In web3, understanding the strategies and logic behind VC investments is crucial for both investors and industry participants. This article delves into the intricate dynamics of VC coins, exploring how major projects like Ethena, IO, and MSN have shaped the market, the emerging trends in different regions, and the key factors that distinguish successful projects from those destined to fade. By uncovering the underlying strategies and potential pitfalls, this article provides valuable insights for navigating the complex landscape of VC-driven crypto projects.

The article is based on a conversation between Sam, Research Lead at Aquarius Fund, and George Yu, President of Uweb.

1. Ethena, IO, and MSN - VC projects like Ethena, IO, and MSN quickly attracted funds through high valuations and market hype. However, the market appeal of such projects has diminished, leading investors to shift their focus towards MEME projects.

2. Market Bubble from the Current Financing Boom - The current surge in financing has led to a market bubble, with high-valuation projects struggling to meet expectations. The influx of people attempting to profit through venture capital has further exacerbated the chaos in the market.

3. Sustainability of Idealists and Puppet Projects - Idealistic projects often struggle to sustain themselves, while puppet projects rely heavily on capital manipulation. Leading teams like Zama and Fhenix, which focus on long-term technological innovation, are expected to have better prospects.

4. Investment Preferences: North America vs. Asia - North American funds tend to focus on technology-driven projects, while Asian funds prioritize market effectiveness. However, Asian projects generally face more challenges in securing long-term funding compared to North American projects.

5. Long-Term Potential of High-Quality Products - Projects with strong products have long-term potential. Retail investors should align with project teams to profit alongside VCs in the current market cycle.

6. Technical Skills and Information Channels for Identifying Project Authenticity - Technical capabilities and access to reliable information channels can aid in identifying whether a project is genuine. Projects with potential issues can still be evaluated based on their fundamentals to determine their acceptability.

7. The "Gold Mine and Human Mine" Theory - This theory reveals that there are no real "gold mines" in the market. Instead, projects depend on new users for growth, and many transactions are essentially valueless cycles.

8. VCs as the Current "Human Mines" - In the current market, the real "human mines" are the VCs themselves. Those who profit in this cycle are the participants who collaborate with project teams to exploit VCs.

9. Low-Cost, Controlled-Risk Strategies - Engaging in airdrop and staking strategies can yield stable returns with low risk, making them suitable for long-term participation.

10. Caution with High-Valuation, Low-Liquidity Projects - These projects face significant inflation pressures. Using tools like Etherscan, investors can check the distribution of token-holding addresses. If a large proportion of tokens are actively circulating, the project is likely sound.

11. ETH's Rigorous Technology and High Security - ETH is technically rigorous and highly secure, making it an ideal project for crypto enthusiasts. However, it's important to note that technology and token price do not always correlate directly.

This year, many projects have been dominated by large VCs, especially in the Staking and CeDeFi sectors. Projects listed on top exchanges like Binance are often driven by these VCs. The rise and fall of VC-driven projects can be analyzed through three cases:

• Ethena: A typical VC-driven project, Ethena performed well in the VC rounds due to its high valuation and tightly controlled whitelist Mint mechanism. Although it initially provided returns to retail investors, its token price dropped significantly over time, with many VC investments still locked. North American VCs' "1+3" terms (one-year cliff, followed by three years of linear release) may seem to protect VCs, but in reality, many investors are still trapped.

• IO: After announcing a $30 million financing, IO attracted significant market attention. However, the project was disappointing; its technology was immature, the team was still forming, and there were security vulnerabilities, leading to a hacker attack. Despite these issues, IO managed to list on Binance, but many retail investors did not achieve the expected returns and even faced losses.

• MSN: The founders of MSN attracted significant investment through extensive promotion and KOL endorsements. However, after listing on OKX, the project quickly lost momentum, and the token value dropped to almost zero. The project team had already arranged exit strategies, profiting from retail investors and other VCs before quietly exiting.

The success of the previous round of VC investments led to the current financing boom, with many so-called cryptocurrency venture capital funds flooding the market and successfully raising large amounts of capital. Original VC institutions rapidly expanded in size due to this influx. However, this inflow of capital was not accompanied by significant technological innovation, leading to a market bubble.

Due to LPs' time constraints, VCs were forced to invest the capital within a limited time frame, leading to two scenarios: either investing in low-valuation but mediocre projects or competing to invest in a few so-called top-tier projects, resulting in valuations far exceeding their actual value. This overvaluation has caused market expectations for these projects to be significantly inflated.

For example, Ethena is not necessarily a bad project, and WorldCoin and RNDR are not necessarily underperforming. However, their valuations have been pushed too high, making it difficult to match actual market performance. Meanwhile, VCs not only need to invest the capital but also hope to profit from these high-valuation projects, leading to projects like IO and MSN. IO is a typical VC-driven project, while MSN is an example of a project team turning the tables and exploiting VCs.

