Source: TradingView, CNBC, Bloomberg, Messari
It’s ETH’s World and We’re All Benefiting
Ethereum rose +49% in July, and it’s already up close to +20% in August. We know Bitcoin has had a strong bid from institutional investors over the past few years, and it’s now becoming clear that Ethereum does as well. But when will capital finally start flowing back into other areas of the crypto market?
There are signs of life, for example:
- Lido (LDO) rose almost +60% last week on the heels of a new proposal for a buyback mechanism. This buyback would be based on the amount in the Lido treasury to avoid depleting assets. The proposal is just in the discussion phase right now, and historically, these buyback proposals have been shot down, but it’s a good sign that the market is paying attention to tokenomic changes again.
- Aerodrom (AERO) jumped +50% last week as Coinbase began explicitly teasing how it will integrate Aerodrome, the native DEX on Base, into its offerings. Again, this is shy on details, but the market has awoken.
- Chainlink (LINK) rose +34% last week following a new strategic reserve setup. The new update mainly revolves around off-chain revenue now getting automatically converted to LINK (buys LINK). If you do the math, the LINK token will still inflate by 70M tokens per year ($1.5B), which doesn’t come close to being offset by revenue (on-chain revenue is less than $5 million, and off-chain revenue isn’t disclosed). Still, again, the market is feeling excited about tokenomics changes.
But these examples largely show rotation of capital rather than growth by new capital. And this is where crypto needs a shot in the arm. Just about any graph you look at shows explosive growth in the usage of digital assets, yet most investors still think they can own this exposure by just buying BTC (and now ETH). And while from a returns standpoint that has been true thus far (correlation), from a logic standpoint, it just doesn’t add up (causation).
For example, the on-chain lend/borrow market is exploding higher right now, with deposits growing another +14% last week. This has little to do with BTC or ETH.
Source: TokenTerminal
Similarly, the rise in real-world assets on-chain, while still small, is a graph any investor would love to see. Again, neither BTC nor ETH directly benefits from this growth.
Source: RWA.xyz
And of course, the growth of USD stablecoins has been well documented, and while ETH may benefit slightly from this growth, BTC certainly does not.
Source: TheBlock
For years, most investors just ignored crypto or made up excuses for why they weren’t going to invest in digital assets. Now, between the real growth and the positive regulatory changes, it’s hard to ignore, and it's even harder not to invest.
But the rest of the crypto market will have to wait until investors realize that they need exposure to the actual growth engines of blockchain, not just the tokens wrapped inside of ETFs.
The Internet Capital Markets (ICM) Thesis Explained
Founders, funds, and traders all have different ideas of what Internet Capital Markets (ICM) means. This can (and should) work, and the best part is that it expands crypto's use cases/TAM massively.
ICM fixes real problems for entrepreneurs and tokenholders. Founders no longer need to rely on venture capital and other traditional capital markets participants. Through ICM, tokenholders get to invest in innovative startups on an even playing field.
My belief in ICM is not because of a massive breakthrough in technology. In fact, the key to ICM has been hiding in plain sight. Tokens enable distinct advantages for businesses (particularly startups) that debt and equity cannot offer.
The ICM Thesis
- The token is the tech. Tokens are the greatest capital formation and customer bootstrapping mechanism we’ve ever seen, fully aligning all stakeholders, from customers to founders to passive tokenholders, and turning customers into power users and evangelists… when designed correctly (!!!)
- ICM can grow to be larger than crypto VC in size because the business does not need to be related to blockchains or crypto in any way. The total addressable market is every single business in the world.
- ICM disrupts the capital structures of businesses. Businesses need to raise capital to start, build new products, expand operations, and optimize for growth. The internet replaces venture capital and other traditional capital markets participants. Tokens replace debt and equity.
- Crypto VC is dying because liquidity is king in volatile (but maturing) markets, retail is getting smarter on token design, and greater transparency is becoming the norm. You will not be rewarded with a 50x for investing in the 100th L2 Protocol.
Why Tokens Are Better Than Debt & Equity
- Worldwide Investor Base - Reliance on VCs ceases to exist. The potential capital pool from the internet is larger in size than Venture Capital, measured by USD.
