Author: @willwangtf

Link：

https://twitter.com/willwangtf/status/1726165465586933984?t=OhGeT4GpU71K5EV1AoQUiA&s=19

A cryptocurrency project’s valuation/market support, aside from being influenced by funding and the cyclical impact of interest rates, is often driven at a micro level by expectations supported by non-fundamental factors. Given that a significant portion of token projects in this industry lack financial fundamentals, demand for tokens typically arises from expectations backed by non-fundamental support. From my observation of projects for over a year, I’ve attempted to summarize the following four drivers:

1. Benchmark / Comparison:

The logic behind benchmarking is straightforward. It is the laziest psychological refuge for primary investment institutions when faced with early-stage projects that cannot be analyzed using fundamental or cash flow models. It is an assumption that others would analyze it similarly, constructing a value analysis based on floating consensus. If BTC is a trillion-dollar asset, then ETH is a hundred-billion-dollar asset, and ETH Layer 2 or ETH challengers are ten-billion-dollar assets, and so on. The so-called benchmark is about aligning with the order of magnitude, but weaker by one level. “As long as everyone feels the price is reasonable, it’s fine.” This also explains why Layer 2 and Move chains are in the tens of billions, but benchmarks are not fixed. In their position, one must seek their own policies. If stronger alternatives emerge, the old guard will gradually recede. Regarding the recent Ordi market trend, besides the factor of Binance listing, the main narrative logic is that of a secondary leadership project in the BTC ecosystem. Similarly, this is why, during market changes, the majority of assets tend to move with changes in BTC prices.

The valuation/market cap of benchmark projects depends on the scale of the benchmark assets, the competition in the same category (diverting investor attention), and the historical status of being the first to propose such benchmark narratives. To maintain the valuation of such projects, “moral coordination” is needed, gradually moving towards the second and fourth points below. Otherwise, with such easily conceived ideas, there will inevitably be many competitors, diluting attention.

2. Status / Importance:

The logic of importance is also straightforward, which means thatthe project itself has a very significant industry position. For example, Uniswap and Chainlink’s positions in DeFi, becoming leading and the largest, the status that cannot be done without. Because although the original demand for their tokens (governance and staking) can generate some demand, it is clearly not enough to support profitable selling pressure. Therefore, the current balance comes from the recognition of their industry position by holders. But whether this position can be strengthened is another matter. This will also affect expectations and subsequently influence supply and demand and prices. For example, Chainlink has a relatively valuable token model, but market recognition comes from the demand for Chainlink services from most DeFi projects and even future trading platforms.

The valuation of useful projects can also be benchmarked, determining its valuation level based on the size of its industry (such as DeFi) and the leading projects in that industry. For example, the importance of Chainlink to DeFi, at least allows it to have a valuation level of a unicorn or more. But if the token does not have a long-term way of value capture, then before it unlocks, the pressure of selling will still be very high.

3. Ponzi / Speculation:

The mechanism of speculation is clear, creating an expectation that “those who buy first can profit from those who buy later.” Because everyone thinks they have a high probability of running faster than others and always believe that they have bought in before the tipping point. In fact, many Ponzi schemes in this field are public and not deceptive or internal accounts. Everyone can see them, and the problem of who cuts whom is determined by the difference in expectations. But the biggest beneficiaries are inevitably the unfettered manipulators and project parties.

In the past two years, typical examples are Axie/Stepn/Luna. These projects are characterized by dramatic ups and downs, and they all have varying degrees of short-livedness. Projects that climb very high, after falling, may still have situations where the camel is thinner than a horse, and they may not completely disappear. But most of the investors in these projects are bound to lose their pants.

The formulation of speculative projects underscores a test of acumen, with marketing strategies, strategic market timing, and a tactful exit strategy serving as benchmarks for competence. Consequently, as the market and investor landscape undergo evolution, the demands on operational proficiency in this domain witness a perpetual escalation. Moreover, the dynamic shifts in the interest rate milieu render the appeal to investors a nuanced and diminishing prospect.

Ponzi schemes, ubiquitously manifested in various facets of life, are essentially distinguished by degrees of exploitation, thriving on the optimism of fortuitous individuals.

