Dai Shan, a partner at Waterdrop Capital, admitted in a recent Space that all four projects he has invested in recently have been listed on Binance, yet none have issued tokens to investors as per the original investment agreement. Although the contract clearly states the token issuance terms, the agreements can be arbitrarily modified after the project is listed, and investors can hardly take any effective countermeasures.
It indicates that the modification of the agreement is not the project party's willingness, but rather a long-standing unspoken rule of Binance, so there is no blame on the project party, as they are also at a disadvantage in front of Binance. The current strategy is very clear: to persuade and help truly quality project parties not to issue tokens, but to go directly for listing in a relatively clean, regulated market to reflect their value.
The contract-based rights protection in traditional VC investments does not possess the same practical enforceability in the structure of cryptocurrency token investments. Due to the fact that the circulation rules after token listing are led by exchanges, on-chain asset distribution is not immediately constrained by traditional legal systems, and investment agreements often lose enforceability at critical junctures. In the current market environment, whether a project can gain access to top exchanges is directly related to its overall survival, and the importance of agreement terms is marginalized in the face of practical interests. To secure listing, project parties are forced to comply with exchanges' redesign of release rhythms, lock-up rules, token ratios, etc., while investors, lacking on-chain governance rights and circulation discourse power, find themselves in a de facto rights disadvantage.
This statement reveals a deep-seated crisis currently facing the cryptocurrency VC investment system, namely a predicament of comprehensive failure regarding contract effectiveness, liquidity control, and exit mechanisms.
The Power Balance is Tilting: New Relationships Between VCs, Projects, and Exchanges
In the development of the industry over the past few years, the model led by 'Project Narrative Building - Multiple Rounds of VC Financing - Major Exchange Token Generation Events (TGE)/Listing' has gradually become mainstream. This model is characterized by early projects relying on professional VC institutions for capital injection, resource matching, and credibility endorsement, completing financing through progressively increasing valuations, with the ultimate goal typically being the first issuance and circulation of tokens on major centralized exchanges, providing exit channels for early investors.
During previous bull market cycles, crypto VCs, as core resources, held significant power over initial financing and token design, playing an important role in driving rapid industry expansion and project incubation. In the last bull market, project parties gained some leverage, but VCs still maintained certain dominance due to their large capital and liquidity empowerment such as Launchpad.
However, as the market enters a new adjustment cycle, the liquidity of altcoins is draining, and the interest structure between investors and project parties is changing. The power of exchanges is rising unprecedentedly, becoming the absolute controllers of liquidity switches, with key aspects like listing approvals, token allocations, and circulation strategies centralized in the hands of exchanges, putting project parties in an extremely weak negotiating position. Even if detailed investment agreements are signed, when faced with adjustments to circulation conditions proposed by exchanges, project parties find it difficult to refuse and ultimately have to violate the original agreements with investors.
Exchanges have become controllers of scarce resources, while VCs are gradually marginalized, significantly reducing their actual control.
The 'Prisoner's Dilemma' under liquidity tightening
Currently, the challenges faced by 'VC Tokens' are not caused by a single factor.
After multiple rounds of financing, the public market valuation of a project at the TGE stage is often already at a high level. This directly leads to higher initial buying costs for secondary market investors, and also means that early investors, including VCs, teams, and early supporters, hold a large number of low-cost tokens, creating strong potential selling motives.
This expectation gap creates inherent selling pressure after token listing, with market participants potentially forming a consensus of 'selling as the optimal strategy,' thereby triggering a negative feedback loop.
Furthermore, the token economy itself is exacerbating the plight of VC tokens.
During bull market periods, the token issuance model of many projects follows the high expected growth assumptions from the bull market, such as continuously rising market values and sufficient liquidity to support gradual unlocking. However, in practice, many projects lack real income support, with DeFi annual yields relying on Ponzi schemes, GameFi relying on subsidies, and NFTs relying on FOMO, causing tokens to lose their intrinsic growth momentum.
The most critical issue is that tokens invested by VCs in the past could ultimately be sold to new retail investors in the secondary market, forming a complete exit path. However, currently, the number of new retail investors on-chain and in exchanges is very limited, incremental funds have dried up, and mutual undermining among VCs has become the norm.
Essentially, early investors, project parties, market makers, and early users have turned into a zero-sum game within a closed loop, making exit increasingly difficult.
For VC institutions, the traditional strategy of relying on rapid TGEs to achieve high multiples of exit is facing challenges, with the realization cycle of investment returns potentially lengthening and uncertainty increasing. This may prompt VCs to place greater emphasis on the long-term fundamentals of projects, sustainable business models, reasonable valuations, and healthier token economic models in their investment decisions. Their role may also need to extend from focusing on early investment and promoting listings to deeper post-investment management, strategic empowerment, and ecosystem building.
For project parties, there is a need to re-evaluate their token issuance strategies and community relations. After the high-profile models have been questioned, starting with lower valuations, implementing fairer issuance mechanisms, designing token economics that better incentivize long-term holders, and increasing operational transparency and accountability may be worth exploring.
From a more macroeconomic perspective on industry development, the current challenges can be seen as an adjustment in the process of market maturation. It exposes problems accumulated during the past rapid growth and may promote the formation of a more balanced and sustainable financing and development ecology. This requires all market participants, including VCs, project parties, exchanges, investors, and even regulatory bodies, to adapt to changes and seek to establish new balance points between innovation incentives and risk control, efficiency and fairness.
This article is republished with permission from: (ForesightNews)
Original author: ChandlerZ, Foresight News
The article 'Are Crypto VCs Being Milked? Industry Participants Share VC Dilemmas: Comprehensive Failure of Contract Effectiveness and Liquidity Control' was first published in 'Crypto City'
