Tangent Co-Founder on Liquidity Funds vs Venture Capital: Who's Truly Driving the Crypto Market?
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Tangent Co-Founder on Liquidity Funds vs Venture Capital: Who's Truly Driving the Crypto Market?
Tangent is a company focused on blockchain technology and DeFi solutions, dedicated to providing users with innovative financial services by leveraging the transparency and security of blockchain to improve the efficiency of traditional financial systems.
Navigating Web3 tides with focused insightsCurated & Translated: TechFlow
Guest: Jason Choi, Co-founder of Tangent
Hosts: Haseeb Qureshi, Managing Partner at Dragonfly; Tom Schmidt, Partner at Dragonfly; Tarun Chitra, Managing Partner at Robot Ventures
Podcast Source: Unchained
Original Title: VC vs. Liquid Fund & Inside Friend.Tech's Exit - The Chopping Block
Release Date: September 14, 2024
Background
This podcast episode features a discussion among DeFi expert Tom, Gauntlet’s Tarun, and Tangent co-founder Jason Choi. They explore the challenges of venture capital in the crypto market and the limitations of airdrops, while also highlighting the potential of DeFi protocols to improve market efficiency. As the market evolves, enhancing investment quality and genuine project value will become central industry concerns.
Tangent is a company focused on blockchain technology and decentralized finance (DeFi) solutions. It aims to deliver innovative financial services by leveraging blockchain’s transparency and security to enhance the efficiency of traditional financial systems.
Key Takeaways
Friend.Tech Token Crash: The price of Friend.Tech’s token plummeted by 96%, underscoring the risks of launching a token without sustainable product planning or user retention strategies.
Project Exits and Ethics: Early token launches have raised ethical concerns about team responsibilities when abandoning projects, with increasing accusations of “rug pulls” and “pump-and-dumps.”
Impact of Airdrop Farming: Systematic airdrop farming distorts authentic user engagement, leading to inflated metrics that falsely reflect product-market fit and real user growth.
Venture Capital in Crypto: Low entry barriers allow venture capital firms (VCs) to inflate project valuations, often resulting in overhyped projects that fail to deliver.
Challenges of Early Token Launches: Premature token releases frequently harm long-term project viability by distorting market signals and undermining user retention.
VCs vs. Liquidity Funds: An ongoing debate persists on whether VCs extract value from the crypto ecosystem or if liquidity funds enhance market efficiency.
Hedge Funds and Market Efficiency: While hedge funds may improve market liquidity, their impact on long-term crypto growth remains under scrutiny.
Speculative Markets vs. Long-Term Value: The crypto market continues to struggle with balancing short-term speculation against the creation of sustainable, long-term value.
American Politics’ Influence in Singapore
Widespread Attention to U.S. Politics
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Jason notes that American politics dominates conversations in Singapore. He says people discuss U.S. developments—especially political debates—almost daily. Recently, he adds, their work has felt more like running a macro fund due to constant monitoring of political events, which he finds unpleasant.
Interest in Trump Family Projects
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Haseeb brings up projects linked to the Trump family in DeFi. Jason says his knowledge is limited to surface-level details and mentions a perceived correlation with Aave’s token price.
Social Media Reactions
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Tarun recalls that past comments he made about certain projects sparked significant backlash—particularly when he labeled one as a “rug-pull” or “poor man’s exit scam.” Due to the intense reactions, he now avoids commenting on such projects to prevent further controversy.
Status of Friend.Tech
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Haseeb highlights that Friend.Tech has recently drawn widespread attention. Friend.Tech is a social finance platform allowing users to support creators by purchasing their tokens and joining private chats. Though it gained popularity during summer 2023, its token has performed poorly since launch, currently down 96% from its all-time high.
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Haseeb adds that four days ago, the team transferred contract control to an invalid address, sparking accusations of a “rug pull.”
Team Explanation and Market Reaction
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Despite the team claiming they did not sell tokens and that the distribution was fair, market sentiment remains negative, with many believing the project is being “abandoned.” Haseeb suggests this incident has triggered broader discussions about the responsibilities of crypto project teams.
