Can democratized hedge funds change the current situation of the proliferation of VC coins?

Author: Revc, Jinse Finance

Preface

AI16Z, with a market cap nearing 100 million USD, has been labeled as a MEME due to the hundreds of times returns it has brought to early investors. However, we can delve further into its implications for on-chain collective asset management activities.

Asset valuation systems are typically divided into two methods: one is based on the discounted cash flow of the asset, with the discount rate determined by the risk characteristics of the asset or cash flow, primarily used for operating entities; while the MEME asset valuation focuses on network dissemination efficiency and consensus of influence, with its sustainability often placed in a secondary position. This different evaluation method significantly affects the positioning and design of Web3 projects.

Taking Friendtech as an example, when I first heard about Friendtech, I was pondering a question: why can't the holders of the same batch of keys form an investment collective? That way, at least there would be a visible investment cash flow to support the value of the community equity tokens, instead of choosing to engage in speculative trading based on dialogue opportunities. Perhaps the Bonding Curve designed around the keys is more suitable for speculation, ultimately leading to an unavoidable liquidity escape during a crash. Most Web3 projects design their economic models to artificially steepen the supply and demand matching, triggering feelings of Fomo, leaving latecomers in a disadvantaged position, which is not conducive to attracting a broader audience. However, mature DeFi protocols are excluded, even though early liquidity incentives are more abundant.

Back to ai16z, it is the project with the largest market value for the Soalna hedge fund protocol Daos.fun, which aims to lower the threshold for hedge funds and achieve the democratization of hedge funds.

Daos.fun** Working Principle**

Daos.fun is an investment DAO that mainly involves fundraising, trading, fund liquidation at maturity, and fund duration, among other aspects.

• Fundraising: DAO creators have one week to raise the required amount of SOL. DAO tokens are issued fairly, and all participants can purchase tokens at the same price.
• Trading: After the fundraising ends, the creator will invest the raised SOL into the Solana tokens of their choice and trade them on a virtual automated market maker (AMM). This causes the price of the DAO tokens to fluctuate based on the trading activity of the fund. While there is no upper limit on the price of DAO tokens, their downside risk is limited to the market value of the fundraising. As long as the market value of the DAO tokens exceeds the original fundraising amount, investors can sell their DAO tokens at any time.
• Fund Expiration Liquidation: Upon the expiration of the fund, the DAO wallet will be frozen, and the SOL from the profits will be returned to the token holders. Investors can choose to burn their DAO tokens to redeem the underlying assets of the DAO, or directly sell the DAO tokens.
• Fund Duration: The fund duration is set by the DAO creator. For example, the fund duration of ai16z is 1 year and will be liquidated on October 25, 2025; the liquidation date for kotopia is October 27, 2025; DCG (Degen Capital Guild) will be liquidated on April 25, 2025;

The creators of the fund are currently reviewed by the official, and their investment capability is primarily assessed qualitatively, which cannot guarantee that they are not driven by other interests, especially under the constantly changing market conditions. The information gap between creators and investors may lead to losses for investors. Daos.fun may require creators to hold at least a certain proportion of the fund's assets, but it still cannot dispel concerns about their operational capabilities, so introducing a pre-investment voting system is necessary. As Daos.fun opens up its invitation system, there will be more room for optimization.

Can democratized hedge funds change the rampant industry status of VC coins?

The reason for the emergence of VC coins is likely the growing pains of the early barbaric development of Web3, where VCs engaged in an immersive competition for positioning. This group realized that the Web3 field will give birth to a decentralized operating system base akin to "Android and iOS," financial infrastructure, and the third generation of the internet (search, data communication, social networks). Compared to the mature regulatory securities issuance system of Web2, VCs are experiencing almost unconstrained expansion in the Web3 field, coupled with the competitive growth model of CEX and an extreme desire for new asset classes, leading to an explosion of air coins in the entire industry.

While VCs are expanding rapidly, they inevitably have a negative impact on the industry. Due to the mature regulatory system in Web2, VCs have a highly specialized process for assessing project potential, growth curves, and exit strategies during the investment process. However, in Web3, the industry has yet to develop a self-discipline awareness that evolves into a more proactive balancing force to promote healthy industry development.

