Cryptocurrency Narrative and Product Development Which is More Important?

Cryptocurrency Narrative vs. Product Development Which is More Important?

Original Author: JOEL JOHN; Translation: MarsBit, MK

TL:DR For readers who are eager to know, please refer to the following summary:

These are some of my observations from last week. You could have invested in Axie Infinity1 at the beginning of the gaming market surge, then leave, and return to earn more money than most Web3 game venture capitalists. At its lowest point, Axie’s trading price was $0.14. Currently, it is priced at $6. The return rate is 40 times.

Its price has once risen to over 1000 times. The reason is that most seed-stage venture capital projects in Web3 games are either far from liquidity or are likely to fail before raising more capital, facing this problem in the current market environment. I will explain this issue further with charts later.

But my thinking has flaws.

Seed-stage projects should not generate returns within 18-24 months.

I assume that investors would invest in Axie Infinity when the game has not yet received attention.

But the fundamental problem is that you could have invested in a liquid asset during the bear market and achieved better returns in early-stage venture capital transactions. This dilemma has led me to some thoughts on the risk scope in cryptocurrency, attention being ahead of capital, and blind spots in the venture capital industry. This article summarizes some of my thoughts and explains how narratives drive funding and attention in our industry.

Before we start, let’s look at some numbers. According to the information tracked by the data product I use, nearly 1,300 out of more than 3,500 tokens have been transferred by less than 10 wallets in the past month. Among the 14,000 dApps tracked by DappRadar, less than 150 have 1,000 users at the time of writing this article. As an industry, our attention to an asset shifts to the next asset very quickly. We also have a similar situation with our belief in fundraising mechanisms. The following data shows the mentions of ICOs and fundraising platforms in important cryptocurrency communities in the past few years.

ICOs used to attract retail investors’ attention but ultimately were replaced by “fundraising platforms” on exchanges – an example of a narrative evolving in real-time.

If you were present in 2017, you might have thought that venture capital was about to change permanently. That year, according to the data sources you provided, cryptocurrencies raised between $1.9 billion and $6 billion from retail and institutional investors. However, the survival rate of those ICO projects was comparable to that seen in traditional venture capital.

You can see the results from the charts between January 2019 and January 2021 – it was the golden age of cryptocurrency venture capital. Interest in ICOs quickly disappeared. Investors saw a brief period of opportunity where founders with uncertain prospects could no longer obtain retail capital to build their companies. Startup valuations ranged from $5 million to $10 million. Founders and investors had to collaborate again to survive.

One reason founders turned to venture capital for funding was a better understanding of the risks of early token issuance. You had to spend time managing the community, doing legal work to ensure compliance, and tying your net worth to liquidity assets – all while building the company. Because someone was unhappy with a comment from a team member on Discord and decided to dump all the tokens on an exchange with only $10,000 in liquidity, founders could wake up 20% poorer.

Years later, we are back in the season of issuance platforms – exchanges acting as gods, deciding which venture capital projects can raise millions of dollars from retail participants. Although there are more thresholds this time, they at least ensure that retail investors have better conditions when investing and no longer see valuations in the billions like in ICOs in 2017.

I used ICOs as an example for the issuance platform because there is relevant data to rely on. Enough time has passed since the boom of ICOs, and now we can understand what happened from the review. If we look at some of the more recent trending topics like DeFi, NFTs, or Web3 games, we will find that public interest in these topics has significantly diminished.

Unlike ICOs, the stories of DeFi, Web3 games, and NFTs are still evolving.

A fading narrative

DeFi has transitioned from a peak of high expectations to a slope of understanding. No longer are new Uniswap competitors emerging daily. Aave and Compound have established a strong position in the lending market for peer-to-peer, over-collateralized assets. The subsequent versions of these products are either more consumer-focused or focused on institutions, no longer obsessed with speculation as a use case as before.

Robert Leshner has shifted focus to launching a mutual fund (CeDeFi?), while Stani has shifted focus to Lens (Web3 social). This shows that founders who have been in the industry for a while are preparing for the next race.

Google search trends, TVL (Total Value Locked) and user counts are good places to observe attention and capital flow in DeFi. As of the time of writing this article, the funds on DeFi platforms have dropped from a high of $160 billion to a low of $40 billion.

If you look at the user count data, it has decreased by 50% in the past few months. However, compared to the beginning of the DeFi summer in March 2020, it has still grown 100 times.

In other words, although interest and usage have declined, the number of users in these product categories is still much higher than before. However, if you observe the search trends for the same function, you will see a completely different situation.

Interest has returned to the bear market levels of 2018. It’s as if no one cares about this industry anymore. I looked at the data for NFTs and ChatGPT, and their trends are similar. On the other hand, the trend for searching “aliens” is on the rise.

Based on this data about DeFi, I have some observations to make.

  • Narratives gradually emerge in the early stages of a bull market.

  • The power of these tailwinds is often due to technological developments.

  • Early participants in specific areas achieve excess returns due to the expansion of narratives and usage simultaneously.

