Cryptocurrency Startup Guide How to Find the Intersection Between Tokens and Markets

Author: Mark Beylin, Boost VC
Translation: Yangz, Techub News
In his article “Be Good,” Y Combinator founder Paul Graham outlined how startups can find the intersection between products and markets, creating things that 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 value capture is something only charities do. However, in the cryptocurrency field, we see the opposite: through token issuance, value is captured before it is created, as people must buy the utility tokens (sometimes years in advance) before they can use them. This may be why many successful cryptocurrency ecosystems in their early stages look more like scams than charities, especially to those familiar with traditional startup models.
Is it possible for early-stage cryptocurrency startups to not worry about creating direct value for token holders, as Paul initially suggested, but instead focus on capturing value by selling tokens first?
Tokens – Tools for Narrative Discovery
One of the most challenging aspects for early-stage startups that have not found product-market fit is constantly communicating 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, the faster the team can iterate to find the best solutions and test them in the market. However, only communicating with customers does not scale, as there are only so many people willing to meet or talk on the phone with you… how do you reach other customers?
When observing existing token projects, it is easy to see a feedback loop between token price and market 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 plans to launch 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 a role as a prediction market, forecasting the collective interest of the population in a project moving in a specific direction and the expected likelihood of achieving this goal. The efficiency of this feedback loop is determined by the token’s liquidity, with tokens with higher liquidity (such as BTC and ETH) immediately responding 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, i.e., if they believe the solutions outlined by the project are valuable for a future group, even tokens with lower liquidity can attract new buyers. The significant increase in the valuation of artificial intelligence tokens over the past 6 months is a clear example: although currently only a few tokens provide value to token holders, based on the significant value traditional artificial intelligence startups have already created, the market has revalued the expected value these ecosystems can create in the future.
The interesting part of this process is that by launching tokens and attracting sufficient liquidity attention (to make people worth spending time/money trading on your news), the team may form an extremely tight feedback loop for their future product releases. While engaging with users, cryptocurrency product builders can also take the temperature of their product decisions through iterative cycles, until they find decisions that the market values (i.e., decisions that can significantly increase the value of your token). Once this happens, you can be confident that you are moving in a direction that the market sees as meaningful, allowing you to use the token price mechanism as a tool to discover mass market demand without having to build anything beforehand.
Tokens – Efficient Venture Capital
Mechanisms that allow people to buy tokens based on their belief in the project’s ability to meet future needs are at the core of venture capital. They typically use the pattern of value creation described by Paul Graham, which is why founders have been following this approach technically.
In most cases, startups raise venture capital because they have specific goals or plans that require new funding. This provides founders with a feedback loop (if venture capital firms are not interested in your new plan, they won’t invest), although this feedback loop is both exclusive and opaque, only appearing about every 18 months.
The emergence of tokens allows anyone to freely participate in funding new projects at any time, increasing the supply of funds available to early-stage projects on the market and thus increasing the likelihood of project funding. If a new proposal expands the market opportunities for tokens by offering new use cases, the market will assign higher value to the project, and the diversity of tokens will also increase. With tokens, the market becomes a direct funding mechanism for innovation, which is the core of tokens becoming a powerful tool to expand human potential.
While venture capitalists love to talk about their love for tokens at length, what is often overlooked is that tokens directly compete with venture capital, making them alternative products. As a former founder and current venture capitalist, I believe that venture capital provides a moderate amount of funding that is useful and necessary for all founders. The appropriate amount of funding depends on the team itself and the market in which it operates, but I don’t think it’s zero for any project. During periods when the public token market is dry, venture capital firms play an important 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 attention to specific ecosystems. Market participants are not all the same, and the attention of specific investors is tied to their own beliefs. People continuously adjust their investment portfolios based on their latest views, so the intensity of the token cycle depends on whether it can sustain the attention of market participants.
One way for founding teams to address this issue is through “narrative surfing,” constantly linking their projects to the latest popular value propositions in the cryptocurrency space, hoping to maximize the value of the tokens by constantly expanding the project’s goals.
Another way for the team to maintain freshness is by using memes: excellent memes generate reactions in the community, creating a snowball effect, and the current “meme war” between communities is quite intense. Communities with excellent meme creation cycles can ensure that a significant amount 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 why memecoins can continue to attract and retain liquidity. By getting the right people to join the ecosystem early, they will have the intrinsic motivation to talk about the project and help it grow. If too many tokens are airdropped to people who are not willing to continue sharing the project, then it will be challenging to maintain long-term interest.
Avoiding Over-Financialization of Decisions
Imagine a world where the market is entirely efficient, and project token prices act as perfect oracles that can predict whether a particular action plan is optimal. Perhaps the market is filled with AI agents that can trade tokens based on updates on various projects and accurately predict whether a project will succeed. Moreover, project teams only take actions that external market participants believe are worth taking. If someone asks, “Who calls the shots here?” the correct answer should be the entire market (through token prices), with other people in the ecosystem serving as managers or custodians to help 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 a particular industry often hate being told what to do. They have a deep understanding of their market and have their own insights into the best course of action. Secondly, the best founders can often accept opinions that deviate from mainstream consensus, and in fact, they often take pride in it. It is essential that these deviations are the reason they create successful companies: every market misunderstanding is an arbitrage opportunity, a reward for being the first to dissent. The most successful companies in our era have gone through long periods where the market actively devalued their work, and it is their ability to resist this force that allows them to maintain value in the long run.
Great founders are visionaries; they do not optimize around local minima like others but explore new areas, hoping to discover opportunities that others do not believe exist. To do this, they ask questions that others have never thought of, quickly switch between different concepts based on intuition in data-scarce situations. This helps them reach product-market fit faster than their competitors, win the market, and create valuable ecosystems out of thin air.
If a team collects valuable new data on untapped markets, the last thing they want to do is share this data publicly. However, if they keep their cards close to their chest, even the best founders will struggle to attract public market attention. Nevertheless, they will benefit from attracting funds through private fundraising (participants in private fundraising are vetted and trustworthy) and from finding crazy investors who can see the vision and think intuitively, just like them.
How can you truly find the intersection between 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 narratives that suit them. Like previous product founders, token founders can quickly iterate on the value proposition of the tokens based on the massive feedback they receive.
To keep this feedback loop vibrant, teams should strive to continuously attract investors’ attention on social platforms. They should have a deep understanding of the various narratives surrounding them and understand why the market values each narrative. By continuously appearing in people’s focus with content and memes, they can ensure people don’t lose interest 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 financial and resource support. If teams can do this well, they can build a Hodl army, one that will not sell tokens and will promote them to new audiences.