Authored by Mark Beylin of Boost VC, translated by Yangz of Techub News, Paul Graham, the founder of Y Combinator, outlined in his article “Be Good” how startups can find the point of convergence between their products and the market, which involves 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 admits that creating value without worrying about capturing it is something only charities would do. However, in the cryptocurrency field, we see the opposite situation: through token issuance, value is inevitably captured before it is created. This may be why many successful crypto token ecosystems in the early stages appear more like scams than charities, especially for those who are well-versed in the traditional startup building model.
To find crypto startups that match the token market, is it possible, as Paul initially suggested, not to worry about creating direct value for token holders and instead focus on capturing value by selling tokens first?
Tokens – Tools for Narratives
For early-stage startups that have not found the product-market fit, one of the most challenging tasks is to continuously communicate with customers to understand their interest in new products or features. Founders need to develop relationships with various stakeholders in the ecosystem, create 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 solution and test it in the market. However, communicating with customers alone does not scale, as there are only so many people willing to meet or talk 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 switch proposal, Vitalik selling MKR in response to Maker launching its own chain plan, or DEGEN raising prices in response to the launch of L3, we can see that token prices are quite responsive to news about specific project plans.
Tokens play a role in predicting the crowd’s collective interest in the direction a project is heading and the likelihood of achieving that goal. The efficiency of this feedback loop is determined by the token’s liquidity; tokens with higher liquidity (such as BTC and ETH) immediately respond to news events, while smaller projects attract fewer speculators (who trade based on news events). However, if new buyers are interested in the narrative the project is building, i.e., 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 growth in the valuation of artificial intelligence tokens over the past 6 months is proof: although only a few tokens currently provide value to token holders, the market has already revalued the expected future value of these ecosystems based on the significant value created by traditional AI startups.
The interesting part of this process is that by launching tokens and attracting enough liquidity attention (to make people spend time/money trading on your news), teams may form an extremely tight feedback loop for their future product releases. While engaging with users, cryptocurrency product builders can also test product decisions through iterative cycles until they find decisions that are valued by the market (i.e., decisions that significantly increase the value of your token). Once this occurs, you know you are moving in a direction that the market deems meaningful, allowing you to use the token’s price mechanism as a tool to discover mass market demand without having to build anything in advance.
Tokens – Efficient Venture Capital Mechanism
The mechanism where people buy tokens based on their belief in the future needs a project can fulfil is at the core of venture capital. It usually relies on the premise of creating value in the pattern described by Paul Graham, which is why founders have been following this approach.
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 capitalists are not interested in your new plan, they will not invest), but this feedback loop is both exclusive and opaque, and only appears 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, thus improving the proportion of funds projects can receive. 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 scale of token diversity will increase accordingly. With tokens, the market becomes a direct financing mechanism for innovation, making tokens a powerful tool for expanding human potential.
Although venture capitalists like to express their love for tokens at length, it is overlooked that tokens directly compete with venture capital and are alternative products. As a former founder turned venture capitalist, I believe that venture capital has a moderate amount that 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’s zero for any project. During times when the public token market is drying up, venture capital plays an important role in continuing to fund early-stage projects, often reaping huge returns by 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 all the same, and the attention of specific investors is related 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 sustain 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 popular value propositions in the cryptocurrency ecosystem, hoping to maximize the value of the token by expanding the goals it can achieve.
Another way for teams to stay fresh is by using memes: excellent memes generate reactions in the community, leading to a snowball effect, and the current “meme wars” among communities 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 on social channels, making their token the focus of attention. 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. 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, it will be challenging to maintain the project’s long-term attention.
Avoiding Over-Financialization of Decisions
Imagine a world where the market is entirely efficient, and the token price of a project is like a perfect oracle, predicting whether a particular course of action is optimal. Perhaps the market is filled with numerous AI agents that can trade tokens based on updates from various projects and accurately predict whether a project will succeed. Furthermore, project teams only take actions deemed worthwhile by external market participants. If someone asks, “Who calls the shots here?” the correct answer should be the entire market (through the token price), with other people in the ecosystem only serving as managers or custodians to help achieve market goals. But does 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 have a deep understanding of their market and have their own insights into the best courses 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 it. Importantly, these deviations are why they create such successful companies: every market misunderstanding is an arbitrage opportunity and 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 was their ability to resist this force that allowed them to maintain value in the long term.
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 switch rapidly between different concepts in data-scarce situations. This helps them achieve product-market fit faster than their competitors, winning 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 they keep their cards close to their chest, even the best founders will struggle to attract public market attention. However, they will benefit from attracting funding through private placements (participants in private placements are screened and trustworthy) and from finding crazy investors who can see the vision and think intuitively like them.
How can we truly find the point of convergence 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 find a narrative that suits them. Like previous product founders, token founders can iterate quickly on the value proposition of the token based on the significant feedback it provides.
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 assertions around them and understand why the market values each narrative. By ensuring that content and memes continue to appear in people’s attention, 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 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.
