Author: Jocy Lin, Founder of IOSG Ventures
This year's Token2049 exhibition has grown significantly, with the number of attendees doubling from last year to over 20,000 people. Even Grab drivers marveled at the fact that the number of participants in cryptocurrency events this week seemed to surpass the number of visitors to the F1 race. In multiple events, overseas audiences and speakers accounted for more than half of the attendees. There is no doubt that this exhibition may become the most successful and profitable edition in the history of Token2049.
Why Are Many US GPs and "Top-tier" Projects Flocking to Asia?
Why are so many US GPs coming to Asia? Why are numerous "top-tier" projects coming from afar? It's because there is a source of fresh capital. Faced with a tight market environment, many top GPs and projects have made special trips to Asia, hoping to achieve their fundraising goals with the help of the Asian community.
During this week, many LPs were able to meet with three US GPs on average every day. Currently, we have also seen that the new fund size of PM Fund has been reduced to $800 million, the fundraising target of another P Fund has been reduced from $800 million to $200 million, and the first fundraising of D Fund is expected to be set at $250 million. This clearly indicates that global cryptocurrency funds are facing a new round of fundraising challenges: due to poor performance in the previous cycle, fund sizes are generally shrinking, and LPs are becoming increasingly cautious. LPs are influencing the VC GP market, and the VC market is demanding stricter requirements and selecting early-stage entrepreneurs more rigorously. The problem of difficulty in fundraising for entrepreneurs is becoming more prominent, while the listing requirements of exchanges such as Binance will also be further raised.
Funds that surged in the first half of this year (some achieving three valuations in the same financing round) are now being asked by LPs to reflect on their performance. Funds and major players who were frantically buying OTC or engaging in secondary trading at the beginning of the year are now starting to doubt this industry. The volatility and reflexivity of the cryptocurrency industry are awe-inspiring. The fundraising market is becoming worse, even very bad, and most active investment deals are only happening at low valuations and in new directions.
Projects with valuations around $100 million that have not completed TGE have abandoned their plans to list on Binance due to the difficulty, while infrastructure projects with valuations between $300 million and $500 million are still undergoing difficult fundraising (basically accepting any investor). For those projects that have completed TGE, if the initial distribution strategy is not good, the FDV has dropped an average of 80% compared to the valuation of the last round of VC. Projects with liquidity on Binance are still hoping for a turnaround in the bull market, while projects not listed on Binance have already started planning new projects or the next phase of work.
Industry Confidence Severely Damaged, Innovation Support in Jeopardy
In this industry, everyone is busy, some fabricating false data and revenue to deceive exchanges and investors, while others are constantly engaging in academic discussions in the technical community but neglecting the fact that good infrastructure is meant to acquire applications and users. Exchanges have become the biggest winners due to their excellent revenue model, providing the best working environment and income levels in the short term, but making it more difficult for startups to acquire top talent. This is somewhat like the prosperity of the 2049 conference, where under the prosperous times, there are few discussions on how to acquire real users and revenue, as well as stable and sustainable business models.
The performance of altcoins may be worse than expected, forcing industry participants to re-examine innovation and real use cases. The interests of VCs, exchanges, project parties, and retail investors are not aligned, and all parties have become victims of the market without any trust and cooperation among them. Without reform, the industry will only lead to a dead end, unable to attract new funds, talent, and users. Even if Bitcoin succeeds, the entire Web3 industry will still fail.
Here, I advocate for adjustments to the utility and unlocking clauses of tokens. Traditional IPOs only require a lock-up period of 6 months to a year, while for investments in crypto super-early-stage seed round companies, the overall lock-up liquidity period is as long as 3 to 4 years.
Most project tokens have no utility, and in the first half year after listing, there are market makers willing to provide liquidity and adjust prices. However, after that period, neither the project party nor the exchange cares about the price, nor do they take responsibility for the VC and retail investors who bought in. After numerous instances of harm and losses, more people will lose confidence in and support for innovation.
If everyone is waiting for a big rebound in the bull market but not thinking about the application scenarios that will bring in real users, they will end up with nothing. Those who have enjoyed the early industry dividends do not understand the hardships of life. The largest 16-letter fund in the US has become self-sufficient, and a fund of $10 billion over a ten-year period allows them to live well without the need to cooperate with any institutions or market forces, while most successful founders do not care about young entrepreneurs as they did five or ten years ago. However, the industry is currently at a very difficult stage, and we need these successful forces to guide us and bring faith to more people, allowing them to persevere and see the dawn of the next bull market.
Where Should Ethereum Go from Here?
Ethereum is facing unprecedented scrutiny. Since the launch of ETFs, it has been experiencing net sales/capital outflows of over $1.2 billion. A huge crisis of trust is emerging among Ethereum's core researchers/EF, developer community organizations, Consensys-related commercial companies, and external investors. Vitalik Buterin needs to better guide different participants and set goals, as Ethereum has become a very large decentralized business entity in the entire cryptocurrency market and even in the traditional market. There has never been such a business entity in history, and the test for the entire Ethereum community and Vitalik Buterin will become increasingly severe, to the point of "no destruction, no establishment." After "The Merge" transition to PoS, due to the significant reduction in ETH issuance and the existence of a burning mechanism, Ethereum has actually entered a 20-month period of deflation. However, due to the low performance of L1 transactions in the past few months, the gas price of L1 has been in the single digits for a long time, leading to a return of Ethereum to an inflation trend, and the total supply may return to the level at the time of "The Merge" in the near future.
