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

Author: Pavel Paramonov

Compiler: Deep Tide TechFlow

This article discusses the recent situation in @celestia and @polychain where Polychain sold $242 million worth of $TIA and I'll explore the pros and cons and what lessons we can learn from them.

Link to original tweet: click here

Have you ever anticipated that investors will not make money?

Many people, including good researchers, consider the Polychain incident to be predatory and uncertain. How can a Tier 1 fund sell such a large allocation to the open market and hurt 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 would say that).

The risks of Polychain's investment in Celestia lie not only in its early stages, but also in the early stages of concepts such as an external data availability layer. At the time, the concept was still very new, and many people (especially "Ethereum supporters") didn't believe in it.

Imagine if you discovered Spotify in 2008 and believed that people would listen to music through streaming services instead of CD and MP3 players: you would be called crazy. That's what financing feels like when you're not just a newbie but also want to operate in terms of data availability, throughput, and create a new market.

Polychain's job is to take risks and get rewarded, just like everyone else. Founders take the risk of creating a company that can fail, and people usually make choices and take certain risks on a daily basis.

Everything we do is make choices and take risks, the difference is only in the nature and magnitude of the risks.

Polychain isn't the only venture capital fund company that invests, there are a lot of different venture capital firms.

Interestingly, no one blames them because it is more difficult to find their transaction data. However, Polychain's sell-off alone would not have caused such a severe data crash. It should be pointed out that this kind of hatred only against Polychain should not be, because:

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

They weren't the only ones selling, there were other investors.

Are these initiatives beneficial to investors? Yes.

Are these behaviors ethical for the community? You get the answer.

Did you anticipate that the team would not make any money?

Well, you probably did expect that. There is a big problem with the profitability of cryptocurrencies: most protocols do not make money on their own, and they do not think about profitability at all. According to defillama, Celestia currently earns about $200 per day (equivalent to the salary of a principal software engineer in Eastern Europe) and gives out about $570,000 in token rewards.

It's just the team's on-chain P&L, we don't know anything about their off-chain P&L, but I believe it's also costly for a team of this size. At present, there are indeed some KOLs who say righteously: "Web3 protocols should be profitable, and enterprises should make money." Hearing such remarks, are we crazy?

Yes, we do, the main problem is not the business model. The main problem is that some teams treat the token sale as a profit and build a business model based on it, without considering the consequences.

If a token sale equals a business model, then there's no need to think about the business model and cash flow, right? That's right, but investors' money is not unlimited, and tokens are not unlimited.

Venture capital, meanwhile, invests in start-ups that have a high chance of achieving great success. Many companies are not currently profitable, but they may bring something revolutionary or interesting enough to entice others to explore and develop these ideas.

Either way, you wouldn't expect the core team to sell the tokens, would you? Here's the thing: when your agreement doesn't make money, you have to make money from somewhere else. The Foundation must sell some of its tokens to pay for infrastructure development, employee salaries, and a host of other expenses.

Link to original tweet: click here

Paying at least a fee is one of the reasons for selling that I would like to believe. There are many other reasons and different perspectives to consider: on the one hand, they "abandoned" their communities; On the other hand, they built this protocol and hyped it around, so maybe they should at least sell something? "Selling" refers to some, not all.

At the end of the day, it's a token/equity issue, which is why crypto VCs don't like equity very much. Selling in the open market is easier than a private placement or waiting for an exit, and the time frame is shorter.

Tokenomics isn't the main issue, tokens are

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 realized that their products may not require tokens, preferring to raise capital through equity. Nonetheless, they often face two major challenges:

• As I said before, most crypto-native risk VCs don't like equity (because it's harder to exit)

• Equity valuations are often lower than token valuations, so people want to raise more money

This situation not only creates a dilemma, but also positively motivates people to choose the token model. The token offering satisfies more investors because it provides a clear exit strategy for the open market, which in turn makes it easier to raise capital. For the team, this means a higher valuation and more money available for development.

Your company's core values remain the same. You can keep 100% of the equity while raising a lot of money through these "artificial" tokens. This approach also attracts more investors who are focused on token investment opportunities.

Unfortunately, in the current situation, in 99% of cases, the token model impoverishes retail investors and makes venture capitalists rich. Or, as @yashhsm is to say: the infrastructure/governance token is a memecoin in a suit.

However, when $TIA was launched, it gave retail investors a huge return, soaring from $2 to $20. People thank the team for making them rich and staking tokens to get different airdrops. Yes, we have experienced such a moment, and that was in the fall of 2023......

After the price started falling, people suddenly started spreading a lot of FUD about Celestia: rumors about team weird behavior, predatory tokenomics, mockery of on-chain revenue, etc.

That's good when the problem is pointed out, but it's bad if those who once praised Celestia now see it as a "" just because of the price action.

What conclusions can we draw from this situation?

• VCs are rarely your friends. Their core business is to make money, your core business is also to make money, and the core interest of VC's LP is also to make money.

• Don't blame the VCs who sold their tokens: their tokens have been unlocked, they have full ownership of the assets, and they can use them as much as they want.

• Blame the VCs who are selling coins while writing on Twitter how they crave these tokens: this is deception and should not be tolerated.

• The business model shouldn't just revolve around token sales. If you find a profit model, or even if the technology is good, it can't be profitable, and people will still buy it.

• The token economy 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're confident in what you're building, selling a large quota is debatable.

• Equity investments are less popular, and some token valuations are artificially and not based on any metrics.

• Teams should keep an eye on tokenomics in the early stages, as this could cost them dearly in the future.

• Technological innovation is not tied to the token price.

• The leaderboard goes up, and people rejoice; As the rankings dropped, some problems came to the fore. It would be bad if the people who once praised the project now hate it.

Don't be obsessed with baggage, love technology, and believe in something.