A brief review of the Celestia and Polychain dumping events: Everyone wants to make money, is the coin price destined to drop to zero?

Author: Pavel Paramonov, Founder of Hazeflow

Compiled by: xiaozou, Golden Finance

This article analyzes the recent sell-off event of Celestia and Polychain—Polychain sold TIA worth 242 million dollars. I believe this is both a good and a bad thing, and this article will delve into the reasons behind it and what lessons we can learn from it.

1. Do you expect investors not to make money?

Many people (including outstanding researchers) describe this as Polychain's highly predatory and uncertain behavior. How can a company regarded as a top-tier fund sell such a massive position to impact the market price?

First of all, Polychain is a venture capital fund whose responsibility is to profit from assets purchased during illiquid periods (I can't believe I actually need to explain this).

Polychain not only took on the risk of investing in the early stages of Celestia but also bet on concepts such as the "external data availability layer," which were completely new at the time. This idea was quite ahead of its time, and many people did not believe in it (especially those from the "Ethereum camp").

Imagine if someone discovered Spotify in 2008 and believed that everyone would listen to music through streaming services rather than CDs and MP3 players; that person would surely have been considered crazy. This is the fundraising situation when you are not only a newcomer in the industry but also want to pioneer new markets in data availability throughput.

Polychain's responsibility is to take on risks and reap rewards, just like everyone else. The founders take on the risk of the company potentially failing, while ordinary people also bear specific risks when making choices every day.

We are all making choices and taking risks, the difference lies only in the nature and scale of the risks.

Polychain is not the only investor; there are several other venture capital funds involved.

Interestingly, no one blames them because their trading data is harder to trace.

However, the sell-off by Polychain alone is not sufficient to cause such a drastic price collapse. It should be noted that this accusation is unfair and specifically directed at Polychain for the following reasons:

• Their responsibility is to take on risks and make profits, and they do it quite well.
• They are not the only sellers; other investors are also taking action.

Are these operations beneficial for investors? Of course.

Are these actions ethical for the community? You know what I mean.

2. Are you expecting the team not to make money?

Well, you might actually think so. There is a serious profitability issue in the crypto space: most protocols are not profitable, and they do not consider profitability at all. According to data from DefiLlama, Celestia currently earns only about $200 per day (equivalent to the daily salary of a senior software engineer in Eastern Europe), while distributing about $570,000 in token incentives.

This is just the profit and loss data on the team's blockchain; we know nothing about their off-chain profit and loss, but I believe that the operational costs for such a large team are also quite high. Nowadays, there are indeed some KOLs seriously claiming: "Web3 protocols should be profitable, and businesses should make money." Are we crazy to take this viewpoint seriously?

Yes, we are indeed crazy, but the core issue is not the business model. The key is that the team views token sales as profit and builds the business model around this, without ever considering the consequences. If token sales are equivalent to the business model, then what is the point of considering the business model and cash flow? Right? But the problem is, investors' money is not unlimited, and tokens are not either.

At the same time, venture capital is essentially a bet on startups with huge potential for success. Many companies are not profitable, but they may offer something revolutionary or interesting enough to attract others to explore and develop the idea.

Regardless, you can't expect the core team to never sell, can you? The fact is: when your protocol isn't making money, you have to find funding elsewhere. The foundation has to sell some tokens to pay for infrastructure, salaries, and a host of other expenses.

At least, covering operational expenses is one of the sell-off reasons I am willing to believe. Of course, there may be other reasons and different perspectives: on one hand, their "dumping" harmed the community; on the other hand, they did build this protocol and create market enthusiasm, so perhaps they at least have the right to sell a portion of their tokens? Note that it is a portion, not all.

Ultimately, this reflects the issue of tokens/equity and is also the reason why crypto venture capitalists are not very fond of equity. Compared to private placements or waiting for an exit, public market sell-offs are more convenient and have a shorter time cycle.

3. Token economics is not the core issue; the token itself is.

Clearly, investors are increasingly inclined towards token investments rather than equity. We are in the era of digital assets; isn't investing in digital assets a given?

However, this trend is not as simple as it seems on the surface. Interestingly, many founders themselves realize that their products may not actually need tokens, and they prefer to raise funds through equity financing. Nevertheless, they still face two major challenges:

• As I mentioned before, most crypto-native venture capitalists do not like equity (exit is more difficult).
• Equity valuation is usually lower than token valuation, and people always want to raise more money.

This situation not only creates a dilemma but also directly encourages teams to choose a token model. Token issuance can attract more investors because it provides a clear public market exit path, making it easier to raise funds. For the team, this means a higher valuation and more development funds.

The core equity value of your company remains unaffected. You can retain 100% ownership while raising substantial funds through these "synthetic" tokens. This approach can also attract a broader pool of investors specifically looking for token investment opportunities.

Unfortunately, in the current environment, in 99% of cases, token models make retail investors poorer and venture capitalists richer. Or as Yash put it: infrastructure/governance tokens are just meme coins in suits.

However, when TIA went live, it indeed brought substantial returns to retail investors—rising from $2 to $20. People at that time thanked the team for making them rich and staked tokens to receive various airdrops. Yeah, we had that time, it was the autumn of 2023...

When the price started to drop, people suddenly began to spread a lot of panic about Celestia: rumors of abnormal team behavior, predatory token economics, mocking on-chain income, and so on.

It is a good thing to identify problems and point them out, but if those who once praised Celestia now see it as a "garbage dump" just because of price trends, that would be too bad.

4. What conclusions can we draw from this?

Venture capital firms are unlikely to be your friends. Their core business is making money, your core business is making money, and the core interest of venture capital LPs is also making money.

Don't blame the venture capitalists for selling off: their tokens have been unlocked, and they have full ownership of their assets, so they can dispose of them freely.

The ones who should really be blamed are those venture capitalists who sell off tokens while promoting them on Twitter: this is deceptive behavior and should not be tolerated.

The business model should not be designed solely around token sales. Either come up with a profitable model, or maintain a non-profit status with top-notch technology— as long as it's done well, the market will naturally pay.

Token economics is open and transparent to everyone: if the team tokens are unlocked, they certainly have full disposal rights over the assets. However, if you are truly a steadfast believer in the project, a large-scale sell-off is worth reconsidering.

Equity investment is not very favored, and the valuation of certain tokens has inflated figures and lacks supporting indicators.

The team should place a high emphasis on the design of token economics at the earliest stages, or they may pay a heavy price in the future.

Technological innovation is completely unrelated to token prices.

When the K-line rises, everyone is happy; when the K-line falls, the problems become apparent. If the same group of people praises the project one moment and then slanders it the next, that is the real tragedy.