Original author: Pavel Paramonov
Original translation: TechFlow
This article discusses the recent situation between @celestia and @polychain where Polychain sold $242M worth of $TIA. I’ll 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 this Polychain incident is extremely predatory and full of uncertainty. How can a primary fund sell such a large allocation into the open market and damage the price?
First, Polychain is a venture fund whose job is to make money from liquid assets that it buys when liquidity is illiquid (I can’t believe I’m saying this).
The risk of Polychain investing in Celestia was not only its early stage, but also the early stage of concepts such as external data availability layers. At the time, the concept was still new and many people (especially “Ethereum supporters”) did not believe in it.
Imagine if you had discovered Spotify in 2008 and believed that people would listen to music through streaming services instead of CDs and MP3 players: you would have been called crazy. This is what it feels like to raise money when you are not only a newcomer but also want to operate and create a new market in data availability throughput.
Polychain’s job is to take risks and reap rewards, just like everyone else. Founders take the risk of creating a company that might fail, and people make choices and take risks every day.
Everything we do involves making choices and taking risks, the only difference being the nature and size of the risk.
Polychain is not the only venture capital fund that is investing, there are many different venture capital firms.
Interestingly, no one blames them because it is more difficult to find their transaction data. However, the sell-off of Polychain alone would not cause such a serious data crash. It should be pointed out that this hatred directed only at Polychain is undeserved because:
Their job is to take risks and make money, and they do it well.
They were not the only ones selling, there were other investors as well.
Are these moves good for investors? Yes.
Are these actions ethical for the community? You know the answer.
Did you anticipate that the team would not make any money?
Well, you probably did expect that. There’s a big problem with profitability in cryptocurrencies: most protocols don’t make money themselves, and they don’t even consider profitability. According to defillama, Celestia currently makes about $200 a day (about the salary of a lead software engineer in Eastern Europe) and has issued about $570,000 in token rewards.
This is just the team’s on-chain PL. We know nothing about their off-chain PL, but I believe that such a large-scale team is also very costly. At present, there are indeed some KOLs who say righteously: Web3 protocols should be profitable, and companies should make money. Are we crazy to hear such remarks?
Yes we do, the main problem is not the business model. The main problem is that some teams treat token sales as profits and build business models based on them without considering the consequences.
If token sales equal business models, then there is no need to consider business models and cash flows, right? Yes, but investors’ money is not infinite, and tokens are not infinite.
Venture capital, meanwhile, invests in startups that have a high probability of becoming wildly successful. Many of these companies aren’t profitable yet, but they may offer something revolutionary or interesting enough to entice others to explore and develop those ideas.
Anyway, you wouldnt expect the core team to sell tokens, right? Heres the thing: when your protocol isnt profitable, you have to make money from somewhere else. The foundation has to sell some of its own tokens to pay for infrastructure, employee salaries, and a whole host of other expenses.
Original tweet link: click here
At least paying fees is one of the reasons to sell, I would like to believe. There are many other reasons and different perspectives to consider: on one hand, they abandoned their community; on the other hand, they built this protocol and created a lot of hype around it, so maybe they should at least sell something? Sell means part of it, not all of it.
Ultimately, this is a token/equity question, which is why crypto VCs don’t like equity very much. Selling in the public market is easier and has a shorter time frame than private placement or waiting for an exit.
Token economics is not the main issue, the token is
Clearly, investors are increasingly favoring token trading over stocks. We live in the age 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. Interestingly, many founders themselves realize that their products may not need tokens and would prefer to raise funds through equity. Despite this, they often face two major challenges:
As I said before, most crypto native venture VCs don’t like equity (because exits are harder)
Equity valuations are usually lower than token valuations, so people want to raise more money
This situation not only creates a dilemma, it also actively incentivizes people to choose the token model. Token issuance satisfies more investors because it provides a clear exit strategy to the public market, which in turn makes it easier to raise funds. For the team, it means higher valuations and more funds available for development.
Your company’s core values remain intact. You can retain 100% of your equity while raising significant amounts of capital through these “artificial” tokens. This approach also attracts a wider range of investors focused on token investment opportunities.
Unfortunately, in the current landscape, the token model makes retail investors poor and VCs rich in 99% of cases. Or, as @yashhsm put it: infrastructure/governance tokens are memecoins in suits.
However, when $TIA was launched, it brought huge returns to retail investors, soaring from $2 to $20. People thanked the team for making them rich and staked tokens to get different airdrops. Yes, we had such a moment, it was in the fall of 2023...
After the price started to drop, people suddenly started spreading a lot of FUD about Celestia: rumors about weird team behavior, predatory token economics, mocking on-chain revenue, etc.
It’s good when problems are pointed out, but it’s bad if those who once praised Celestia now dismiss it as a “shithole” simply because of price action.
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 VCs’ LPs is also making money.
Don’t blame the VCs who sold their tokens: their tokens are unlocked, they have full ownership of the asset, and they can do with them as they please.
Blame the VCs who are selling their coins while writing on Twitter about how much they want these tokens: this is deception and should not be tolerated.
The business model should not be centered around token sales alone. Find a profitable model, or even if the technology is great, people will still buy it if it is not profitable.
The token economy is open to everyone: if a team unlocks the tokens, they have full ownership of their assets and can do with them as they please. However, if you are confident in what you are building, selling large allocations may be a questionable decision.
Equity investments are less popular and some token valuations are artificial and not based on any metrics.
Teams should pay close attention to token economics in the early stages as this could cost them dearly in the future.
Technological innovation has nothing to do with token prices.
When it goes up the charts, people are happy; when it goes down the charts, some problems become apparent. It would be bad if people who once praised the project now hate it.
Dont be obsessed with baggage, love technology, and believe in something.