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Jason shares that he was once an active Friend.Tech user. Although the token price crashed, he acknowledges the platform initially attracted significant user engagement.
Perspectives on Team Responsibility
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Tom analyzes the scope of team responsibility, noting that compared to clear-cut “rug pulls,” Friend.Tech’s case is more nuanced. He points out that while the team didn’t reserve tokens for themselves, they profited via platform trading fees—an outcome that disappointed users, as these revenues didn’t translate into token value.
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Haseeb adds that there’s a mismatch between user expectations and reality, contributing to widespread disappointment.
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Jason concludes that Friend.Tech may have launched its token too early, failing to establish a proper value accrual mechanism. The project also struggled with product-market fit—despite strong initial traction, it failed to retain users. Overall, this event has prompted deep reflection on team accountability in crypto and offers valuable lessons for future projects.
The Future of Friend.Tech
Platform Limitations and Challenges
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Jason explains that Friend.Tech’s design inherently limits its user base. Due to the token pricing curve, users are quickly priced out, making it difficult to scale. Additionally, creators earn primarily when users buy their tokens. Once users join the chat group, creators lack incentives to keep delivering value. This structure leads many creators to disengage after joining, especially since they don’t hold their own tokens.
Timing and Impact of Token Launch
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Haseeb believes that while the token launch temporarily brought back users, it didn’t improve the platform’s infrastructure or user experience. He notes that despite renewed activity, core functionality remains flawed and UX is poor.
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Haseeb compares this to a comedian’s first TV appearance—if they bomb, they might never get another chance.
Reflections and Recommendations for the Future
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Tarun says he feels less emotionally invested in Friend.Tech but acknowledges it was ahead of its time in some ways. He notes that the project attempted to incorporate meme token elements but failed to execute them effectively.
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Haseeb adds that the Friend.Tech team didn’t iterate sufficiently on the core product, causing innovation to stall.
Deteriorating User Experience and Content Quality
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The discussion notes that over time, user questions became repetitive and creator interactions dwindled. Tarun even observes that creators’ content quality declined due to reduced engagement on the platform.
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Haseeb believes Friend.Tech failed to strike a balance between user participation and content creation, ultimately leading to user fatigue.
How to Shut Down a Startup
Normalcy and Challenges of Startup Closures
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Haseeb points out that startup shutdowns are common, especially in crypto. Many early-stage startups realize they can’t achieve their original goals and must consider exiting. Unlike traditional industries, crypto lacks standardized exit procedures, leaving founders confused about how to proceed.
Founder Exit Strategies
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Jason believes shutting down is relatively straightforward in the early stages—before a token launch. Founders can work with lawyers to wind down the company and refund investors proportionally. However, once a token is issued, the process becomes complex, as founders must now answer to thousands of token holders, not just a few investors.
Timing of Token Launch
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Jason emphasizes that founders must be cautious when deciding to launch a token. A token should only be issued once the project has achieved some level of product-market fit—not as a “last resort” when struggling. He mentions that some projects undergoing legal proceedings are now exploring ways to gradually shut down tokens and return funds proportionally to investors.
Successful Shutdown Examples
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Haseeb and Tarun reference successful token shutdown cases like Vega and Fei, which used community voting and buyback mechanisms to manage the closure. These approaches allowed community involvement in decision-making and provided some compensation to investors.
Potential for Decentralization and Open-Source
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Tom suggests that ideally, founders should consider open-sourcing the project so the community can continue operating it. This approach can mitigate user disappointment when a project shuts down, as users could maintain and manage it independently. However, fully decentralized products remain rare, as most still rely on centralized infrastructure.
Venture Capital Funds and Market Liquidity in Crypto
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Haseeb raises a recent heated Twitter debate about the dynamics between venture capital (VC) funds and liquidity markets. A tweet by Arthur Chung sparked the discussion, claiming that in today’s crypto market, VC funds are “net extractors”—withdrawing more value from the ecosystem than they contribute. The argument centers on how VCs typically invest at low valuations and later sell tokens on exchanges as projects mature, thereby extracting capital from the ecosystem.
