Article by Mark Beylin, Boost VC
Translated by Yangz, Techub News
In his essay “Be Good,” Y Combinator founder Paul Graham outlines how startups can find the intersection of product and market by creating something people want. If we believe that tokens are products, then the question we face is: how do we create tokens that people want?
Paul’s first suggestion is not to worry too much about the business model at the beginning, although he acknowledges that creating value without worrying about capturing it is something only charities do. However, in the cryptocurrency space, we see the opposite: value is captured before it is created through the issuance of utility tokens that people must buy before using (sometimes years in advance). This may be why many successful cryptocurrency ecosystems in the early stages appear more like scams than charities, especially for those familiar with traditional startup building models.
Is it possible for cryptocurrency startups to find a match in the token market without worrying about creating direct value for token holders, but instead focusing on capturing value by selling tokens first, just like Paul’s initial suggestion?
Tokens – Tools for Storytelling
One of the most challenging aspects for early-stage startups that have not found product-market fit is constant communication with customers to understand their interest in new products or features. Founders need to develop relationships with various stakeholders in the ecosystem, establish close feedback loops, and design solutions that fully meet market demands. The tighter these feedback loops are, the faster the team can iterate to find the best solutions and test them in the market. However, scaling cannot be achieved by just talking to customers, as there are only so many people willing to meet or have phone conversations with you… how do you reach other customers?
When observing existing token projects, it is easy to see a feedback loop between the token price and the market’s expectations of the future value the token ecosystem will create. Whether it’s Uniswap raising token prices in response to its fee conversion proposal, Vitalik selling MKR in response to Maker’s launch plan for its own chain, or DEGEN raising prices in response to the launch of L3, we can see that token prices are quite sensitive to news about specific project plans.
Tokens play the role of a prediction market, predicting the collective interest of people in a project moving in a specific direction, as well as the likelihood of achieving this goal. The efficiency of this feedback loop is determined by the liquidity of the token, with highly liquid tokens (such as BTC and ETH) reacting immediately to news events, while smaller projects attracting fewer speculators (trading based on news events). However, if new buyers are interested in the narrative the project is building, if they believe the solution outlined by the project is valuable to a future audience, even tokens with lower liquidity will attract new buyers. The significant increase in valuation of artificial intelligence tokens over the past six months is evidence of this: although only a few tokens currently bring value to token holders, based on the immense value traditional artificial intelligence startups have already created, the market has revalued the expected future value these ecosystems can create.
The interesting part of this process is that by launching tokens and attracting sufficient liquidity attention (to make people willing to spend time/money trading on your news), teams can potentially form extremely tight feedback loops for their product releases in the future. While engaging with users, cryptocurrency product builders can also temperature check their product decisions through iterative cycles until they find the market-relevant decisions (those that significantly increase the value of your token). Once this scenario arises, you will know that you are developing in the direction the market deems meaningful, allowing you to use the token price mechanism as a tool to discover mass market demand without having to build anything in advance.
Tokens – Efficient Venture Capital Mechanism
Mechanisms that allow people to buy tokens based on their belief in the future needs a project can fulfill are at the core of venture capital. They typically utilize the pattern of creating value as described by Paul Graham, which is why founders often act in this way from a technical perspective.
Typically, startups raise venture capital because they have specific goals or plans that require new funding. This also provides founders with a feedback loop (if venture capital firms are not interested in your new plan, they will not invest), but this feedback loop is both exclusive and opaque, only appearing about every 18 months.
The emergence of tokens allows anyone to participate freely in the funding of new projects at any time, increasing the supply of funds available to buy into early-stage projects in the market, thereby increasing the likelihood of projects receiving funding. If a new proposal expands the market opportunity for a token by providing new use cases, the market will assign a higher value to the project, and the scale of token diversity will expand accordingly. With tokens, the market becomes a direct financing mechanism for innovation, which is the core reason tokens have become a powerful tool for expanding human potential.
