Source: Binance

Important points

• This report explores several major observations on the cryptocurrency market, focusing on valuation, centralization-related risks, the need to improve transparency in fund use, and the reasons for project branding.

• Market participants including venture capital (VC) funds, centralized trading platforms and individual users are increasingly paying attention to valuation.This increased awareness makes investment and operational decisions smarter.

• The concentration of token ownership will bring risks such as potential vulnerabilities and governance issues.Ensuring decentralized control and widespread participation is crucial, helping to maintain the integrity and resilience of cryptocurrency projects and promoting long-term trust and stability.

• Calls for increasing transparency in project funds use are growing.Detailed information disclosure can promote responsible financial management and build trust among stakeholders.

• Rebranding can be a strategic move to mark new focus, attract new investors and update project goals.But rebranding must be driven by legitimate business needs and must not be used to cover up or hide certain wrongdoing.Investors should conduct a comprehensive and prudent inspection to fully understand the reasons behind the project’s brand reshaping.

Overview

In recent weeks, we have participated in several cryptocurrency events with the opportunity to communicate with market participants such as industry leaders, investors, project teams and individual users.These conversations give us valuable insight into the ideas of our community.

This report aims to share several insights we have gathered from these conversations and our views on the current industry landscape.Specifically, our conversation involves four major topics and proposes four major observations:

• Valuations are still high (in some segments): Some venture capital funds either slow down their deployment or are looking for other industries with more reasonable valuations.

• Centralized risks are often overlooked: risks associated with centralized token ownership cannot be ignored.

• Transparency in fund use needs to be improved: Given the direct impact of recent events on token holders and communities, people have begun to call for disclosure of the use of vault funds.

• Brand reshaping should be targeted: Brand reshaping can be used as a strategic initiative to clarify new focus, attract new investors and update project goals.However, brand reshaping should be driven by real business needs and should not be used to cover up or hide certain wrongdoing.

1. The valuation is still high

Abstract: Although the token valuation has declined, there is still a valuation premium in some market segments.

During discussions with several venture capitalists at Token2049, they repeatedly mentioned that valuations in certain sectors in the primary market are still high.

This observation is consistent with our previous research.In our report released in May, we focused on the issue of overvalued valuations, especially when token circulation supplies are low.In summary, one observable trend is that token issuances are highly valued but have limited circulation supply.This trend is particularly evident compared to the tokens launched in recent years.At its peak, the valuation of some newly issued tokens is close to the valuation of large tokens that have been launched in the market for many years.

In addition, with the continuous introduction of new tokens, the problem of low initial circulation supply has been further intensified.With the launch of more and more low-circulation supply tokens, a large number of tokens will be unlocked in the future, and the supply of circulating tokens in the secondary market will increase exponentially.For example, if most tokens are issued less than 10% of the initial circulating supply, the industry will face a large number of token unlocks over the next 1-2 years.To absorb these increases in supply, capital and investors must increase accordingly, otherwise the performance of many tokens will be affected.Meeting this challenge can provide growth opportunities for the industry and help it adapt to changing market conditions.

Responsive measures taken

Since our release of the report “Observation and Thoughts on the Current Situation of High Valuation and Low Circulation Tokens”, discussions on this topic have emerged one after another, and importantly, market participants have improved their awareness, and some of the responses already taken include:

• Venture Capital Funds: A dialogue conducted on Token2049 shows that venture capital funds are looking for investment opportunities in other sectors with more reasonable valuations.Some funds have also slowed down their deployment this year and maintained self-discipline by focusing on fundamentals.

Data from the PitchBook Crypto Venture Capital Fund Report also shows that the time interval between financing rounds is gradually extending, with the median interval between the two financing rounds more than doubled, from 1.1 to 2.4 years.The report highlights that this extension of the interval suggests that it takes longer for fund managers to return to the market, which may be because they invest more time in managing portfolios during the cryptocurrency bear market and are slow to deploy capital during the slower period..

Figure 1: Venture Capital Trading Activity (measured by monthly transactions) fell to its lowest level in four years

• Centralized trading platforms: Binance and other trading platforms call for the launch of high-quality projects with medium and low valuations, and tokens are applied for the launch of moderate circulation during the token generation activity (TGE).In addition, it is best for the project to demonstrate product-market fit and market, as well as the sustainable growth of users.

• Retail investors: Although we don’t have data on hand to show what actions have been taken by retail investors, we have observed a lot of discussion on this phenomenon on social media, which shows that people’s awareness has increased and hopefully encourage more individual users to take their own initiative before investing.Careful verification.

2. Centralized risks are often ignored

Abstract: The risk of centralization should not be underestimated.In the worst case, other stakeholders may suffer direct or indirect losses due to centralized risks.

One aspect that cryptocurrency projects are often overlooked is centralized risk, and we believe that the impact should not be underestimated.In this section, we will share some observations and methods for detecting centralization.

Centralized risks seriously affect the decision-making process, vault management and overall governance.When power is concentrated in the hands of a few individuals or entities, there may be some adverse consequences.In the worst case scenario, this concentration of power can trigger loopholes, runaway scams, and other malicious activities that endanger the community.