Different Types of Venture Capital Funds
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Jason argues this view is overly simplistic and shouldn’t be generalized. He notes that the barrier to entry for crypto VCs is relatively low, leading to varying project quality across funds. While some funds do buy cheap tokens and sell at higher valuations, this doesn’t represent the entire VC landscape. He emphasizes that excess capital in the market has intensified competition for high-quality projects.
Early-Stage Investment Opportunities
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Jason further explains that Tangent focuses on early-stage investments because many large funds struggle to support startups at this phase. They aim to fill this gap with smaller investments. He also notes that public market price discovery is weak, leading to valuation disagreements—a point echoed in Arthur’s critique.
Uniqueness of the Crypto Market
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Tarun highlights that crypto blurs the line between private and public investing. Compared to traditional markets, VCs have greater influence in crypto, as they can directly affect project liquidity and market pricing. In contrast, traditional VCs have limited control over final public offering prices.
Pricing Efficiency in Private Markets
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Tarun adds that private market pricing may be less efficient than public markets. Due to competitive pressure, investors often pay above their intrinsic valuation to close deals, making private market pricing more volatile and inefficient through auction-like dynamics.
The Winner’s Curse
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Haseeb references the “winner’s curse,” a well-known phenomenon first observed in the 1960s when the U.S. government auctioned oil tracts in Alaska. Oil companies would take samples from specific plots and bid based on those findings. Since each bidder had limited data, some overestimated the overall land value and overbid, ultimately suffering losses—the “winner’s curse.”
The Winner’s Curse in Crypto Venture Investing
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Tarun argues that the winner’s curse exists not only in crypto venture investing but across all VC sectors—though it’s more severe in crypto. He notes that crypto VCs often double as public market participants, engaging in liquidity provision and trading with market makers at token launch. This dual role gives them more influence over pricing when assets go public.
Impact of Market Intervention
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Haseeb elaborates that Tarun’s point is that fiercely competitive VC deals often result in overpaying, meaning the winning bidder may face negative expected returns.
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Tarun adds that while VCs may appear to “win” a deal, without intervention, the final value might fall below expectations. In crypto, private funds can intervene more during the transition from private to public assets—unlike traditional IPOs, where banks and intermediaries control pricing.
Dynamics Between Public and Private Markets
Brand Value and Liquidity
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Tarun believes brand carries more weight in traditional tech VC because investors pay premiums for well-known names before liquidity. In crypto, brand premiums are lower. Haseeb counters that in early-stage crypto projects—many of which haven’t launched products—brand acts as a crucial signal.
Stage Differences and Investment Strategies
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In the discussion, Haseeb and Tarun compare crypto to traditional tech investing. Haseeb notes that while brand matters early on, its influence may wane in later stages. Tarun argues that the lack of late-stage funding rounds in crypto makes brand impact more pronounced in the early phases.
Liquidity Events and Market Speculation
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Jason observes that public markets in crypto often assign projects valuations far exceeding their intrinsic value, allowing VCs to reap substantial profits at launch. For example, if a VC invests in a new Layer 1 at a $30 million FDV and it lists at a $1 billion market cap three months later, this creates a kind of “fiduciary duty” for the VC—to sell. In such cases, selling becomes almost obligatory.
Impact of Rapid Listings
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Jason adds that the liquidity window in crypto allows projects to raise capital much faster than in traditional markets, where going from startup to public company usually takes seven to ten years.
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While Haseeb questions the idea of projects listing tokens within two months—arguing no one can launch that fast—Jason maintains that even if not two months, the timeline is drastically shorter than in traditional finance.
Market Speculation and Valuation Pressure
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Jason believes this rapid listing dynamic prevents projects from realizing their full potential, partly due to the massive speculative premium imposed by the market. Nearly every project entering crypto, even with minimal promise, receives a high valuation—but few can justify such valuations early on.
