From Fundraising Frenzy to Liquidity Drought, What Is Crypto VC Going Through?

Foresight News

2025-04-28 21:01

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Original Article Title: "Crypto VC Under Liquidity Anxiety: An Unfolding Imbalance"
Original Source: ChandlerZ, Foresight News

Waterdrop Capital Partner Dashan recently confessed in a Space session that all four projects he had recently invested in had already launched on Binance, yet not a single one had distributed tokens to investors as per the original investment agreement. Despite the clear token distribution terms in the contract, the projects could arbitrarily amend the agreement after the launch, leaving investors with little to no effective recourse.

He stated that the alteration of the agreements was not actually the project teams' intention but rather a longstanding unwritten rule of Binance. Therefore, he does not blame the project teams because they are also at a disadvantage in front of Binance. The current strategy is very clear, which is to persuade and assist truly high-quality projects to skip token distribution and directly go for listing, entering a relatively clean and regulated market to showcase their value.

In traditional VC investments, rights protection based on contracts does not carry the same practical enforceability in the context of crypto token investment structures. As post-token launch circulation rules are dictated by exchanges, on-chain asset distribution is not immediately bound by traditional legal systems, and investment agreements often lose their effectiveness at crucial junctures. In the current market environment, a project's ability to gain entry to top exchanges directly impacts its overall survival, marginalizing the importance of contractual terms in the face of real interests. In order to go live, project teams have to cooperate with exchanges on redefining aspects such as release schedules, lock-up rules, token distribution ratios, etc. Meanwhile, investors, lacking on-chain governance rights and circulation discourse power, find themselves in a de facto weak position.

This statement reveals a profound crisis that the current crypto VC investment ecosystem is facing, namely a profound dilemma where contract effectiveness, liquidity control, and exit mechanisms have completely failed.

Imbalance of Power: The New Relationship Between VCs, Projects, and Exchanges

In the industry's development over the past few years, the narrative of "project storytelling - multi-round VC funding - flagship exchange token generation event (TGE) / listing" has gradually become mainstream. The characteristic of this model lies in the project's early reliance on professional VC institutions for funding, resource connections, and credibility endorsements, completing fundraising through escalating valuations, with the ultimate goal usually being the initial issuance and circulation of tokens on a major centralized exchange to provide an exit channel for early investors.

In the previous multi-round bull markets, as a core resource, crypto VCs held the authority over early-stage funding and token design, playing a significant role in driving rapid industry expansion and project incubation. In the last bull market, the standing of project teams rose, but VCs still maintained a certain dominance due to their large capital size and liquidity empowerment such as Launchpads.

However, as the market enters a new adjustment cycle, with the liquidity of altcoins drying up, the interest structure between investors and project teams has changed. The power of exchanges has risen to unprecedented levels, becoming the absolute controller of liquidity switches, with key aspects such as listing approval, token allocation, and circulation strategies concentrated in the hands of exchanges. This has put project teams in an extremely weak position during negotiations. Even if a detailed investment agreement has been signed, facing the exchange's proposed circulation condition adjustments, project teams find it difficult to refuse, ultimately having to violate the original agreement with investors.

Exchanges have become controllers of scarce resources, with VCs gradually being marginalized and their actual control ability significantly reduced.

The "Prisoner's Dilemma" in Liquidity Contraction

The dilemma faced by the current "VC Coin" is not caused by a single factor.

After multiple rounds of financing, a project's public market valuation at TGE is often at a high level. This directly results in the initial buy-in cost for secondary market investors being high, while also meaning that early investors including VCs, the team, early supporters, etc., hold a large amount of low-cost chips, with a strong potential sell-off incentive.

This expectation gap leads to a natural selling pressure after the token is listed, with market participants potentially forming a consensus that "selling is the optimal strategy," thereby triggering a negative feedback loop.

Furthermore, the token economy itself is exacerbating the dilemma of VC Coins.

During a bull market, the token issuance model of many projects continues to follow the high expectation growth assumptions of the bull market period, such as the market cap rising continuously, with sufficient liquidity to support gradual unlocking. However, in practice, many projects lack real revenue support, DeFi annualized returns rely on Ponzi schemes, GameFi relies on subsidies, NFTs rely on FOMO, and tokens completely lose intrinsic growth momentum.

Most importantly, the tokens invested in by VCs in the past can eventually be sold to new retail investors in the secondary market, forming a complete exit path. However, there are currently very few new on-chain and exchange retail investors, incremental funds are drying up, and VCs mutually smashing each other has become the norm.

Essentially, early investors, project teams, liquidity providers, and early users have become part of a zero-sum game within a closed loop, making it increasingly difficult to exit.

VC Return in the Previous Bull Market Cycle

VC Return in the Current Cycle

For VC institutions, the traditional strategy of relying on fast TGEs to achieve high multiple exits is facing challenges, the realization period of investment returns may be extended, and uncertainty is increasing. This may prompt VCs to pay more attention to a project's long-term fundamentals, sustainable business models, reasonable valuations, and healthier tokenomic models when making investment decisions. Their role may also need to extend from focusing on early-stage investment and facilitating listings to deeper post-investment management, strategic empowerment, and ecosystem development.

For project teams, a reassessment of their token distribution strategy and community relations is needed. Following the questioning of the "pump and dump" model, exploring a lower valuation to start, a more equitable distribution mechanism, designing tokenomics that better incentivize long-term holders, as well as increasing operational transparency and strengthening accountability may be more worth exploring.

From a more macro view of industry development, the current challenges can be seen as an adjustment in the market's path to maturity. It has exposed issues accumulated during past rapid growth and may lead to the formation of a more balanced, sustainable financing and development ecosystem. This requires all market participants, including VCs, project teams, exchanges, investors, and even regulatory bodies, to collectively adapt to change, seeking to establish a new balance between innovation incentives and risk control, efficiency, and fairness.