  • Compound, UniSwap, and Bored Apes are examples of narratives and product usage combining to bring excess returns to investors.

The challenge is to invest in a narrative tailwind that may disappear before seeing enough users. We may need to look back at Axie Infinity to understand what I mean.

Timing is key

I mentioned Axie because it captured several themes well:

  1. It is a listed asset with a product development process of about 2 years before 2021.

  2. You can think of it as being undervalued at that time.

  3. Axie marks the beginning (and possibly the decline) of Web3 gaming as a theme.

If you pay attention to the chart above, you will notice that before Axie surged to $150, the number of users increased significantly. Through on-chain tracking, people may see the extent to which new users flock to the product and price it well before July 2021.

But by October, when the number of new users started to decrease, Axie became less like a product and more like an asset. This is a trap that all on-chain products are susceptible to. The over-financialization of in-game assets means that hedge funds in New York may pay players who make efforts in the game. The play-to-earn model relies on the inflow and liquidity of in-game assets. Sometimes, this liquidity comes from speculators and institutions.

Investing in venture capital themes gained momentum between July 2021 and January 2022. Many investors hesitated, formed beliefs, and wrote papers discussing the industry’s development trends. Similarly, founders also became aware of the challenges in building DeFi dApps and believed that gaming is the next big trend, just as many founders are now venturing into artificial intelligence.

The real risk lies in the 18 months after January 2022. Have you noticed the sharp decline in the number of new users on the chart? This is the shrinking user base of all Web3 native gaming applications. Tools built on the fringes, such as “Steam for Web3 Games” or “Reputation for Web3 Games,” will quickly struggle to find users.

Mistaking short-term price surges for genuine consumer demand is a trap that many founders fall into. For these founders, the risk lies in struggling to raise funds again in the current market environment if there is not enough growth.

It is highly likely that founders are starting their ventures in the right market but at the wrong time. The danger for founders is closing the company before enough attention or capital inflow occurs.

As a venture capitalist, on one hand, you will see the liquid market generously rewarding traders, but on the other hand, you will compete with a group of founders who are entering the same theme. This is not a pleasant experience for everyone involved.

My perspective is:

  1. The market often incorporates narratives into pricing in the short term.

  2. Given the liquidity nature of Web3 investments, liquid assets may provide exit opportunities within a quarter.

  3. Considering the illiquidity of venture capital, venture projects may not have a market to leverage after product launch, as products take time to develop and grow.

  4. This often means a slow death and a bet on user return. The product becomes a bet on “bull market return”.

An exception is when a category expands to have enough interested users and you build something unique. Ironically, DeFi has already crossed that bridge. DeFi founders with 3 million users no longer need to worry about new users entering the market.

As long as they are not producing the 30th replica, they will have enough user interest.

For native cryptocurrency investors, venture capital comes in either the form of connoisseurs or pioneers. They either have enough distribution and influence to carve out a new category or have foresight to see a completely new field emerging. If price action is the driving factor for entering emerging themes, then they are likely entering the market very late. They are unlikely to see meaningful exit opportunities unless it is a business that can develop into an IPO or be acquired, both of which are rare in the token space.

In such a market, making the right decisions is crucial. Both investors and founders must keep a clear head and realize that short-term price fluctuations do not always reflect true user demand and long-term value. They need to see the potential behind the trends, not just the current hype. At the same time, they also need to recognize that investment and entrepreneurship require patience and should not be blinded by short-term profits and passions.

Overall, the cryptocurrency field is a realm full of opportunities and challenges. The right narratives and themes can bring substantial returns, but it also requires caution and firm determination. In this constantly evolving industry, paying attention to technological developments and changes in user demand is crucial, as it will help make wise investment and entrepreneurial decisions.

This situation has an impact on founders as it brings some challenges when business models evolve. For example, the effective royalty rate for NFTs has dropped from about 2.5% to 0.6% over the past year, thanks to the emergence of royalty-free markets like Blur. At the time of writing this article, about 90% of NFT transactions have no royalties.

Essentially, this means that any venture capital based on the idea of a large influx of traditional artists into the industry and their need to deal with income will be completely wiped out. Over the past year, countless creator economy startups have had to change their strategies because the landscape has shifted.

Like all emerging technologies, chaos is a way of life in the cryptocurrency field.


Let’s go back to the late 2000s. After finishing a full day of school, you log onto Facebook to chat with friends. There are countless interesting videos on YouTube. Google leads you down the rabbit hole of secrets about secret banking groups. In all of these activities, there are advertisements, but you rarely pay a cent for these things. The internet cultivated your habits before expecting you to pay.

LimeWire introduced us to free music..and malware.

In contrast, Web3’s obsession with ownership and exclusivity has led us to create small user groups that interact in echo chambers. According to their blog, Arkham Intelligence has over 100,000 users. Nansen’s V2 product has surpassed 500,000 registered users today. Dune has one of the largest communities of data scientists in the industry. The only thing they have in common is that they all have free tiers.

