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

Author: Revc, Golden Finance

The market capitalization 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.

Asset valuation systems are typically divided into two approaches: 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, mainly used for operating entities; while the valuation of MEME assets focuses on network dissemination efficiency and consensus of influence, often placing sustainability in a secondary position. This different evaluation approach 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 same group of Key Holders be an investment collective? That way, there would at least be a visualized investment cash flow to support the value of the community equity token, instead of choosing to speculate on trading opportunities. Perhaps the Bonding Curve designed around the Key is more suitable for speculation, ultimately leading to an unavoidable liquidity escape. Most economic models designed for Web3 projects artificially steepen the supply-demand matching, triggering FOMO emotions, putting latecomers in a disadvantaged position, which is not conducive to attracting 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 by market capitalization on the Soalna hedge fund protocol Daos.fun, which aims to lower the threshold for hedge funds and achieve the democratization of hedge funds.

How Daos.fun Works

Daos.fun is an investment DAO, mainly involving fundraising, trading, fund expiration liquidation, and fund duration.

• Fundraising: The DAO creator has 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 fundraising ends, the creator will invest the raised SOL into Solana tokens of their choice and trade on a virtual automated market maker (AMM). This causes the price of the DAO tokens to fluctuate based on the trading activities of the fund. While there is no upper limit on the price of DAO tokens, their downside risk is limited to the market capitalization of the fundraising. As long as the market capitalization of the DAO tokens exceeds the original fundraising amount, investors can sell their DAO tokens at any time.
• Fund Expiration Liquidation: At the expiration of the fund, the DAO wallet will be frozen, and the profits in SOL will be returned to the token holders. Investors can choose to burn their DAO tokens to redeem the underlying assets of the DAO or sell the DAO tokens directly.
• Fund Duration: The fund duration is set by the DAO creator. For example, the fund duration of ai16z is 1 year and will liquidate on October 25, 2025; the liquidation date for kotopia is October 27, 2025; and DCG (Degen Capital Guild) will liquidate on April 25, 2025;

The fund creators are currently reviewed by the official, and their investment capabilities are assessed mainly through qualitative methods, with no guarantee that they are not driven by other interests. Especially in a constantly changing market, the information gap between creators and investors may lead to investor losses. Whether Daos.fun will require creators to hold at least a certain proportion of the fund's assets remains uncertain, but it still does not eliminate concerns about their operational capabilities. Therefore, introducing a pre-investment voting system is necessary. As Daos.fun relaxes its invitation system, there will be more room for optimization.

Can Democratized Hedge Funds Change the Current Situation of VC Token Proliferation?

First, the phenomenon of VC tokens may arise from the growing pains of the early wild development of Web3. The immersive positioning wars of VCs made this group realize that the Web3 field will give birth to decentralized operating systems as the foundation for "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 have expanded almost without restraint in the Web3 field, combined with the competitive growth model of CEX, leading to an oversaturation of air tokens in the entire industry.

While VCs are expanding wildly, they inevitably have a negative impact on the industry. Due to the mature regulatory system of Web2, VCs have a highly specialized process for evaluating project potential, growth curves, and exit stages during the investment process. However, in Web3, the industry has not yet developed a self-regulatory awareness that evolves into a more positive balancing force to promote healthy industry development.

How to understand the destructive impact of VCs on innovation? Although Web2 also operated in a radical manner, fund managers are responsible to investors, but VCs (and CEX) in Web3 pose a greater risk of coercion and monopolization of industry development. Suppose a new species is born in the early biological community deep in the Amazon rainforest. This new track develops slowly, has its own micro-ecosystem, and, based on its perception of market demand and user experience, grows its wings. At this time, other parties 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 VCs intrude too early and wildly? They would bring concrete and modern construction projects into the Amazon rainforest, seize the head species of the micro-ecosystem, and alter their objective development laws, feeding them nutrients to hasten their growth. In most cases, this new species would lose its ability to perceive products and markets, developing towards "giant infants and air-like" directions, while the entire small ecosystem would be destroyed, breaking the positive feedback loop and replaced by monopolized methods, suppressing the possibility of competition and evolution in the Amazon rainforest. This is the cost that the entire industry and society must bear.

Currently, the primary market is sluggish, financing is difficult, and the ecological deterioration is backfiring on VCs themselves. For VCs, it is necessary to abandon the fantasy of monopoly and focus on decentralized projects with commercial potential, avoiding becoming promoters of "giant infant" 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 faced the pressure of distorted regulation, with unprecedented density of judicial lawsuits regarding crypto in the U.S. Leading crypto companies like Coinbase are on the front lines of the struggle, and it is difficult to identify who is the original sin of industry development in 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 round after round. What we can do is to establish self-regulatory organizations with a decentralized awareness after the wild development, while the leading crypto companies that have developed should avoid coercing the industry with traffic and user advantages.

However, as commercial organizations, obtaining funding, traffic, and users means extremely high costs. Balancing commercialization and public interest is a long-term issue faced by large crypto 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 has continuously evolved and landed. Abstractly, the 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 focus on truly decentralized projects with clear business models, narrowing the gap between communities and professional investment institutions, which may be a way to solve the proliferation of VC tokens and promote "good money" to become the market mainstream. This leverages the more transparent and open operation of DaosFun.

2. Short-selling funds can target pseudo-Web3 projects where VCs hold more than 20% of the token share, with a single VC entity holding more than 3%, depending on the project attributes. If a project attracts VC funding that exceeds its development and promotion needs, then the Web3 industry needs to examine its decentralization attributes. Similar to the previous Gamestop short squeeze and Occupy Wall Street movement, there seems to be a hint of irrational enthusiasm, but for retail investors, the movement itself only has some corrective claims. When problems arise in the industry, they must be faced, using some methods that may not be easily understood at the time but can be verified in the long term. Everyone has the right to take action against unhealthy industry development, but it does not want to rise to a certain ideological level.

Does overly corrective claims affect industry competition? The answer is yes, but reflecting on the current monopolistic phenomena that generally exist in the development of Web2, the industry also needs "Citron Research or Muddy Waters" type of surgical micro-operations.

Conclusion

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

Returning to Daosfun itself, we should not expect democratized funds to bring self-regulatory influence to the industry in the short term, but the opportunities for free development brought by Web3 need each of us to maintain.