While venture capitalists often express their love for tokens in lengthy discussions, it is overlooked that tokens and venture capital directly compete with each other, as they are alternative products. As a former founder turned venture capitalist, I believe that venture capital funds should have a moderate amount, which is useful and necessary for all founders. The appropriate amount of funding depends on the team itself and the market they are in, but I don’t think it is zero for any project. During periods of drying up in the public token market, venture capital firms also play a crucial role in continuing to provide funding for early-stage projects, often reaping huge returns for taking on this risk.
Surviving Market Cyclicality
One drawback of tokens is that capital flows with the attention in a specific ecosystem. Market participants are not homogenous, with the attention of specific investors tied to their own beliefs. People adjust their investment portfolios based on their latest views, so the intensity of the token cycle depends on its ability to continue attracting the attention of market participants.
One of the ways founding teams address this issue is through “narrative surfing,” constantly linking their projects to the latest hot value propositions in the cryptocurrency space, hoping to maximize the value of tokens by expanding the goals they can achieve. Another way for teams to stay fresh is to use memes: excellent memes generate reactions in the community, creating a snowball effect, and the current “meme war” among communities is quite intense. Communities with a strong meme creation cycle can ensure a constant stream of content about the project is created/shared on social channels, keeping their tokens in the spotlight. This is why memes are a necessary factor in maintaining sufficient liquidity for tokens and one of the reasons memecoins can continue to attract and retain liquidity. Bringing the right people into the ecosystem early will give them the inherent motivation to talk about the project and help it grow. If too many tokens are airdropped to those unwilling to continue sharing the project, it will be challenging to maintain long-term attention for the project.
Avoiding Over-Financialization of Decisions
Imagine a world where the market is entirely efficient, and project token prices act as perfect oracles, predicting whether a particular course of action is optimal. Perhaps the market is filled with numerous AI agents trading tokens based on updates from various projects, effectively predicting the success of a project. And project teams only take actions that external market participants deem worthy. If someone asks, “Who calls the shots here?” the correct answer should be the entire market (through token prices), with others in the token ecosystem merely acting as managers or custodians, helping achieve market goals. But would this governance system actually achieve greater success than other models?
I believe the answer is no.
First, the best founders in specific industries often dislike being told what to do by others. They have a deep understanding of their market and have their own insights into the best course of action. Secondly, the best founders are often able to accept opinions that deviate from mainstream consensus, and in fact, they often take pride in this. Importantly, these deviations are often the reason why they create such successful companies: every market misunderstanding is an arbitrage opportunity, a reward for being the first to dissent. The most successful companies of our time have gone through long periods where the market actively devalued their work, and it is their ability to resist this force that has allowed them to maintain value in the long run.
Great founders are visionaries who do not optimize around local minima like others but explore new territories, hoping to discover new opportunities that others believe do not exist. To achieve this, they ask questions that others have never considered, quickly switching between different concepts based on intuition in data-scarce situations. This helps them achieve product-market fit faster than their competitors, capturing the market and creating valuable ecosystems out of thin air.
If a team collects valuable data on untapped markets, the last thing they want to do is share this data publicly. But if the cards are kept close to the chest, even the best founders will struggle to attract public market attention. However, they will benefit from attracting funds through private placements (participants in private placements are screened and trustworthy) and finding crazy investors who can see the vision and think intuitively like them.
How can one truly find the intersection of tokens and the market?
Returning to our initial question, we believe that tokens are a powerful tool that teams can use to discover market demand and their own narrative. Just like product founders before them, token founders can quickly iterate their value propositions based on the huge feedback provided by the token.
To keep this feedback loop vibrant, teams should strive to continuously attract investors’ attention on social platforms. They should have a deep understanding of various narratives around them and understand why the market values each narrative. By continuously appearing in people’s attention through content and memes, they can keep people interested and rebalance their investment portfolios. Most importantly, teams should focus on attracting high-value contributors who believe in the project’s vision and are willing to provide funding and support. If teams can do this well, they can build a Hodl army, who will not sell tokens and will spread the word to new audiences.
