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

Author: Revc, Golden Finance

###Preface

The market cap of AI16Z, which is close to one hundred million dollars, has been labeled as a MEME due to the hundreds of times returns it has brought to early investors. However, we can further explore its implications for on-chain collective asset management activities.

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

Taking Friendtech as an example, when I first heard about Friendtech, I was contemplating a question: why can't the holders of the same batch of keys be an investment collective? That way, at least there would be a visible investment cash flow to support the value of the community rights tokens, instead of choosing to engage in trading speculation for dialogue opportunities. Perhaps the bonding curve designed around the keys is more suitable for speculation, ultimately leading to an unavoidable liquidity escape during a stampede. Most Web3 projects design their economic models to artificially steepen the supply-demand matching, triggering Fomo emotions, putting latecomers at a disadvantage and making it difficult to attract a broader audience. However, mature DeFi protocols are excluded from this, although early liquidity incentives are more abundant.

Returning to ai16z, it is the largest project in terms of market value for the Soalna hedge fund protocol Daos.fun, which aims to lower the barriers to entry 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 maturity liquidation, and fund duration, among other aspects.

• Fundraising: DAO creators have one week to raise the required amount of SOL. DAO tokens are issued fairly, allowing all participants to 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 on virtual automated market makers (AMMs). 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, the 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: When the fund reaches its expiration, 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 it 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 fund creators are currently reviewed by the official, and their investment ability is mainly assessed qualitatively. There is no guarantee that they are not driven by other interests, especially in a continuously changing market. The information gap between creators and investors may lead to investor losses. Although Daos.fun will require creators to hold at least a certain proportion of the fund's assets, it still cannot dispel concerns about their operational capabilities. Therefore, it is necessary to introduce a pre-investment voting system. As Daos.fun relaxes the invitation system, there will be more space for optimization.

###Can democratized hedge funds change the current industry situation of VC coin proliferation?

The reason for the phenomenon of VC coins is likely the growing pains of the early, barbaric development of Web3. The immersive positioning wars among VCs have made this group realize that the Web3 field will give rise to a "Android and IOS" foundation dominated by decentralized operating systems, financial infrastructure, and the third generation of the internet (search, data communication, social networks). Compared to the mature regulatory securities issuance system of Web2, VC is almost unrestrained in its expansion within the Web3 space, combined with the competitive growth model of CEX, and the extreme desire for new asset classes, resulting in a proliferation 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 of Web2, VCs have highly specialized processes for assessing project potential, growth curves, and exit strategies during the investment process. However, in Web3, the industry has not yet developed a sense of self-discipline that evolves into a more positive balancing force to promote healthy industry development.

How to understand the destructive nature of VC towards innovation, despite the fact that Web2 also operates in a radical manner, where fund managers are accountable to investors. However, VC (and CEX) pose a greater risk of coercing and monopolizing industry development in Web3. Assuming a new species is born in the early biotic community deep within the Amazon rainforest, this new track is developing slowly, with its own micro-ecosystem. In response to market demands and user experiences, it strengthens its wings. At this point, other entities within the micro-ecosystem also provide positive feedback to each other, and in the process of continuous growth, they refine their core and interact with the environment to hone the vitality of the organization. Note that this vitality is crucial for the long-term development and iteration of the project.

But what would it look like if VC invaded too early and aggressively? They would bring reinforced concrete and modern construction projects into the Amazon rainforest, seizing the head species of micro-ecosystems and altering their objective development laws, feeding them with nutrients 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 airification," while the entire small ecosystem suffers destruction, breaking the positive feedback loop, replaced by monopolistic means, suppressing the possibility of competition and evolution in the Amazon rainforest. This is the price that the entire industry and society must bear.

The current primary market is sluggish, with financing difficulties and an ecological decline that is backfiring on VCs themselves. For VCs, it is necessary to let go of the fantasy of monopoly and focus on decentralized projects with commercial potential, avoiding becoming promoters of "giant baby" projects. However, VCs themselves also face pressure for capital returns, and the contradiction between operations and capital returns needs to be balanced.

Since 2021, the entire crypto industry has been under pressure from distorted regulations. The United States has launched unprecedentedly dense judicial lawsuits regarding crypto, with leading crypto companies like Coinbase fighting on the front lines. It is difficult to identify who is the original sin of the industry's development along the entire chain from SEC to CEX to VC to Project, especially in the context of previous interest rate hikes, where the industry lacks liquidity and the cries against FUD come one after another. What we can do is, after the barbaric development, establish self-regulatory organizations with a sense of decentralization, and the leading crypto companies that have developed should avoid leveraging traffic and user advantages to coerce 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 Effect of On-Chain Asset Management on the Industry

The concept of on-chain asset management or investment DAOs was proposed by projects as early as 2021 and has been continuously evolving and landing. To be more abstract, the holders of the MEME community are also a form of investment DAO. On-chain asset management can promote the healthy development of the industry from two aspects.

1. Actively managed funds focus on truly decentralized projects with clear business models, which may narrow the gap between communities and professional investment institutions, potentially addressing the issue of rampant VC coins and promoting "good coins" to become the market mainstream. This leverages the more transparent and open operational methods of DaosFun.

2.** Short-selling funds, the short-selling targets can be those Web3 projects where the share of tokens held by VC exceeds 20%, and a single VC entity accounts for more than 3%, which may vary depending on the attributes of the project. If the VC funding attracted by a project exceeds its development and promotion needs, then the Web3 industry needs to scrutinize 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, but for retail investors, the movement itself only carries some corrective claims. When issues arise in the industry, they must be confronted, using methods that were not easily understood at the time but can be verified in the long run. Everyone has the right to take action against unhealthy developments in the industry, but this is not intended to rise to the level of a certain ideology.**

Does overly corrected claims affect competition in the industry? The answer is yes, but in contrast to the current monopolistic phenomena that generally exist as Web2 has developed, the industry also needs surgical-level micro-manipulation from "short-selling firms like Citron or Muddy Waters."

###Summary

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

Returning to Daosfun itself, we should not expect the democratization fund to bring about self-regulation in the industry in the short term, but the free development opportunities brought by Web3 require each of us to uphold.