Meme magic or VC tragedy? Decoding the future of tokenomics and financing.

Web3 financing is at a turning point.

Written by: Newman

ICO Craze: Historical Background of Web3 Financing

The ICO craze of 2017-2018 was a pivotal moment in the field of crypto financing, characterized by:

Minimal lock-up and huge returns: VCs entered projects at relatively lower valuations compared to ordinary investors, with no lock-up period, thus reaping massive returns (for example, @Zilliqa achieved a 50x increase after its ICO in January 2018).
Concentrated liquidity: At that time, only a small number of tokens were issued weekly in the market, with limited choices for investors, and this scarcity drove demand and amplified returns.
VCs as signaling agents: The appeal of VCs was primarily not in their capital (most ICO projects did not require much funding at the pre-product stage), but in their signaling effect. Projects raised millions by attracting a few well-known VCs, thereby drawing in more ICO investors.

However, this period was not sustainable. Scams, fund misappropriation, and unclear regulations eroded market trust.

By 2019, regulations began to shape a more structured financing environment. This period was characterized by:

Longer lock-up periods: VCs had to accept longer lock-up periods when entering private rounds. The market could no longer support the early speculative "same-day unlock" behavior of VCs.
Decentralized liquidity: The market became oversaturated, with too many ICO projects launching simultaneously. Investor demand was no longer concentrated on a few projects, and the hype that early success relied on began to wane.
VCs as sources of funding for builders: Founders needed VC funding to develop products before launching tokens. This marked a shift in the financing landscape from speculative ICOs to a more product-focused approach.

After 2019, the market transitioned to what is now commonly referred to as a "low liquidity, high FDV (Fully Diluted Valuation)" environment, where token issuances typically have low circulating supply at launch, while FDV valuations are high.

Current Challenges Faced by VCs

Although VCs have historically played an important role, they face increasing challenges in today's market:

1. Mismatch in Tokenomics

Historically, VCs entered at low valuations with short lock-up periods, which was inconsistent with the interests of ordinary investors. This led to reputational issues and a lack of trust.
Poorly designed Tokenomics (such as low liquidity and high FDV) resulted in projects experiencing "sustained and expected sell-offs" after launch.

2. Decreased Demand for VC Funding

Wealthier founders: Successful founders no longer rely on VCs but use personal resources to launch projects.
Retail-driven models: Projects like Memecoin and high liquidity issuances (see @HyperliquidX) demonstrate that some projects can succeed without VC involvement.
Weakened signaling effect: While some mainstream VCs still have influence in infrastructure projects, their impact on application-layer projects has significantly declined.

3. Mismatch between Product and Market

For most Web3 projects, community and users are the driving forces for success. However, VCs are not adept at engaging with communities.
As a result, the role of traditional VCs is gradually being replaced by well-known angel investors. These angel investors often have closer ties to end users and can better drive community-driven growth.

Future Role of VCs

Despite the uncertain demand for VC funding, VCs still hold significant importance in certain specific contexts:

1. Deep Engagement in Ecosystems

VCs need to actively participate in ecosystem activities, such as mining, Memecoin trading, and other retail-level operations.
To remain relevant, VCs must not only exist as institutions but also become deeply embedded players in the trenches. This participation allows them to provide unique insights into evolving growth hacking strategies, Tokenomics design, and market strategies.

2. Providing Strategic Value

Founders increasingly value VCs that can provide tangible benefits (such as operational support, Tokenomics guidance, and market expertise).
Although angel investors can also provide assistance, their focus on portfolio management is not as strong as that of VCs.
VCs need to shift from being passive funders to active strategic partners.

3. Selective Participation

VCs can focus on a small number of investment projects, concentrating their efforts on contributing to these projects while adopting a "scattergun" approach for smaller investments.
Founders tend to prefer a smaller investor structure, favoring fewer investors who can make substantial contributions.

Recent / Upcoming Interesting Projects

1. Hyperliquid (@HyperliquidX)

May adopt a high liquidity, no VC participation issuance model, testing whether the market can maintain price stability without long-term lock-ups.
If successful, it could establish a new model for other projects, but it also faces challenges such as first-day sell-off pressure.

2. BIO Protocol (@bioprotocol)

Combines VC rounds with public auctions, allowing participants to exchange $BIO for WETH or original sub-DAO tokens.
Expands community membership through public auctions while introducing VC investment for broader community coverage.

3. Universal Basic Compute $UBC (@UBC4ai)

Fair issuance similar to Memecoin, with no team allocation, no pre-sale, and no airdrop.

Potential New Financing Models

To transition from a low liquidity, high FDV environment, we need an experimental phase to explore sustainable solutions. Here are some possible models:

1. VCs and Retail Investors Enter at Similar Valuations

VCs invest in projects at similar or even the same valuations, potentially receiving larger allocations compared to retail investors but accepting stricter lock-ups. This alignment ensures that the interests of VCs and retail participants are consistent, reducing the risk of VCs dumping on ordinary users.
This model could promote healthier and more organic growth for projects.

2. No VC Model

Projects raise funds directly from retail investors without seeking VC support.
This will test whether the market can maintain price stability and growth without significant lock-ups or VC participation. If successful, this model could set a precedent for other projects balancing Memecoin economics with operational/funding needs.

3. Memecoin-Inspired Models

The success of Memecoins is influencing structured projects to adopt simpler, community-driven Tokenomics:
No foundation-held pools: No community/ecosystem pools, team and advisor pools, or treasury pools. Founders/developers need to purchase tokens on the open market, aligning their interests with retail participants.
100% initial liquidity: Ensures liquidity and reduces reliance on long-term lock-ups.
For example, Universal Basic Compute (@UBC4ai) and $URO and $RIF launched by @pumpdotscience adopted a Memecoin-like issuance model, with no VC funding, team allocations, airdrops, or pre-sales.

Future Directions of Tokenomics

As the market continues to evolve, the ideal Tokenomics structure (for non-Memecoins) is becoming clearer:

1. Interest Alignment

VCs enter at valuations similar to retail participants and ensure long-term interest alignment through lock-ups.
The trade-off is that VCs can receive a larger proportion of allocations compared to retail.

2. Relatively High Initial Liquidity

While referencing Memecoin-inspired Tokenomics, projects should strive for 60%-70% liquidity at launch to ensure liquidity and reduce the potential for manipulation.

3. Changes in Token Pool Structure

Unlike Memecoins, projects require ongoing operational funding, so 100% initial liquidity cannot be achieved. 30%-40% of tokens can be allocated to treasury pools for future financing, team and advisor pools, and investor pools, with lock-up periods set.

4. Volatility Expectations in the First 7 Days

For projects adopting airdrop strategies, a large supply will be unlocked on the first day, allocated to farmers and NFT holders, especially for projects using high liquidity methods. Similar to companies like Spotify going public, a large circulating supply on the first day may lead to extreme volatility in the first 7 days.

Conclusion: The Future of Web3 Financing and VCs

Web3 financing is at a turning point. High liquidity, no VC models are challenging traditional norms, but the role of VCs remains crucial in areas requiring significant upfront investment. The future of Web3 financing may merge the advantages of both:

For founders: Streamlined investor structures and redesigned Tokenomics will enable projects to attract communities while aligning with investors.
For VCs: The focus will shift from capital deployment to providing concentrated value-added services to ensure their relevance in a rapidly changing ecosystem.
For the market: Growth hacking will rely on product innovation and improved Tokenomics rather than traditional mechanisms (such as airdrops).

As the market experiments with these new paradigms, successful cases will pave the way for broader adoption, creating a more sustainable and equitable financing environment for Web3.

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