Valuing projects of this nature proves to be a formidable challenge, often necessitating consideration alongside valuation anchor points such as 1/2/3.

4. Fomo / Desire:

The biggest desire in this industry also comes from FOMO, the expectation that this industry will be popularized and widely accepted, the so-called Mass Adoption, similar to the innovation on the application side in the industry. There have always been many wishes, social/gaming being typical. A good wish is one that hasn’t been realized yet but is grand enough, and there is a chance to realize it. It is a wish that can be displayed as hope in some way. Games and social applications belong to this category, and more recently, AI projects. However, wishful projects must be the first to have enough attention because everyone is on a starting line that has not been reached.

Wishes are beautiful, but hopes are even more beautiful. Hope comes from the continuous feeling of getting closer to realizing the wish. The creation of this feeling depends on standards, is it DAU? Is it attention? Is it reported by mainstream media? All can be.

Unlike most funds that understand web3 as the internet, our fund and most funds that understand web3 differently. Our perception of mass adoption is seen from the perspective of assets. If encrypted assets account for 5% of the global liquidity of ordinary people, then there will be at least $200 trillion, which is at least a 20x beta for the current market value. However, the driving forces of asset allocation are not consistent with the development of the Internet. So we see all encrypted projects that want to leverage the driving force of the Internet are very difficult to become mainstream assets.

The current FDV of top projects that only meet this attribute is between 1–30 billion USD.

These four drivers are not mutually exclusive but rather superimpose to buff more power. Everyone can give many examples based on their daily feelings.

In fact, in addition to the above four drivers, there are also more fundamental or basic drivers:

5. Useful:

Similar to the need for ETH as a daily transaction fee or the need for a certain NFT to obtain a certain right.

6. Revenue:

Similar to GMT’s fee-sharing model or certain DeFi tokens’ staking returns based on fees.

7. Deflation:

Similar to the deflation expectations created by Binance for BNB.

The above three are similar to our offchain tickets and stocks. However, category 5 faces challenges in sustaining a large market cap, while 6 encounters regulatory hurdles. Category 7 demands both strength from the project team and acknowledgment of their creditworthiness by investors, representing attributes that impose exceedingly high requirements on the project team.

Acquiring all the seven key factors is undeniably a gem on the crown. I welcome everyone to analyze and discuss which categories mainstream projects currently belong to in the comments. Among them, the “potency” varies, with varying strengths and weaknesses. Most are extremely sensitive to liquidity and are often considered by value investors to lack fundamental value. Your insights on this collective analysis are welcomed.

Afterword:

Every time I ride a high-speed train, I am reminded of a metaphor. The design of entities like ETH is analogous to (1) fuel, (2) tickets, and (3) stocks. This three-in-one design, while effective in creating FOMO in the early stages, encounters issues in the mid-term where adding fuel no longer accelerates, and in the long term where stocks are deemed too precious for use as tickets and fuel. Thus, concepts like “coal-to-electricity,” “layer-2 networks,” etc., emerged — capital maneuvers such as separating the railway operating company or individually listing the Beijing-Shanghai line. It is akin to telecommunication operators, where there is a fusion of “electricity fees + service fees + stocks.”

Therefore, the sequence often involves first laying the groundwork, then burning fuel, and finally selling tickets. But, as we all know, in this industry, there are too many tracks without trains or too many trains running empty. Hence, the idea is to join forces, filling every carriage with chickens, ducks, cows, and sheep. However, in this network of trains, the focus is on establishing a value consensus using technology and strategic methods because the primary purpose is to transport “funds.” This is why the application-driven web3, driven by internet application thinking, has already collapsed, as it is using an expensive approach that cannot be sold.

In essence, the industry is using a multi-price-driven token model to fund public infrastructure. This public infrastructure, primarily centered around the scalable circulation of financial resources, incidentally, invents a pricing and circulation model for public goods. Therefore, instead of constantly thinking about the commercial world and internet models, it’s more worthwhile to ponder which public goods in today’s world have significant social value but are not priced. Although they are valuable, their circulation efficiency is extremely low, and friction is high. This might be where the real opportunities lie.

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