How to understand the destructive impact of VCs on innovation, despite the radical operational methods of Web2, where fund managers are accountable to investors. However, VCs (and CEXs) pose a more coercive and monopolistic threat to the development of the industry in Web3. Imagine a new species emerging in the early biotic community deep in the Amazon rainforest. This new track is developing slowly, with its own micro-ecosystem. In response to market demand and user experience, it gradually strengthens its wings, and at this point, other parties within the micro-ecosystem also provide positive feedback to each other. In the process of continuous growth, it distills its core and interacts with the environment to hone the vitality of the organization. It is important to note that this vitality is crucial for the long-term development and iteration of the project.

But what would it look like if VC intrudes too early and brutally? They would bring reinforced concrete and modern construction projects into the Amazon rainforest, seizing the flagship species of micro-ecosystems and altering their objective development laws, nourishing them to hasten their growth. In most cases, this new species would lose its ability to perceive products and markets, evolving towards the direction of "giant infants and vaporization," while the entire small ecosystem is destroyed, breaking the positive feedback loop, replaced by monopolistic methods, suppressing the possibility of competition and evolution in the Amazon rainforest. This is the cost that the entire industry and society must bear.

The current primary market is sluggish, financing is difficult, and the deteriorating ecosystem is backfiring on VCs themselves. For VCs, it is necessary to let go of the illusion of monopoly and focus on decentralized projects with commercial potential, avoiding becoming promoters of "giant baby" projects. However, VCs themselves are also facing pressure for capital returns, and the contradiction between operations and capital returns needs to be balanced.

Since 2021, the entire cryptocurrency industry has faced the pressure of distorted regulation, with unprecedented intensity of judicial lawsuits regarding cryptocurrency in the United States. Leading cryptocurrency companies like Coinbase are on the front lines of the struggle, making it difficult to identify who is to blame for the industry's original sins along the entire chain from SEC to CEX to VC to Project. Especially in the context of previous interest rate hikes, the industry lacks liquidity, and the calls to combat FUD come in waves. What we can do is, after the wild development, establish self-regulatory organizations with a sense of decentralization, and for the leading companies that have emerged in the cryptocurrency space, avoid using traffic and user advantages to dominate the industry.

However, as a commercial organization, obtaining cash flow and users means extremely high costs. Balancing commercialization and public interest is a long-term issue faced by large cryptocurrency enterprises.

The Promoting Role of On-chain Asset Management for the Industry

The concept of on-chain asset management or investment DAOs was proposed as early as 2021, and it has been continuously evolving and being implemented. Abstractly speaking, holders of the MEME community are also a type of investment DAO. On-chain asset management can promote the healthy development of the industry from two aspects.

1. Actively managed funds that focus on truly decentralized projects with clear business models may be a way to narrow the gap between the community and professional investment institutions, potentially addressing the overflow of VC tokens and promoting "good tokens" to become mainstream in the market. Utilize the more transparent and open operational methods of DaosFun.

2. Short-selling funds, the target for short-selling can be any pseudo-Web3 project where the share of tokens held by VC exceeds 20%, and a single VC entity accounts for more than 3%, depending on the specific attributes of the project. That is, if a project attracts VC funding that exceeds its development and promotion needs, then the Web3 industry should examine its decentralization attributes. Similar to the previous Gamestop short squeeze battle and the Occupy Wall Street movement, there seems to be a hint of irrational enthusiasm. However, for retail investors, the movement itself only has some corrective claims. When problems arise in the industry, one must face them and use some methods that may be difficult to understand at the time but can be verified in the long term. Everyone has the right to take action against unhealthy developments in the industry, but it is not intended to elevate to a certain ideological level.

Does overly revised claims affect competition in the industry? The answer is yes, it does. However, in contrast to the monopolistic phenomenon that generally exists in the current development of Web2, the industry also needs surgical precision interventions from entities like "Citron Research or Muddy Waters."

Summary

Quoting what Petyr Baelish said in "Game of Thrones" — "Chaos is a ladder", freedom comes with chaos and monopoly. It is time for the Web3 industry to enter the next stage, as traditional regulation may not be suitable for the Web3 industry, even though it continues to exert its influence.

Returning to Daosfun itself, we should not expect the democratization fund to bring self-regulatory influence to the industry in the short term. However, the opportunities for free development brought by Web3 require each of us to maintain.