About five years ago, when we visited the Ethereum official website, we could still see a list of several other L1 competitors at the bottom, providing a completely open and transparent comparison to help everyone understand Ethereum's shortcomings or problems. Today's Ethereum is stronger than ever before, but how to make this network more open and diverse is a problem that we urgently need to solve.
Emphasizing our position, IOSG continues to be bullish on Ethereum in our investment strategy, as we have not found a more successful technical ecosystem than Ethereum. The overall TVL of the Ethereum ecosystem has grown from about $34 billion a year ago to $88 billion, with a growth rate of 159.5%. This significant growth further demonstrates the potential of Ethereum to drive new innovative projects in the future.
The Cryptocurrency Industry Needs to Return to Real Use Cases and Avoid False Prosperity
The latest data on monthly active users of MetaMask shows a significant decline from the peak of the bull market, dropping from 30 million to 1 million, marking a significant decline. The user activity of EVM-compatible L1/L2 chains has also dropped by over 50%. This liquidity dispersion has led to a wide dispersion of applications, developers (asset issuers), and users. Developers and users are rapidly moving to chains with subsidies and memes, and the liquidity between different chains and L2s is too fragmented, and high-performance chains have not brought high-performance applications.
The scale of real users brought by airdrops and incentives is relatively limited, and people have begun to feel disgusted with the customer acquisition strategy through airdrops. Third-party research shows that after the end of airdrops, the user churn rate is as high as 80%, which is not beneficial for founders and projects. Taking Friendtech as an example, it was a project that had a significant impact and attracted attention in the market before, but after the subsequent token launch and without maintaining the price, all users abandoned the application. The restaking track has also encountered similar bottlenecks, with TVL leaving or moving to new protocols after the end of airdrops.
Western funds are not optimistic about TON and Web2 platforms. Many believe that there are still some underlying issues with Russia and the TON chain, and they are not optimistic but have not answered the question of whether to invest or not. However, it is obvious that in this difficult period, TON has brought new vitality to the cryptocurrency market. Of the approximately 900 million monthly active Telegram users, there are roughly 3 million genuine gamers. The customer acquisition cost for each TON user is around $0.7. It is highly probable that TON will bring new users from Web2 to Web3, and this model will also be used in the growth of new L1/L2 platforms. It can be expected that these platforms will specifically allocate a budget to subsidize this user growth. At the same time, there is an opportunity to see that after the strategic deployment of cryptocurrency financial ETFs in the United States, there will be a consideration to allow the application of technology companies to access and penetrate Web3. A one-stop experience for users without awareness of the chain will become a new standard.
In the gaming sector, we have had discussions with several gaming funds, including Bitkraft and Makers Fund, which have transitioned from Web2 to Web3. Their positions and performance in Web3 have not been as good as expected. Compared to the more mature Web2 gaming industry, they are still more willing to raise new Web3 funds from LPs. The gaming track has become exceptionally difficult, and participants with long-term visions are considering "what's next" after listing. Most native investment funds in crypto games are having a hard time. In the past two years, 90% of GameFi projects have experienced a price drop after listing (compared to the valuation of the last round of VC investment). It seems that 3A games, full-chain games, and Degen game community platforms are being abandoned by retail investors. Of course, Pirate Nation, invested by a16z at the beginning of the year, and Small Brain, which recently completed fundraising, still have a good community base. The gaming track has become exceptionally difficult, and all participants are losing confidence. Cryptocurrency games are forcing participants to leave or create more innovative products and fun games in a more difficult manner. However, we are still continuing to find teams that have faith in games and consensus in the crypto market.
This time, I learned from a person responsible for listing at a leading exchange that their current internal principle and consensus is to find long-term entrepreneurs. Some founders who falsified data in the past chose to cash out and lie flat after successful listing, leaving a pile of debts to the community. Long-term visionary entrepreneurs are committed to growth and finding more reliable and effective sustainable business scenarios at any stage.
At the same time, at this 2049, I also saw more founders from traditional AI venturing into Web3 entrepreneurship.
Computing represented by @gensynai and @hyperbolic_labs, as well as Web2 type All in players represented by @SchellingAI, and platforms like http://Title.xyz dedicated to creating Midjourney artistic style image/video generation models, AI+Consumer+DePin is becoming a new track that industry funds are actively betting on. More talent will definitely bring better efforts and growth to the industry. Stay optimistic and move forward positively!
I call on more successful beneficiaries of the industry to pay more attention to the root problems currently facing the industry, support public goods construction, and create a better business innovation environment for these long-term entrepreneurs. IOSG will take the lead in setting an example, providing support from 0 to 1 for early-stage entrepreneurs in the industry, and will continue to reflect and iterate on its investment thesis, guiding entrepreneurs to think about new business models and customer acquisition methods.
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