Guests: Haseeb, Tarun, Jason, Tom

Compiled by: zhouzhou, Joyce, BlockBeats

Editor's note: This podcast delves into the impact of the significant price drop of the Friend.Tech token on project planning and user retention, as well as the ethical issues of cryptocurrency project exits, especially when the project is accused of "running away" after the token issuance. It also discusses 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 market efficiency improvement.

This podcast raises and discusses the following core issues:

• Sharp drop in the 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:

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

Project exits and ethical issues: The token issuance of early 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: The low barrier to entry has led to a large influx of venture capital into the cryptocurrency market, driving up project valuations and resulting in overhype 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: Discusses whether venture capital is extracting value from the cryptocurrency market or if liquidity funds can improve market efficiency.

Hedge funds and market efficiency: 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 creating 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. Over the past few weeks, we have been watching the movements of the Federal Reserve and political debates all day. To be honest, this is the part of the crypto cycle that I dislike the most.

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 increase 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 seem to have said that this project seems like a "rug-style scam" or a "poor man's exit scam."

Sharp drop in the Friend.Tech token price

Haseeb: The dominant news story this week is about Friend.Tech, a SocialFi project that essentially allows you to bet on creators, buy their tokens, and join the creator's chat room. In the summer of 2023, it was very popular, but it gradually cooled down. This year, they launched their own token, but its performance has not been ideal. The token price has almost continuously declined and is now down 96% from its all-time high. The initial market value was about $230 million, and it has now shrunk to around $10 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 the Friend Token plummeted, and many people claimed that Friend.Tech was "running away," meaning they issued the token 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 close or abandon the project, and the application is still running. However, it seems that everyone interpreted it as Friend.Tech running away.

This incident has sparked a broader discussion about what responsibilities 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 of cryptocurrency entrepreneurs when launching products.

Jason: I did 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 public 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 for a while, people did use this app. They also fairly distributed this token without conducting 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 the moment for Friend.Tech. 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 would see a new wave of 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 delivering nothing in the end. I think these were the teams often accused in the 2017 wave of projects. Then you look at some token or NFT projects, like Stoner Cats, perhaps not promising 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 the Racer and Friend.Tech teams than at other teams. Compared to those 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 trading fees—they earned about $50 million from platform trading 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 trading 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 is because everyone knows that Friend.Tech made over $50 million in trading fees over the course of a year and a half, but that money did not flow into Friend.Tech's token. I saw that Hasu provocatively raised this point, 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, it's not the thing that accumulates value from the business. The business accumulated $52 million in value, that's it. So, at least one logically valid complaint is that they knew people had this expectation, 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 trading 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, it's essentially a meme token, which was clear from the beginning.

Jason: I think many of these issues could have been solved by issuing the token later, before any value accumulation mechanism, they launched the token, and they hadn't found the product-market fit loop. I think the app had strong viral potential at the beginning, but they didn't solve two big problems. The first problem is that the platform naturally becomes a small circle, for example, the price of buying Keys is built into the price curve. So the Friend.Tech community quickly excluded many people because the price rose to 5 ETH, and as a result, these communities had a hard time expanding beyond 30 people, so they never solved the expansion problem.

The second problem is that the value creators obtained 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 make money once people join your community. You could say that if the creators are not active, people can sell their keys. But in reality, the creators also don't have much incentive to remain active because the creators didn't initially hold the keys, as the creators had to buy their own keys.

If they had solved these problems before issuing the token, 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, hoping to attract people back through the promise of airdrops, so they rushed to launch the token.

Haseeb: This did indeed trigger a wave of user growth, everyone returned to the platform, saw new features, a new club system. But the features didn't work, the experience was very poor. It's more like they wasted the platform 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 becomes very difficult to seize a similar opportunity again.

Tarun: I was active for a while, but then it turned into people buying my keys just to ask me questions. I thought at the time, I don't have time to be a question-answering robot all the time, isn't ChatGPT already available? But I want to say that Friend.Tech actually got this "hype + entertainment" metaverse play wrong, they were indeed the first to create this model, burning keys, collecting fees, it's actually exactly the same as the entire meme coin play—someone injects liquidity, they burn keys, fees are split between creators and the platform. This is exactly what Friend.Tech did, they just did it too early. Because Friend.Tech's play 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 might be that they now see some more successful mechanisms, and the early Friend.Tech seems less outstanding in comparison, but I think they were actually on the right track. You could say that Friend.Tech figured out this play before meme coins became popular. But I kind of 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 might have been hoping to get a bigger airdrop reward through a large number of interactions. 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 then they turned sour. When I felt that Friend.Tech really entered the mainstream, it was when the OnlyFans creators started to join, at that point, it was no longer just a niche crypto project, it became something that truly attracted the public.

Tom: That's right, 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, and they have a big presence on the platform. These are some good signals appearing on creator platforms, creators can build their own careers through the platform.

