is more significant than some of the existing poor strategies. For example, in traditional markets, self-financing investment portfolios can be found, where the expected growth of assets can cover the cost of funds, such as option premiums. However, in the crypto market, 90% of derivatives exposure is primarily perpetual contracts, which do not constitute self-financing because you have to pay funding rates continuously. Although collateral exists, there is also a problem of mismatched terms.

This is also why there are not many long-term traditional hedging funds in the crypto market; there are more short-term trading or long-term holding strategies, and the middle ground of operations is almost missing. If you were to graph the trading frequency of these funds, the traditional market would show a normal distribution, while the crypto market would show a bimodal distribution. This distribution pattern may change each time a new DeFi mechanism or collateral mechanism appears, but it has not fully integrated yet. Therefore, the lack of medium-frequency operations is a clear deficiency.

Jason: If I were to point out a detrimental hedge fund strategy for the industry, I would say it's the systematic "yield farming" strategy. This type of operation brings chaotic metric data to project founders, making it difficult to determine if the product truly matches the market. And these yield farmers only extract value from the project without staying to use the product. Many studies have shown that after the end of yield farming, the user churn rate can be as high as 80%, which is not beneficial for founders and projects.

The scale effect of this strategy is limited and is usually operated by small teams of two or three people. Although there have been larger-scale yield farming operations in the past, such as Pendle's TVL performing well at its peak, the scale of these operations has now decreased.

Tarun: I hope to see a more efficient, transparent, and mature market. Although progress seems slow, this field has indeed been gradually maturing compared to 10 years ago.

Haseeb: Yes, after this discussion, I generally agree with Jason's viewpoint. Short-term hedge funds can improve liquidity, while long-term funds can make the market more efficient and to some extent reallocate capital. Although Tom mentioned that the capital reallocation in the crypto market is not significant because project teams struggle to raise funds through the public market, they can still obtain capital through other channels, such as DWS or venture capital funds, and their discounts will be reflected in the public market, and price signals will be transmitted back from the public market. Therefore, these strategies are generally reasonable.

Tarun: Another issue is that some risk-free operations can be profitable, and these operations have no impact on the long-term liquidity or price of assets. For example, wash trading is done to obtain farming incentives, but these incentives do not make traders take on any risk, so they have no positive impact on the project. The market should make participants take on a certain amount of risk so that they will contribute to the long-term development of the project. Although yield farmers now take on some risk, it has not changed their non-productive nature.

Haseeb: Yes, taking on risk can prevent this behavior from distorting project metrics. If I believe a project will have positive results, the risk will prompt me to make a positive contribution to the project. Risk-free operations only inflate project metrics without actually helping.

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