Meme magic or VC tragedy?Decode the future of Tokenomics and financing

Written by: Newman

ICO Frenzy: The Historical Background of Web3 Financing

The ICO craze of 2017-2018 was a critical moment in the crypto financing space, with features including:

• Minimum lockdown and huge returns: VC entered the project at a lower valuation than the average investor and had no lockdown period, thus achieving huge returns (e.g., @Zilliqa achieved 50x growth after the ICO in January 2018).

• Liquidity concentration: At that time, there were only a small number of tokens issued in the market every week and limited investor choice, and this scarcity drove demand and amplified returns.

• VC functions as signal: The attractiveness of VCs is not mainly due to their capital (most ICO projects do not require too much capital in the product-free stage), but their signal function.The project attracts more ICO investors by raising millions of funds by attracting a handful of well-known VCs.

However, this period is not sustainable.Scams, runaway funds and unclear supervision undermine market trust.

By 2019, regulation began to shape a more structured financing environment.Characteristics of this period include:

• Longer lock-up period: VCs need to accept a longer lock-up period when entering the private equity round.The market can no longer support the early hype-driven VC “unlocked the day” behavior.

• Diversified liquidity: The market is oversaturated and too many ICO projects are launched simultaneously.Investor demand is no longer focused on a few projects, and the hype that early success depends on begins to weaken.

• VC’s source of funding as a builder: The founder needs VC funds to develop the product before launching the token.This marks the shift in the financing landscape from speculative ICOs to a more product-oriented approach.

After 2019, the market transitioned to an environment commonly known as “low circulation, high FDV (fully diluted valuation)”, with token issuances usually having lower circulation supply at startup, while FDV valuation is higher.

The current challenges facing VCs

Although VCs have played an important role in history, VCs face increasing challenges in today’s market:

1. Tokenomics mismatch

• Historically, VCs entered at low valuations and had a short lock-up period, which was inconsistent with the interests of ordinary investors.This leads to reputational problems and lack of trust.

• Poorly designed Tokenomics (such as low circulation, high FDV) have resulted in the project undergoing “continuous and expected sell-off” after it went online.

2. Reduced demand for VC funds

• Richer Founders: Successful founders no longer rely on VCs, but use personal resources to start projects.

• Retail-driven models: such as Memecoin and high circulation issuances (see @HyperliquidX) show that some projects can succeed without VC participation.

• Signaling effect weakens: While some mainstream VCs still have influence in infrastructure projects, their influence in application-level projects has dropped significantly.

3. Miscope between products and markets

• For most Web3 projects, the community and users are the driving force behind success.However, VCs are not good at reaching the community.

• Therefore, the role of traditional VC is gradually replaced by well-known angel investors.These angel investors tend to have closer ties with end users and can better drive community-driven growth.

Future roles of VC

Although the demand for VC funds may be uncertain, VCs are of great significance in certain situations:

1. Deeply participate in the ecosystem

• VCs need to actively participate in ecosystem activities, such as mining, Memecoin transactions and other retail-level operations.

• To remain relevant, VCs need not only exist as institutions, but also become players deeply embedded in the trenches.This engagement allows it to provide unique insights in evolving growth hacking strategies, Tokenomics designs and market strategies.

2. Provide strategic value

• Founders are increasingly paying attention to VCs that provide real value (such as operational support, Tokenomics guidance, market expertise).

• While angel investors can help, they are less focused on portfolio management than VCs.

• VCs need to transform from passive fund investors to active strategic partners.

3. Selective participation

• VCs can focus on small investment projects, focus on contributing to these projects, while adopting a “show-grid” approach to smaller investments.

• Founders tend to maintain a smaller investor structure and prefer investors who have small amounts but can make substantial contributions.

Recent/coming fun projects

1. Hyperliquid (@HyperliquidX)

• It is possible to adopt a high circulation and no VC participation issuance method to test whether the market can maintain price stability without long-term lockdown.

• If successful, a new model may be established for other projects, but it also faces challenges such as the pressure of selling on the first day.

2.BIO Protocol (@bioprotocol)

• Combined with VC rounds and public auctions, participants are allowed to exchange $BIO with WETH or original child DAO tokens.

• Expand community members through open auctions while introducing VC investments to achieve wider community coverage.

3.Universal Basic Compute $UBC (@UBC4ai)

• A fair issuance similar to Memecoin, with no team distribution, no pre-sale, no airdrop.

Potential new financing model

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

1. VC enters with retail investors at similar valuations

• VCs may obtain greater allocations than retail investors with similar or even the same valuation investment projects, but need to accept stricter lock-up positions.This alignment ensures the interests of VCs and retail participants consistently and reduces the risk of VCs selling out average users.

• This model may drive healthier and more organic growth for projects.

2. No VC model

• The project raises funds directly from retail investors without seeking VC support.

• This will test whether the market can maintain price stability and growth without major lockdowns or VC participation.If successful, this model may set a precedent for other projects to balance Memecoin economics with operations/funding needs.

3. Memecoin-inspired model

• Memecoin’s success is affecting structured projects adopting simpler, community-driven Tokenomics:

• No Foundation Holding Pool: No Community/Eco Pool, Team and Advisor Pool or Treasury Pool.Founders/developers need to buy tokens on the open market, consistent with the interests of retail participants.

• 100% Initial Fluidity: Ensure liquidity and reduce dependence on long-term lockouts.

• For example, the $URO and $RIF launched by Universal Basic Compute (@UBC4ai) and @pumpdotscience, which adopt a Memecoin-like issuance without VC funding, team allocation, airdrop or pre-sale.

The future direction of Tokenomics

As the market continues to evolve, the ideal Tokenomics structure (for non-Memecoin) is gradually becoming clear:

1. Align interests

• VCs enter at a valuation similar to retail participants and ensure long-term benefits alignment through locking positions.

• The price is that VCs can get a larger proportion of distribution than retail.

2. Relatively high initial circulation

• While referring to Memecoin-inspired Tokenomics, the project should strive to achieve 60%-70% circulation at startup to ensure liquidity and reduce the likelihood of manipulation.

3. Changes in the structure of the Token pool

• Unlike Memecoin, the project requires ongoing operating capital and therefore cannot achieve 100% initial circulation.30%-40% of tokens can be allocated to the treasury pool, team and consulting pool and investor pool for future financing, and set a lock-in period.

4. Volatility expectations in the first 7 days

• For projects with airdrop strategies, there will be a large amount of supply unlocked on the first day, allocated to farmers and NFT holders, especially those with high circulation methods.Similar to the direct listing of companies such as Spotify, the large circulation supply on the first day could lead to extreme fluctuations in the first seven days.

Conclusion: Web3 Financing and the Future of VC

Web3 financing is at a turning point.High circulation, VC-free models are challenging traditional norms, but the role of VC remains critical in areas that require a large amount of upfront investment.The future of Web3 financing may combine the advantages of both:

• For the Founders: Streamlined investor structure and redesigned Tokenomics will enable the project to attract communities while aligning with investors.

• For VC: The focus will shift from capital deployment to services that provide centralized value to ensure their relevance in a rapidly changing ecosystem.

• For the market: Growth hackers will rely on product innovation and improvements tokenomics, rather than traditional mechanisms (such as airdrops).

As markets experiment in these new paradigms, successful cases will pave the way for wider adoption, creating a more sustainable and equitable financing environment for Web3.