Events like this not only weaken trust, but also jeopardize the long-term sustainability and credibility of the project.Therefore, ensuring decentralized control and widespread participation is crucial and helps maintain the integrity and resilience of cryptocurrency projects.

In contrast, decentralization ensures that no single entity can control the entire network, thereby increasing network transparency and security and enhancing trust among users.Decentralization is reflected in the following aspects:

• Infrastructure: Hardware is distributed in multiple nodes, data centers and geographical locations, reducing single point of failure and making it difficult for criminals to destroy the network.Decentralized infrastructure also has advantages in cybersecurity, availability and censorship resistance.

• Governance: Decentralized decision-making and governance are an integral part of the cryptocurrency industry, which empowers the community and ensures that no single entity can unilaterally control the direction and development of blockchain projects.

• Token Allocation: Diversified token allocation promotes inclusion and equity, fostering a sense of belonging and engagement in a vast community of users and supporters.As far as governance tokens are concerned, it also helps democratic decision-making.

In this section, we will focus mainly on the centralized risks associated with token allocation.

Case Study: High Concentration of Meme Coin “Z” Token Holders

For ease of illustration, we analyze a meme coin project as an example. To remain anonymous, we call it “project Z”.As far as Project Z is concerned, multiple indicators indicate that its token ownership is highly concentrated and on-chain activity may adversely affect token holders.

At first glance, the token Z seems to be widely distributed, with nearly 200,000 addresses holding the token.However, a closer examination of on-chain transactions reveals that many of these addresses are interrelated, possibly indicating ownership belongs to a single entity.This allocation strategy seems to be aimed at artificially increasing the number of token holders.

Figure 2: Most of the token supply is held by interrelated addresses

Furthermore, even in unrelated addresses, most of the tokens are held by a small number of large holders, often referred to as “giant whales.”Retail investors account for only 3.5% of this group, and their tokens hold only 0.5% of the total token supply.

Figure 3: In irrelevant addresses, most of the token supply is held by giant whales

Possible impact

In this case, we found potential signs of preemptive transactions, and within 1 hour of the token’s initial offering, a considerable amount of access to the relevant addresses at the part of the token supply.Furthermore, given the high concentration of tokens held by these interrelated addresses, if the group decides to force flatten their tokens, there will be considerable risk of selling pressure.

Next step: Analyze token ownership

It should be noted that it is not uncommon for a small number of internal wallets to hold most of the tokens, especially during the initial stages of project launch.We are not suggesting that investors should regard this feature as a red flag and avoid such projects altogether.However, the concentration of token ownership does pose higher risks compared to the more diversified token holders group, such as possible runaway scams and lack of decentralization in decision making.Such risks are particularly obvious for tokens such as meme coins that are speculative and have low utility.By analyzing token ownership, investors can have a more comprehensive understanding of the risks associated with a particular token.You can achieve this with on-chain data visualization and smart tools like Bubblemaps and Arkham.

3. Transparency in fund use needs to be improved

Abstract: Improving the transparency of the use of vault funds will help achieve responsible financial management and encourage active participation of governance token holders.We should strive to make it the norm for disclosure of detailed fund use.

To meet operating costs and implement expansion plans, project teams often need to sell vault tokens through primary markets (such as venture capital funds, initial coin offerings and Launchpads) or secondary markets (such as selling vault tokens on centralized and decentralized trading platforms)Raise funds.

Figure 4: To date, the cryptocurrency industry’s venture capital funding amount has reached US$5.7 billion, a year-on-year increase of 26.6%

However, the use of these funds is often not transparent enough.While some DAOs or foundations have disclosed in detail the use of their vault funds, not all projects follow this practice.Despite no formal disclosure obligations, stakeholders undoubtedly want greater transparency.This is especially important when an entity pays for the fee by selling native tokens, as such behavior directly affects the token price.

We believe that managing a well-functioning project is similar to running a company.The project team is fiduciary responsibility and its actions must be in the best interests of stakeholders, including users, token holders and investors.Proper disclosure (especially about financial matters) can further inspire the project team to make informed decisions and maximize stakeholder value.

Case Study: Polkadot and the Ethereum Foundation

Polkadot

Polkadot has been under extensive supervision since the release of its vault report in July.There are concerns that its financial life could be only two years due to a sharp increase in spending speeds (two-folded in the first half of 2024 alone).

Figure 5: Outreach spending accounts for the majority of Polkadot spending in the first half of 2024

Transparent disclosure plays a critical role in helping to develop trust among stakeholders and encouraging in-depth discussions on spending and project sustainability, thereby reducing the risk of reappearing similar issues.At this point, Polkadot’s continued release of vault reports is a popular move.

Ethereum Foundation

The Ethereum Foundation’s sale of large amounts of ETH (which has sold about $9.67 million worth of ETH so far this year) has sparked speculation about its potential motivation, especially when market sentiment is already very fragile.