Self-Correcting Markets
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Jason suggests the market will eventually self-correct. As retail investors realize buying tokens at hundreds of millions in FDV could lead to losses, speculative behavior may decline. He notes that in the past six months, nearly all newly launched tokens—except a few highly liquid meme coins—have dropped in price. This indicates investors are recognizing the pattern, potentially leading to shifts in future market behavior.
Hedge Funds and Market Efficiency
Market Volatility and the Role of VCs
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Haseeb points out that the market has fallen sharply over the past six months, with nearly all assets down around 50%. While he is a VC himself, he disagrees with the notion that liquidity funds benefit the market while VCs harm it. He argues this perspective wrongly implies that VC-backed projects lack real value, which isn’t true.
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Haseeb emphasizes that many VC-funded projects—such as Polymarket, Solana, Avalanche, Circle, Tether, and Coinbase—have significantly advanced the crypto space and added real value.
Role of Liquidity Funds
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Haseeb further discusses the effectiveness of liquidity funds, arguing they don’t necessarily drive long-term project development. Their goal is short-term profit through frequent trading, not funding new ventures. This model tends to extract value from the market rather than support long-term technological progress.
Market Efficiency and Liquidity
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Haseeb raises concerns about liquidity market efficiency. He questions whether the entry of liquidity funds means they’ll underperform. He notes their focus is on quick profits, not long-term investment, which may lead to excessive value extraction rather than supporting new project development.
VCs vs. Traditional Finance
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Tarun joins the discussion, noting that similar criticisms exist in traditional finance. Many believe VCs merely inflate valuations among themselves, reflecting the tension between long-term investing and short-term profit-taking. He views this conflict as a core feature of capitalism, driving frequent trading activity.
Airdrop Farming and Wash Trading
(TechFlow Note: Wash Trading is a form of market manipulation where traders repeatedly buy and sell the same asset without transferring ownership, creating artificial trading volume. This can mislead other investors into believing demand is high, attracting more participation. Wash trading undermines market transparency, inflates prices, and harms healthy market development.)
Inefficiency in Market Financing
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Tom points out that crypto public markets perform poorly in helping teams raise or provide capital through token issuance. Unlike traditional stock markets, crypto teams cannot easily issue new tokens on public markets when they need capital. Instead, most raise funds by selling tokens to VCs, not through public offerings. This makes crypto markets inefficient at capital formation for teams.
Relationship Between Hedge Funds and Retail Investors
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Haseeb further discusses the relationship between hedge funds and retail investors, noting that discussions on Crypto Twitter often favor hedge funds—contrary to retail interests.
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Tarun adds that, similar to the GameStop situation, retail sentiment toward hedge funds is complex, especially during market volatility.
VC Quality and Market Perception
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Jason notes that the quality of different VCs significantly shapes market perceptions of venture capital. High-quality VCs tend to back projects that attract more capital, while low-quality VCs can distort market judgment, fostering pessimism toward VC-backed projects.
Value of Liquidity Funds
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Discussing liquidity funds, Jason stresses that different strategies can have varied market impacts. High-frequency trading funds may boost market liquidity, while theme-based funds can enhance market efficiency by sharing investment theses, redirecting capital from weaker to stronger projects.
Impact of Wash Trading
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On wash trading, Tarun and Haseeb discuss its prevalence and market effects. Tarun notes that while wash trading may be legally ambiguous in some contexts, it distorts genuine market conditions. In crypto, the cost of engaging in wash trading may be too low to deter the practice.
Controversy Around Airdrop Farming
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Jason states that systematic airdrop farming can negatively impact projects by artificially inflating user numbers, misleading founders about true product-market fit. He believes such behavior harms long-term project sustainability.
Future Market Structure and Strategy
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When discussing market strategy, Tarun expresses concern about the current lack of mid-frequency trading strategies in crypto, arguing this gap limits market maturity and efficiency. He believes the market needs more diverse trading strategies to enable better price discovery across different market conditions.
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