- Merit-Based Capital Allocation - Capital allocation to innovation is based on merit — it cuts through classical Silicon Valley accessibility exclusivities. Founders can raise capital regardless of pedigree, job experience, sector, location, or SF/SV cabal pipeline. May the best founder with the best idea win.
- Instant Liquidity - The illiquidity of VC/private investments is the biggest drawback of investing in the current startup landscape (5+ years if lucky). Teams get lower valuations because of the illiquidity. Tokens receive a premium due to instant liquidity.
- Better GTMs - Most startups fail to gain awareness from more than 100 people. The new best practice is, "We need to go viral on TikTok to have a chance." Tokens provide immediate awareness to hundreds of thousands — instantly. For example, Kled AI got 983K impressions on its project announcement tweet.
- Armies of Brand Advocates - Some may call them cults (the good kind). Your investors are also your users, so customer engagement and retention run deep. The token is a new form of loyalty rewards, similar to credit card points and airline miles. If you do right by these holders, they become your marketing team for free. Hyperliquid is a great recent example of this, as its users own the HYPE token, and they constantly market the product for Hyperliquid with the hashtag “Hyperliquid”.
- Incentivize User Behaviors - Token incentives/rewards are another distinct advantage over debt and equity that founders can leverage. Have a new product you want people to try? Need user feedback on a campaign you are running? Want to get your name out to a new target market? As long as incentives are used strategically and sparingly, they are value accretive to the project.
- Building In Public, Not Silence - By building in public and being part of the “cult,” people gain an emotional connection to your project — not only because they are financially invested, but because they see it evolve step-by-step. Everyone likes to say, "I knew that band before they were popular."
Execution: Align Tokenholders With Teams
When tokens are designed correctly, there are no conflicts of interest between teams and tokenholders. What is best for founders and tokenholders is what is best for the business. Founders can be trusted with increased discretion over decision-making. Institutions have to buy on the open market like everyone else. You don’t need legal protection as a shareholder when you know that the founding team is aligned in the same way you are – i.e. to grow the price of the token.
Bootstrapping Capital
- Team → Needs to bootstrap enough capital to get to product release/sustainable revenue generation.
- Tokenholders → Provide upfront capital. In return, they receive access to investing on a level playing field in an asset that may increase in value over time.
Buybacks
- Tokenholders → Are part-owners of the business that monetize their investment via the token. They invested because they want exposure to the business. The asset they hold should correlate with the success of the business (revenue/earnings) and the token’s value.
- Team → Buys back X% of the token as the business generates fees/revenues and vaults the token (e.g., HYPE Assistance Fund or more recently PUMP.fun). The buyback is the mechanism that makes the token valuable.
Series A-Z
- Teams → At times, will need additional capital to pay for growth/expansion. Bought-back tokens, team tokens, or pre-allocated treasury tokens are offered to current tokenholders. There are various ways to structure these offerings between discounts, lock-ups, call options, etc. Just like with shares of stock, issuers need to keep in mind that this causes dilution, which is a tradeoff against the potential value gained in growth.
- Tokenholders → Get a right of first refusal on buying more tokens. Deals can be structured to reward long-time believers, which also creates further demand not to sell.
Transparency
- Tokenholders → Need (and deserve) to know what they are buying. They also need peace of mind that their capital is being used appropriately.
- Founders → Provide a reasonable level of Pre-TGE DD material and report regularly on the business. In turn, they receive greater capital formation. Regardless of preference, incoming regulation will eventually make Pre-TGE DD material and regular reporting mandatory.
Final Thoughts
The Gensler era ruined most people's perception of the potential for non-BTC tokens and the importance of token design. That was their goal. Founders do what's right by tokenholders when incentivized to do so via a token's design (e.g. HYPE, BNB, LEO). The token is the tech.
The opposite is true for most projects, which is why market structure in crypto is a big game of chicken… I need to dump on their heads so they don't dump on mine first.
"Well, that's just how crypto works”, many have said. But it doesn’t have to be that way?
If you sit back, jaded by the status quo, and assume things will never change, I promise you they won't. Instead, if you think about how the token and project alignment can improve, you’ll see how close we are. Instead of assuming the worst, you start thinking, “What could go right?”
Internet Capital Markets is the right idea, but it has historically been done incorrectly. That’s starting to change.
