Original author: Anagram
Original translation: Block unicorn
VCs never innovated in funding structures, they just found a way to invest in companies earlier than ever before. There is no doubt that VC money infusing early-stage tech companies has accelerated innovation, but it has also meant minimizing the communities these products were designed to serve.
Cryptocurrency itself is a novel technology with novel properties — permissionless, composable, decentralized — that bring new capabilities to bear on self-sufficient technology. With the advent of new technologies and new requirements, people are starting to think creatively about capital formation for the first time since the IPO.
In 2017, ICOs received a lot of attention and quickly attracted investors across the field. However, in 2018, the bear market arrived and many projects and their accompanying tokens faced collapse. The collapse of ICOs also brought huge scrutiny from the public, institutions, and most importantly, regulators.
As public financial support for decentralized technologies wanes, new sources of funding emerge and traditional venture capital structures re-emerge.
Along the way, intermittent funding mechanisms were tried: namely, IDOs and IEOs. But against the backdrop of the negative public perception of ICOs, cryptocurrency financings have tended to be private-oriented rounds, further crowding out the community. Crypto financings today look a lot like traditional venture capital — from seed rounds to Series A to Series B to token offerings.
Venture capital is a powerful mechanism for financing innovation. The current wave of VCs investing at higher and higher valuations has been great for getting large amounts of money into the hands of founders to build great new products and technologies. We’ve participated in many of these funding rounds and have seen our portfolio companies go on to make real changes in the world. But on the other hand, we’ve also realized that these higher valuation VCs can harm communities by limiting their ability to participate in any meaningful way.
VC involvement does not need to disappear and in many cases is necessary for the survival of early-stage projects building on the cutting edge. But as capital pours into crypto, when asymmetric opportunities are presented, funds will race for returns rather than long-term development.
Private capital may have a big influence on the fate of these new attempts to some extent, and these fates will depend on community participation. Community members and smaller retail investors, not private funds, are critical to the future of any network. Decentralization happens because of them - both communities and builders, users and owners should overlap as much as possible.
The power of micro communities
In essence, microcommunities are small, focused groups of like-minded people who delve deeply into a specific interest or goal. In crypto, these microcommunities can create billions of dollars in value and often represent outliers, or individuals who are most likely to be initial holders. For example, communities like the Ordinals have generated considerable interest in the Bitcoin ecosystem and have driven the emergence of novel projects, such as Bitcoin-based stablecoins, as well as a surge in network activity, especially in the form of fees. The emergence of the Ordinals was a byproduct of organic experimentation and was launched on the open market solely through user interest.
In the case of memecoin, Bonk was created as a community reward token alongside bonk bot, a trading app for Telegram, which ultimately led to the creation of six other dapps that powered bonk and opened a path to escape velocity for pump.fun, a new funding mechanism for funding community-generated memecoins. Bonk rewards Solana users, making those users owners through revenue generation from the bonk ecosystem, ultimately paving the way for a potentially unlimited number of other products built in parallel with it. In both cases, organic distribution and decentralized, equitable funding created value, which led to greater interest and further experimentation, which translated into more value. People cared about projects they felt aligned with, which led to further creativity and ecosystem growth.
What can we learn from memecoin?
Assignment builds community
Communities build and demand value
Products built for the community
The community becomes more valuable
Investors want to invest in new projects that are being built within the community and ecosystem
The original meme becomes more valuable
Democratizing funding
Self-sufficiency in cryptocurrencies is possible and can exist outside of traditional financing avenues. For example, crypto startups have the lowest barriers to entry. A set of smart contracts and a powerful idea can radically disrupt traditional systems and literally change the world. This means a lot of new companies emerge, but it also means the pace of innovation can be very fast — because knowledge is open source and existing breakthroughs become useful components of new systems. Crypto projects are uniquely highly leveraged from a human capital perspective. Traditional companies tend to scale linearly. Uber’s growth requires more drivers to pick up more passengers. Low-level open source infrastructure can be built by one person and used by billions.
Since these are often highly leveraged human protocols, and are more like cities than corporations, democratized money, a great fit in any business, has found an ideal launch point in crypto. ICOs are a fantastic mechanism for capital formation in crypto, and should continue to exist. They get tokens into the hands of the community early, they decentralize the network early, and they reduce the concentration of ownership from the outset.
Yes, some ICOs don’t go well. But that’s no different than traditional investing, and venture capital in particular. In fact, it’s much better. Over 90% of venture-backed projects go to zero or peter out, with no incentive to move forward. Yet only 47% of ICO investments go to zero. The difference is that in crypto, we all see the failures up close through liquid markets. In traditional VC, those failures are masked by (hopefully) high-performing funds.
Distributed Token Launch (DTL)
The core focus of DTL is to get tokens and technology into the hands of real users, not just speculators. The latter is inevitable, but where possible, the end user should be the central point. Ideally, no financial capital is used at all. Airdrop on day one, free emission on GitHub commits. Post CTO position on Twitter for 3% of token supply, and exchange ownership with tasks On jokerace, select the best shitposter by voting on farcaster.
Priority should be given to offering token grants to attract talent and builders to the project in any form or fashion, not just a run-of-the-mill “eco-fund” that takes 4 years to fully unlock. Instead, under this strategy, tokens are ready immediately and the goal is to bring talent into the ecosystem on day one, like hiring a CFO or head of developer relations. While we don’t currently have a 3-step process to disrupt the funding paradigm or guarantee an optimal launch, we are putting some of our ideas into practice.
in conclusion
For the first time in financial history, a system has emerged that rewards permissionless experimentation through an ever-growing toolset that enables the rapid and technically precise creation of institutions, money, and irrevocable contracts, and we should avoid undermining the impact of this permissionless value creation. Decentralization and long-term collaboration happen at the intersection of communities and builders, and these two groups should overlap as much as possible. In crypto, one of the main motivations is to build a community that is financially incentivized to build a future where products serve their needs rather than rent-seeking monopolies. To incentivize this community, they must be prioritized in funding strategies. The blockchain is a distributed database where trust is built through mass collaboration rather than through a powerful institution that only retains the power to control access and censorship - lets leverage these unique characteristics. We believe that the blockchain has become a melting pot of powerful economic tools at a scale we have yet to fully understand, and working to reshape a new system of transaction and cooperation in this context is an endeavor worth pursuing.