Although it was revealed that the sale was related to the voucher management activity that provided grants and wages, many people still demanded greater transparency in how spending and how funds were used.In response, Josh Stark of the Ethereum Foundation said the foundation will release a report covering its spending in 2022 and 2023.

This event clearly reflects the demands for detailed disclosure and transparency, especially those holding large amounts of vault assets, as transactions in these entities may directly affect the price of tokens.We believe that every step towards greater transparency is a step in the right direction.

Next step: Make disclosure the norm

While it may not be feasible or reasonable to require all DAOs or foundations to disclose the use of funds, encouraging voluntary openness and transparency can significantly enhance trust within the community.

It is crucial for the entire community to identify the large-scale flow of tokens using on-chain monitoring tools.For users who are not very familiar with cryptocurrencies or have limited time, setting reminders to get notifications about such trends can provide them with timely insights.

4. Brand reshaping should be targeted

Abstract: Projects sometimes choose to rebrand as a strategic move to identify new focus, attract new investors and update project goals.However, branding should be driven by legal business needs and should not be used to cover up or hide certain wrongdoing.

Projects occasionally choose to rename or rebrand their tokens.This may be a strategic move driven by a variety of business, operational or commercial purposes.For example, a project may announce a strategic direction or improve its product portfolio, allowing for easy restart with a new brand image.This rebranding strategy can mark a new focus, attract new investors, and keep project development closely aligned with its new goals and vision.

A recent example is that MakerDAO has been renamed Sky under its “End Game” plan.The DAI stablecoin has been renamed USDS, with a 1:1 exchange rate between the two.In addition, the new governance token, SKY, was launched as an upgraded version of MKR.Each MKR token can be exchanged for 24,000 SKY tokens.This rebranding plan aims to keep Maker governance mechanisms immutable and ensure sustainable decentralized growth.

However, not all rebranding is due to legitimate business needs.There have been projects that rebrand their tokens without clear or reasonable reasons, sometimes to cover up or hide certain behaviors.

For example, a project might change token A token B and change token economics at the same time, such as increasing the token supply without providing a corresponding fair exchange rate (e.g., increasing the token supply by 10 times, but the exchange rate isThe rate is still 1:1).Such behavior may mask potential problems or cause confusion and may cause financial losses to investors.

Next steps: Prudent verification and active participation

In order to cope with the complexity of token branding, users should take the following steps:

• Analysis of reasons for brand reshaping: Potential investors should understand the reasons behind brand reshaping, the new direction of the project, and the changes in token economics.Sources of information include official announcements of the project, white papers and well-known cryptocurrency news media.

• Participate in governance decision-making: Users should actively participate in governance forums and discussions, share their views, and encourage project teams to solve community concerns.Individual token holders should especially actively participate in the vote on rebranding proposals to ensure that the interests of all stakeholders are consistent.This active participation not only increases transparency, but also helps future investors understand the reasons behind the token branding and all the related issues, allowing them to make smarter decisions.

• Monitor on-chain activities: Use on-chain monitoring tools to track major changes in tokens.This helps identify abnormal patterns or activities that may indicate potential problems.Setting up large-value token transfer reminders can provide users with timely insights and help them stay well-informed.

Summarize the past and look forward to the future

Looking ahead, while there is certainly still something to improve, we remain firmly optimistic about the future of the industry.We believe that addressing the following issues will help to realize the full potential of the industry.

• Achieve sustainable valuation: We acknowledge that it will take some time to achieve a more reasonable valuation.There will always be some areas with higher valuations in the market, which may be due to the premium given by investors or the high popularity of certain areas.However, as investors become more discerning, they prefer projects with stable fundamentals and realistic growth prospects rather than speculative projects, so a more sustainable valuation trend is expected to continue.This gradual transformation is expected to create a healthier and more stable market environment.

• Balance between centralization and decentralization: While a level of centralization can be beneficial, especially for new teams that need to make quick decisions or solve problems such as vulnerabilities more effectively, stay decentralizedStill crucial.Centralization has advantages in speed and flexibility, but should not come at the expense of community trust or project integrity.To succeed in the long term, it is necessary to balance with prioritizing decentralization, especially areas where centralization can harm communities.

• Improve transparency: Transparency will remain the cornerstone of building trust in the cryptocurrency space.Projects that clearly and detailedly disclose fund use and governance will stand out and attract more stakeholders.In addition, transparency measures are also conducive to the realization of responsible financial management and accountability.

• Purposeful rebranding: A rebranding strategy can be a strategic move that will clarify new focus, attract new investors, and keep project development in line with its new goals and vision.But it is crucial that rebranding should be driven by legitimate business needs and should not be used to cover up or hide certain wrongdoing.Investors should conduct a comprehensive and prudent verification to fully understand the reasons behind the project’s branding and ensure that it is in line with the project’s long-term goals and the interests of the community.

By solving problems such as valuation, centralization, transparency and purposeful brand reshaping, the cryptocurrency industry can build a more sound and resilient ecosystem.Stakeholders at all levels must work together to promote innovation while adhering to the principles of decentralization and high transparency.