Guide for Cryptocurrency Startups How to Find Alignment Between Tokens and Market

Authored by Mark Beylin of Boost VC
Translated by Yangz, Techub News
In his article “Be Good,” Y Combinator founder Paul Graham outlines how startups can find the intersection of product and market, 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 value is something only charities do. However, in the cryptocurrency space, we see the opposite: through token issuance, value is captured before it is created. This may be why many successful cryptocurrency ecosystems in the early stages seem more like scams than charities, especially to those familiar with traditional startup building models.
Is it possible, in order to find cryptocurrency startups that match the token market, to follow Paul’s initial advice and not worry about creating direct value for token holders, but rather focus on capturing value by selling tokens first?
Tokens – Tools for Discovery of Narratives
For early-stage startups that have not found product-market fit, one of the most challenging aspects is continuous communication with customers to understand their interest in new products or features. Founders need to develop relationships with various stakeholders in the ecosystem, establish tight feedback loops, and design solutions that 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 is limited by only being able to personally engage with so many customers… how do you reach other customers?
When observing existing token projects, it is easy to see that there is 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 their fee conversion proposal, Vitalik selling MKR in response to Maker launching their own chain, or DEGEN raising prices in response to launching L3, we can see that token prices are quite sensitive to news about specific projects’ future plans.
Tokens play the role of a prediction market, forecasting the collective interest of people in a project moving in a specific direction, and the likelihood of achieving that goal. The efficiency of this feedback loop depends on the token’s liquidity, with tokens with high liquidity (such as BTC and ETH) reacting immediately to news events, while smaller projects attract fewer speculators (who trade based on news events). However, if new buyers are interested in the narrative a project is building, i.e., if they believe the outlined solution will be valuable to a certain group in the future, then even tokens with lower liquidity can attract new buyers. The significant increase in the valuation of AI tokens over the past 6 months is evidence of this: although currently only a few tokens bring value to token holders, based on the enormous value traditional AI startups have already created, the market has revalued the future potential of these ecosystems.
The interesting aspect of this process is that by launching tokens and attracting enough liquidity attention (to make people worth spending time/money trading on your news), teams can establish an extremely tight feedback loop for their future product releases. While engaging with users, cryptocurrency product builders can test product decisions through iteration cycles until they find decisions that resonate with the market (i.e., decisions that significantly increase the value of your token). Once this scenario occurs, you can know that you are developing in a direction that the market deems meaningful, allowing you to use the token price mechanism as a tool to discover mass market demand without needing to build anything in advance.
Tokens – Efficient Venture Capital Mechanism
The mechanism of allowing people to purchase tokens based on their belief in the project’s ability to meet future needs is at the core of venture capital. It typically follows the pattern of creating value described by Paul Graham, which is why technically, founders have been following this approach.
In most cases, 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, and only occurs about every 18 months.
The emergence of tokens allows anyone to participate in funding new projects at any time, increasing the supply of funds available to early-stage projects in the market and thus increasing the proportion of projects that receive funding. If a new proposal expands the market opportunities for a token by offering new use cases, the market will assign higher value to the project, and the scale of token diversity will expand. With tokens, the market becomes a direct financing mechanism for innovation, which is the core reason why tokens have become powerful tools for expanding human potential.
While venture capitalists often express their love for tokens in lengthy discussions, what is overlooked is that tokens and venture capital directly compete with each other; they are substitute products. As a former founder turned venture capitalist, I believe that there is a moderate amount of venture capital that is useful and necessary for all founders. The appropriate amount of capital depends on the team itself and the market in which they operate, but I believe it is not zero for any project. During times of public token market depletion, venture capital firms play an important role in continuing to provide funding for early-stage projects, often reaping huge returns by taking on this risk.
Surviving Market Cycle Volatility
One downside of tokens is that capital flows with the attention of specific ecosystems. Market participants are not all the same, and the attention of specific investors is related to their own beliefs. People constantly adjust their investment portfolios based on their latest views, so the intensity of token cycles depends on whether they can continue to attract the attention of market participants.
One way for founding teams to address this issue is through “narrative surfing,” continuously linking their project to the latest hot value propositions that attract liquidity in the cryptocurrency space, hoping to maximize the value of tokens by expanding the project’s goals. Another way for teams to stay fresh is to use memes: excellent memes generate community responses, creating a snowball effect, and the current “meme wars” within the community are quite intense. Communities with a cycle of excellent meme creation can ensure that a significant amount of content about the project is created/shared in social channels, making their tokens the focus of attention. This is why memes are a necessary factor in maintaining sufficient liquidity for tokens and one of the reasons why memecoins can continue to attract and retain liquidity. By bringing the right people into 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 those unwilling to continue sharing the project, it will be challenging for the project to maintain long-term attention.
Avoiding Over-Financialization of Decisions
Imagine a world where the market is entirely efficient, and the token price of project tokens is like a perfect oracle that can predict whether a particular action plan is optimal. Perhaps the market is filled with a multitude of AI agents that can trade tokens based on updates from various projects and predict whether a project will succeed. And 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 others in the ecosystem just acting as managers or custodians, helping achieve the market’s goals. But would this governance system actually achieve greater success than other models?
I believe the answer is no.
Firstly, the best founders in specific industries often dislike being told what to do. They know their market very well and have their own insights into the best course of action. Secondly, the best founders are often willing to accept opinions that deviate from mainstream consensus and, in fact, take pride in doing so. Importantly, these deviations are what makes them create successful companies: every market misunderstanding is an arbitrage opportunity, a reward for the first person to dissent. The most successful companies of our time have gone through long periods of undervaluation in the market, 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; they explore new areas, hoping to discover opportunities that others believe do not exist. To do this, they ask questions that others have never thought of, relying on intuition to quickly switch between different concepts in data-scarce situations. This helps them achieve 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 that data publicly. However, even the best founders struggle to attract public market attention if they keep their cards close to their chest. Instead, they benefit from attracting funds through private sales (where participants are screened and trustworthy) and from finding crazy investors who share the same vision and think intuitively.
How can you 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 narratives that suit them. Like previous product founders, token founders can quickly iterate on the value proposition of tokens based on the significant feedback they provide.
To maintain the vitality of this feedback loop, 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. They should keep appearing in people’s focus with content and memes so that people do not 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 funds and support. If teams can do this well, they can build a Hodl army that will not sell tokens and will promote them to new audiences.