The chaos in the current market can be attributed to an excess of primary market funds but a scarcity of quality projects. Many people have flooded the market, trying to profit through venture capital, further exacerbating the chaos—a classic example of a market bubble.

In North America, it's common to see project teams led by idealists who hope to change the world through their efforts. These entrepreneurs are usually young, first-time founders, particularly those deeply influenced by Silicon Valley culture or familiar with American culture. They often believe that what they are doing is not just for profit but to create something truly valuable. While these projects may receive early funding, they often struggle to sustain themselves and eventually fade away.

Another type of entrepreneur is the "puppet" founder, who is pushed to the forefront but whose project is not based on the team's strength. Instead, it relies on carefully crafted marketing and strong support systems behind the scenes. Foundations may have already set the project's profit path, including who will boost the project's TVL (Total Value Locked), who will stand in support, and which ecosystem will drive the project's development. In these cases, the importance of the team itself is reduced, with success more dependent on capital and market manipulation.

Some teams plan from the start how to profit from the project and exit the market. If they can successfully "cut leeks" (a Chinese term for exploiting inexperienced investors) on exchanges, they quickly profit from retail investors. If that fails, they still make a significant profit through financing.

Additionally, some projects work entirely in collaboration with VCs, launching short-term profit-oriented "shitcoin" projects, primarily aiming to quickly raise funds. This simple and crude operating model is particularly common in the Asian market.

However, there are also excellent projects formed by top scientific and technical teams. For example, the teams behind Zama and Fhenix, both working on Fully Homomorphic Encryption (FHE), have raised substantial funds, with Zama alone raising $75 million. These team members are genuine scientists, akin to those in the Ethereum Foundation, who focus on academic research and the development of the blockchain industry by publishing papers and driving industry progress.

Other projects are also noteworthy: these teams clearly understand their goals and are advancing their projects seriously. Although these projects might not attract much attention in the current market cycle due to uncertainties in performance and future success, it is certain that they will continue to exist in the industry in the next 3 to 5 years.

There are significant differences in the investment mentality between North American and Asian funds. North American funds are generally more patient, willing to support projects that may not succeed in the short term or even in the next market cycle, especially those "scientist" projects that enhance blockchain technology. In contrast, Asian funds are more focused on practical results, concerned with how to obtain more liquidity on-chain and how to make projects widely recognized and popular in the market, emphasizing data performance and market acceptance.

This difference doesn't necessarily imply superiority or inferiority but reflects different investment logics and cultural backgrounds. While Asian projects often exhibit high technical standards and perform well, they usually face more challenges in securing long-term funding compared to North American projects driven by ideals.

Projects can be categorized into two types: those with excellent products and those that allow retail investors to participate and gain profits. For product-excellent projects, consider funds that focus on projects and directions that have helped investors avoid many potential risks. Although such funds may also experience losses during bear markets, their research, published papers, and the technical logic of the projects they invest in demonstrate a serious and rigorous attitude. Most of their invested projects have long-term survival potential. Even if they face difficulties, they will persevere, as they are research-driven native crypto funds that have invested in. It is worth paying attention to these projects.

While high-quality projects may not always offer retail participation opportunities, those with significant momentum often allow retail investors to participate. However, in the current market environment, retail investors need to change their investment mindset. The previous logic was to profit from the funds of later entrants through early investment, but in this cycle, it's more necessary to align with the project teams to profit from VCs. By adjusting this mindset, even participation in less-than-ideal projects can still yield good returns.

For those with technical skills, identifying the authenticity of a project is relatively easy. For example, reading IO's technical documentation revealed some inconsistencies, which raised red flags. Projects with impure intentions are less likely to invest heavily in product development, making it easier for those with a technical background to spot issues. Some projects may hide their flaws well, but even then, there are usually some clues to be found.

Having access to information channels within the community can also help, as rumors often provide valuable clues about projects. By combining rumors with technical understanding, one can identify many so-called "set-up" projects. Even if there is an intention to set up a project, if it doesn't have a bad reputation and its technology and fundamentals are decent, it can still be considered acceptable. This is a reasonable judgment logic.

This theory, formed after reflecting on the market and industry, suggests that most projects are essentially providing services or tools, akin to making "shovels." But what are these "shovels" digging for? It turns out that there is no real "gold mine" in the market. The so-called gold mine is actually a "human mine"—new users who are continually attracted and then consumed by subsequent projects. Many projects do not have a real demand logic but instead present a mutually dependent gambling relationship. For example, Uniswap serves Aave, and Aave serves Uniswap. This relationship raises questions about the true nature of platforms like Uniswap, which ultimately provide a trading platform where most transactions are actually valueless "air."