The brilliance of the internet is that it relieves users of much of the cost of action. In return, it gains widespread adoption. The huge risk that Web3 faces is how high the cost of each interaction is. For users who don’t need online communities, it’s not appealing to spend $8 to buy an image on the blockchain. When you have friends on Reddit, why bother to get an ape worth $10,000?

For users who have had free email addresses for decades, the value proposition of buying an ENS for $50 may not be obvious. Axie Infinity initially required a purchase of $1,200 NFT to play the game. The guild mode relies on this high barrier to entry. Last year, they released a free version of the game, realizing the risk of maintaining a high barrier to entry.

On Reddit, the combination of “free” and “ownership” is somewhat cleverly realized. The social network with 400 million monthly active users is a behemoth. So far, about 15 million wallets have collected their collectibles. This is roughly twice the number of monthly active users in DeFi at its peak. Specific age and profile accounts can purchase collectibles from Reddit.

In this case, most users are still using “free” products, with only a small percentage of users minting, trading, and owning collectibles. The distribution problem has been solved through a website that has been running for 18 years.

A new class of applications has attracted a large number of users by providing incentives. Rabbithole and Layer3 are typical examples. They do not charge users, but provide value to those willing to explore new opportunities on the blockchain. According to a tweet from the founder of Layer3, the product has provided about 15 million on-chain actions for users interested in cryptocurrencies.

This shift in product strategy is happening. If you visit, you will find a wallet that can be set up in less than 10 seconds. helps you collect NFTs in less than 3 clicks. Users don’t have to worry about gas costs, getting started, and setting up wallets. Of course, there are security trade-offs here. These changes are similar to the changes in email, from everyone running their own servers to third-party servers hosted by companies like Hotmail and Google.

Hedging Trades

Remember when I said that timing in the cryptocurrency field cannot be solely based on narratives? The only way to escape traps is the oldest trick in the book:

  • Attract a user base and keep it for the long term

  • Accumulate value over a longer time frame

In this industry, some tokens have successfully done this. In the DeFi space, Uniswap is an example. Despite the attacks on royalties, OpenSea still maintains relevance. The tail end of venture capital is a bet on attention and capital flow.

The only way to break free from an unhealthy reliance on investor or speculator capital is to rely on the purest form of capital that all businesses have access to – the attention of their customers. With the contraction of venture capital, more and more startups (and protocols) will have to return to finding users who care.

The most relevant example I found is This product focuses on making it relatively easy for creators to mint NFTs. According to TokenTerminal data, their fees exceeded $1 million last month. Maybe not so exciting? But it is very important in the current market.

I found that many participants who perform well in market cycles have early advantages. This is a recurring story.

A small team enters an industry when the thematic narrative reaches its peak. They see the market gradually drying up while competitors are leaving. When attention and capital return, they are the most likely to achieve scale expansion. From this perspective, those themes that large investors are giving up on should be participated in as long as you can survive.

Usually, founders are shaken by a state change before they fall into trouble. Not long ago, being part of Web3 was “cool.” Now mentioning your work in this industry can be embarrassing. Teams feel the need to fabricate statistics to maintain relevance. We often see founders exaggerating their products through robot activities driven by airdrops.

For experienced investors, these games are often quite obvious and send the wrong signals about the team, regardless of how good their products are.

In the cryptocurrency field, to survive and succeed in fierce market competition, one needs to be more cautious and rational. Relying solely on narratives and short-term popularity is not enough. Entrepreneurs and investors must stick to their original intentions, focus on long-term value, and always pay attention to the development of technology and changes in user needs. Only in this way can success be achieved in this industry full of opportunities and challenges.

For founders, here is a survival checklist:

  1. Understand the difference between venture capitalists’ bets on narratives and in-depth exploration of the themes you are exploring. One may just be flipping your SAFT (Simple Agreement for Future Tokens), while the other may co-write a white paper with you.

  2. Entering the market early is an advantage. But it also means that it may take several months for someone to have confidence in what you are creating. Most of your demos will become an educational course for investors. This is both a blessing and a curse.

  3. In a market where all peers have died, survival is the ultimate show-off. Keeping expenses to a minimum to survive is often the right approach.

  4. Consumer attention often precedes investor capital. It is helpful to communicate with users and iterate on the product before pitching it to investors.

  5. If market fit cannot be found within a meaningful timeframe, it is acceptable to shut down a venture-backed company. Life is too short, and you should not be employed by your venture capital firm forever. There needs to be more candid discussions about how to end operations with minimal friction. (This is difficult to write, but it must be mentioned).

Given the volatility of the cryptocurrency market, it is important for investors (in terms of time or capital) to understand whether they are early adopters in a particular theme or simply following a trend. The trap often lies in spending years on a collapsing theme. It is worth mentioning that I don’t believe the Web3 game as a theme has ended. Its story is still being written by countless founders who still have confidence in this theme. Personally, I spend every week trying to understand the different chapters of this story.

The trap lies in confusing the price movements in the public market with investment opportunities in the private market. A narrative that may have disappeared by the time a product is listed. Follow-up financing may vanish as well. And consumers may not care. This is a tough battle many founders will have to face in the coming quarters.