Jason: Friend.Tech did show some early signs of success, but it feels like 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 just too slow, and the chat experience didn't improve. I think they seemed to have fallen into their own product trap, because the product had a bit of a shine at the beginning, they thought they should stick closely to the initial direction. Friend.Tech didn't really develop beyond the initial framework, it's just an app where "you chat with the people who have your keys," that's it. I think they didn't have enough willingness to try new plays, 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 attractive. Initially, the questions you received were quite interesting, but later the questions became about which token you think will rise? Or which project do you like? 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, it 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 to get good content, you have to buy his keys, 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, people don't know how to wrap up, and what responsibilities the 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 are often very disparate. 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 the project very early on, before the token is issued, 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, work with a lawyer to dissolve the company, and proportionally return the investment, it's basically a very simple process. But once you issue tokens, you're no longer facing 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're sure you've 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, even though it no longer has substantial development, the token still exists.

Tom: Yes, there's a version of Luna called Luna Classic, in the crypto space we like to call it the classic version. In fact, something similar just happened this week with Vega, a decentralized derivatives platform with its own chain, they proposed a plan to gradually exit and shut down the chain. This kind of thing is quite simple, even though it's decided through community voting, essentially the team has 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 the service, people often complain, "Why did you ruin the device I spent $1000 on?" They would hope the company opens the source 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, if you want the community to take over, then open source the front end and let users operate and govern it themselves, if you unilaterally shut down the project, it becomes more tricky. To do this, you need complete decentralization, 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 investment and liquidity market investment and token issuance, right?

Jason: Yes, that's right.

Venture Capital vs. Liquidity Funds

Haseeb: Recently, many people on Twitter have been discussing the dynamic relationship between VC funds and liquidity funds, arguing 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, rather than continuing to invest in new projects.

More and more people agree that VC funds are "extractive" or net negative for the industry, considering that you previously worked at Spartan, which does both liquidity market and venture capital, 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, the barrier to establishing crypto funds was relatively low compared to the Web2 field, because 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's usually multiple mature venture capital funds finding a reasonable price in competition. 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 boundaries between private and public investment. As you said, in the crypto space, it seems like everyone can participate. This is in stark contrast to traditional markets, such as private equity investments. Traditionally, you might 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 think 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 often pays a price that exceeds the actual value of the target in a competitive auction. Investors in the crypto space 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, and at that time, due diligence was just someone going to the field to collect samples and measure, there may not have been the sonar technology we have now. The problem is that this kind 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 bidders don't share it, the ultimate winner often ends up paying too high a price. 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"—although 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 out 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 the traditional public market, 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 just a third party.

In the crypto market, private equity funds have more intervention 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 seems 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 misjudged, 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 recommendation to the market makers, but it doesn't mean direct involvement in pricing or negotiations. Sometimes you might lend assets to market makers or perform 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, and the highest bidding team does not always win. 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 think 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 problem is that the crypto space does not have a traditional late stage, it's almost all early stage until a liquidity event occurs, and Series B can be considered a kind of late stage. Traditional venture capital may have Series D or F rounds, but the stage division in the crypto space is not as clear.

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 particularly 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. Therefore, crypto investment is not just a bidding for capital, but also a bidding for reputation. And in the crypto space, the balance between capital and reputation is more prominent than in 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 think that the influence of branding is on par.

Tom: In 2020 and 2021, many people thought 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, which has allowed 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 the tokens when they were unlocked, so the public market provided VCs with a cashing 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 liquidity windows 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 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? 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-funded 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-funded projects eventually go to zero, this is common in all venture capital in every industry. And buying liquidity tokens is still necessary.

Tarun: I think VC funds also drive 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 increases market efficiency and is 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 activity. I think 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, and almost all sales are 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, rather than through private placements, so they are more likely to resonate with liquidity funds.

Jason: Arthur mentioned that most VCs in the crypto space have performed poorly because the barrier to entry into this space was low in 2019 and 2020, leading to many low-quality projects being funded and entering the market at overvalued prices. This has allowed VCs to quickly 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 projects with real potential.

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 perform poorly, but there are also funds that are helpful 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, if they consistently fund projects that fail, that's obviously not good. 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 think the most valuable funds for the market are those that are theme-driven and openly share their investment philosophy. 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 crypto market is indeed somewhat ambiguous in certain definitions, and many things, if scrutinized, 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 the events. If you look at penalty cases, the results usually come five years later. The crypto market has not fully reached this level of regulation, and there are indeed many people profiting 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 qualify as self-financing because you have to continuously pay funding rates. Although collateral exists, there is also a problem of mismatched maturities.

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 intermediate operations are almost absent. 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. 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 "farmer" strategy of airdrops. 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 airdrop "farmers" only extract value from the project without actually using the product. Many studies have shown that after the airdrop ends, 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, usually operated by small teams of two or three people. Although there used to be larger-scale airdrop mining, 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 is indeed 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 positively to the long-term development of the project. Although airdrop "farmers" now take on some risk, it does not change 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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