Chinese investors are better at reconciling with this reality, entering the market without necessarily pursuing lofty goals. By viewing the market through the lens of the "Gold Mine and Human Mine" theory, one can identify where the "human mine" comes from. While it may sound harsh, it is indeed a methodology for analyzing industry issues.

The current market is clearly segmented into several parts. Looking back at the heyday of the inscription projects, the "human mine" at that time mainly came from retail investors. Just by releasing an inscription on-chain and hinting at its name, one could trigger a strong FOMO (Fear of Missing Out) sentiment and attract a large number of retail participants. This wave of retail influx, whether from Web2 or Web3, was driven by emotions.

The situation is different now. VC-driven projects mainly rely on existing funds, and the market has no significant new capital inflows. Even if new capital, such as ETFs, enters the market, it is unlikely to flow into the Altcoin market, creating an isolated phenomenon. Therefore, the "human mine" in the VC market is actually the VCs themselves. Since the last market cycle, VCs have maintained cash flow by covering their losses through other channels, but in this cycle, those who truly profit are the participants who exploit the VCs alongside the project teams.

Large exchanges usually restrict token sales by project teams, so project teams often legally distribute tokens through airdrops. Manta's airdrop rules, for example, are designed to allow the project team to obtain more tokens. This has made "airdrops" a legitimate business, allowing participants to share in the profits from project teams and VCs.

The cost of participating in airdrops is relatively low, especially compared to trading derivatives. For example, in interaction-based airdrop strategies, the basic cost for an account includes three essentials: Twitter, Discord, and Telegram. The cost of setting up these three essentials is around 20 to 50 RMB. When performing on-chain operations, it is advisable to minimize the time spent on the mainnet and mainly interact on Layer 2 to keep GAS fees negligible. Other costs, such as isolating IPs and using anti-sybil tools, are also relatively low, keeping the overall cost of airdrops within a manageable range.

Staking-based airdrop strategies might seem to require more capital, but by distributing your funds across different staking opportunities, you can reduce risk and still achieve substantial returns. For example, staking with EtherFi can provide a safety net. By tracking on-chain activity, you can identify potential loopholes in the project’s rules and earn additional rewards. There are many ways to engage in airdrops, and whether you have a large or small amount of capital, persistence can lead to good returns. Compared to trading, airdrops are less risky and offer more stable returns.

It's important to be cautious of projects that have high valuations but low liquidity, as they often face significant inflationary pressures. The continuous release of new tokens can have an impact on the market. For example, with Arbitrum's ARB, although its price initially performed well, holders have no means to earn interest, and they also face an annual inflation rate of about 60%. This means that the value of the token is being continuously diluted, which is unfair to regular holders.

While SUI is also a project highly dependent on VCs, it has high liquidity and continuously releases new tokens. However, it offers substantial rewards on-chain, particularly through various DeFi applications. This allows SUI holders to counteract the effects of inflation through on-chain activities, thus reducing the direct impact of inflation.

To identify projects that require caution on-chain, tools like Etherscan can be used to examine the distribution of token-holding addresses. For example, if most tokens are concentrated in the addresses of exchanges or platforms like Uniswap, it indicates that these tokens are actively circulating. If the tokens make up a small percentage of the current circulation despite high valuations, it’s a warning sign. Checking the distribution ratio between exchange addresses and holding addresses can help you determine if the project is relatively sound based on whether a large portion of tokens are actively circulating.

Ethereum is often referred to as the "scientist's chain" because of its rigorous underlying architecture, game theory design, and cryptographic foundations. These were all crafted by true scientists. In contrast, Ethereum’s main competitor, Solana, is more of an "engineer’s chain." The engineers working on Solana seem to lack clear guidance on improving the platform, and many technical issues remain unresolved. For example, Solana’s frequent outages and the need to rewrite code highlight the limitations of the engineer's approach.

Ethereum's upgrades are always conducted with extreme rigor. Although some argue that its degree of decentralization has decreased, the cryptographic and game theory designs that underpin it still ensure its security. Therefore, the future of blockchain will require one or two projects that truly embody the ideals of the crypto community, and Ethereum is one such suitable choice. It is crucial to understand that the quality of a project’s technology does not directly correlate with its token price.

Disclaimer: This post is for general informational purposes only and does not constitute investment advice, recommendations, or a solicitation to buy or sell any securities. It should not be used as the basis for making any investment decision and should not be relied upon for accounting, legal, tax advice, or investment recommendations. You are encouraged to consult your own advisers regarding legal, business, tax, or other related matters concerning any investment decisions. Certain information included here may have been obtained from third-party sources, including portfolio companies of funds managed by Aquarius. The opinions expressed in this post are those of the authors and do not necessarily reflect the views of Aquarius or its affiliates. These opinions are subject to change without notice and may not be updated.