When VC presses the sell button: the wealth transfer game of Polychain, Celestia, and the encryption world.

Author: Pavel Paramonov

Compilation: Deep Tide TechFlow

This article discusses the recent situation with @celestia and @polychain, where Polychain sold $242 million worth of $TIA. I will explore the pros and cons of this and what lessons we can learn from it.

Original tweet link: Click here

Did you anticipate that investors would not make money?

Many people (including excellent researchers) believe that Polychain's recent event is highly predatory and full of uncertainty. How can a top-tier fund sell such a large allocation to the public market and harm the price?

First of all, Polychain is a venture fund whose job is to make money from liquid assets purchased when liquidity is low (I can't believe I'm saying this).

The risks of Polychain investing in Celestia not only lie in its early stage but also in the early stage of concepts such as external data availability layers. At that time, the concept was still very new, and many people (especially "Ethereum supporters") did not believe in it.

Imagine if you discovered Spotify in 2008 and believed that people would listen to music through streaming services instead of CDs and MP3 players: you would be called crazy. When you are not only a newcomer but also want to operate in terms of data availability throughput and create a new market, financing feels like that.

The job responsibilities of Polychain are to take on risks and earn returns, just like anyone else. The founders take the risk of creating a company that may fail, while people typically make choices every day and assume certain risks.

Everything we do is about making choices and taking risks, the only difference is the nature and magnitude of the risks.

Polychain is not the only venture capital firm making investments; there are many different venture capital companies.

Interestingly, no one blames them because it is more difficult to find their trading data. However, the sell-off by Polychain alone would not cause such a severe data crash. It should be noted that this hatred directed solely at Polychain is unwarranted because:

Their job is to take risks and make money, and they do it very well.

They are not the only sellers; there are other investors.

Are these measures beneficial to investors? Yes.

Are these actions ethical for the community? You know the answer.

Did you expect the team would not make money?

Well, you might have anticipated this. There is a significant issue with the profitability of cryptocurrencies: most protocols themselves do not make money, and they do not consider profit at all. According to defillama, Celestia currently has a daily revenue of about $200 (equivalent to the salary of a chief software engineer in Eastern Europe) and has distributed approximately $570,000 in token rewards.

This is just the team's on-chain profit and loss statement, and we know nothing about their off-chain profit and loss statement, but I believe the team costs at such a large scale are also high. Currently, there are indeed some KOLs sternly stating: "Web3 protocols should be profitable, and businesses should make money." When we hear such remarks, are we going crazy?

Yes, we do, the main issue is not the business model. The main problem is that some teams treat token sales as profit and build their business model on that basis without considering the consequences.

If token sales equal the business model, then there's no need to consider the business model and cash flow, right? That's right, but investors' money is not unlimited, and tokens are not unlimited.

At the same time, venture capital invests in startups that are highly likely to achieve great success. Many companies are not yet profitable, but they may bring something revolutionary or interesting enough to attract others to explore and develop these ideas.

Anyway, you wouldn't expect the core team to sell the tokens, would you? The thing is, when your protocol isn't making money, you have to earn it from somewhere else. The foundation has to sell part of its own tokens to pay for infrastructure development, employee salaries, and a whole bunch of other expenses.

Original tweet link: Click here

At least the payment fee is one of the selling reasons I want to believe in. There are many other reasons and different perspectives to consider: on one hand, they have "abandoned" their community; on the other hand, they built this protocol and heavily promoted it, so maybe they should at least sell something? "Selling" refers to a part, not the whole.

Ultimately, this is a token/equity issue, which is also why cryptocurrency VCs are less fond of equity. Selling on the public market is easier than private placements or waiting for an exit, and the time cycle is shorter.

Token economics is not the main issue; the token is.

Clearly, investors are increasingly favoring token trading over stocks. We live in the era of digital assets, so investing in digital assets is a good choice, isn't it?

This trend is not always as simple as it seems on the surface. Interestingly, many founders themselves realize that their products may not need a token, and they prefer to raise funds through equity financing. Nevertheless, they often face two major challenges:

As I mentioned before, most cryptocurrency-native risk VCs do not like equity (because exits are more difficult).

Equity valuation is usually lower than token valuation, so people hope to raise more funds.

This situation not only created difficulties but also actively encouraged people to choose the token model. Token issuance meets the needs of more investors as it provides a clear exit strategy for the public market, which in turn makes fundraising easier. For the team, this means higher valuations and more funds available for development.

Your company's core values remain unchanged. You can retain 100% equity while raising substantial funds through these "artificial" tokens. This approach can also attract more investors focused on token investment opportunities.

Unfortunately, under the current circumstances, in 99% of cases, the token model makes retail investors poor while making venture capitalists rich. Or, as @yashhsm puts it: infrastructure/governance tokens are the suited memecoins.

However, when $TIA was launched, it brought substantial returns to retail investors, soaring from $2 to $20. People thanked the team for making them wealthy and staked tokens to receive various airdrops. Yes, we have experienced such moments, that was in the fall of 2023...

After the price began to decline, people suddenly started spreading a lot of FUD about Celestia: rumors about the team's strange behavior, predatory token economics, mocking on-chain revenue, and so on.

It's a good thing when problems are pointed out, but it would be bad if those who once praised Celestia now view it as a "dump" just because of price actions.

What conclusions can we draw from this situation?

VCs are rarely your friends. Their core business is making money, your core business is also making money, and the core interest of the VCs' LPs is also making money.

Don't blame those VCs who sold their tokens: their tokens have been unlocked, and they have full ownership of the assets, allowing them to use these tokens as they wish.

Blaming those VCs who sell coins while writing on Twitter about how much they desire these tokens: this is deceit and should not be tolerated.

Business models should not revolve solely around token sales. Finding a profitable model is essential; otherwise, even with the best technology, people will not buy into it.

Token economics is open to everyone: If a team unlocks tokens, they have full ownership of their assets and can dispose of them at will. However, if you are confident in what you are building, then selling large allocations is debatable.

Equity investment is not very popular, and some token valuations are artificial, not based on any metrics.

The team should closely monitor the token economics in the early stages, as this could lead to significant costs for them in the future.

Technological innovation is unrelated to token prices.

The ranking rises, and people are happy; when the ranking falls, some problems become apparent. If those who once praised the project now dislike it, that would be bad.

Don't be attached to burdens, love technology, and believe in certain things.